WEEK 4 – FIS

AGENDA FOR TODAY!

1. Review of 1st, 2nd, & 3rd Session

2. News Discussion

Topics:
Government of Pakistan Sukuks
1. What is Sukuk?
2. Process of Auction
3. Issuance
4. Sukuks Revaluation Process – Fixed & Floater
5. Selling before maturity – Fixed & Floater
6. Maturity – Fixed & Floater
2
 What is Sukuk

▰ Islamic Bond

▰ Backed by a security, sharia compliant.

▰ Pays both fixed and floating interest rate or also called as Rent.

▰ Assets tagged behind Sukuk generate revenue, which is used to pay off the
rent to its holder.

3
 Recent Issues

▰ Govt to raise Rs100bln via domestic Sukuk in Sept

https://
www.thenews.com.pk/print/895858-govt-to-raise-rs100bln-via-domestic-sukuk-in-sept

▰ Recently, PIA is in process of issuing new Sukuk.

https://www.thenews.com.pk/print/858995-pia-to-issue-rs20bln-sukuk-this-month

▰ WAPDA to issue next tranche of Sukuk next year

https://www.dawn.com/news/1649049

4
 Auction Process
▰ Three Parties Involved:
▻ A company named “Pakistan Domestic Sukuk Company Limited” was formed
by Ministry of Finance as “Issuer” or “Investment Agent”.
▻ Civil Aviation Authority was appointed as “Trustee”.
▻ President of Pakistan
https://www.sbp.org.pk/ecodata/Auction-Sukuk.pdf

▰ Process:
▻ An agency agreement between PDSCL and SBP BSC.
▻ Investment Agent uses the proceeds to purchase assets from government.
▻ The Purchase asset is then leased to President of Pakistan on behalf of Sukuk
holders under “Ijarah Agreement”.
▻ Rentals from Ijarah agreement are used to pay the rent to Investor.

5
 Auction Process

▰ SBP announces the Auction Tender Notice, highlighting

▻ Auction Date
▻ Signing of Subscription Undertaking
▻ Settlement Date
▻ Target

▰ Auction dates are not pre-decided due to its sharia complaint nature.
Auction Tender Notice (Fixed & Floater): https://www.sbp.org.pk/ecodata/Auction-Sukuk.pdf

6
 Auction Process (Fixed & Floater)

▰ Primary dealers can only participate in the auction through Bloomberg

Online Auction Module

▰ Two types of Bids

▻ Competitive
▻ Non Competitive
▰ Competitive bids: Investor quote their expected rates
▰ Non Competitive bids: Investor gets weighted average yield of the auction.
▰ Face Value is quoted
Primary Dealers List: https://www.sbp.org.pk/dmmd/2021/C11.htm 7
 Auction Process (Fixed & Floater)

1. SBP Announces Auction Tender Notice

2. Primary Dealers participate it in Auction
1. Individuals and non-primary dealers have to participate through Primary
dealers by opening an IPS (Investor Portfolio of Securities) account with
primary dealers.
3. SBP decides the cut-off yield for the Fixed auction to shortlist the best deals.
▻ Fixed: All accepted deals shall get the same yield.
▻ Floater: All accepted deals shall get the same “Cut of Margin”.
Latest Auction Report (Fixed): https://www.sbp.org.pk/ecodata/Auction-Ijara-FRR.pdf
Latest Auction Report (Floater): https://www.sbp.org.pk/ecodata/Auction-Ijara-VRR.pdf
8
 Issuance

▰ Investors are informed by the primary dealers regarding the deals accepted by
SBP.

▰ Primary dealers request bidders to deposit the funds on the settlement date (First
Half Usually).

▰ Bank transfers the securities from their IPS account with SBP to individual or
other FI’s IPS account with bank.
9
 Maturity

▰ At Maturity, Face Value would be 100 and the profit amount would be subjected to tax, depending on
filer and non-filer status.

▰ Primary dealers submithttps://www.sbp.org.pk/ecodata/Auction-Sukuk.pdf

the holders report to SBP one day before maturity.

▰ SBP withholds the tax and transfer the initially invested amount along with profit after tax to bank.

▰ Bank credits it to customer without any commission.

10
LET’S REVIEW CONCEPTS

Auction Process Issuance Revaluation

How does an When does SBP issue What formula is used
individual can security? for revaluation?
participate?

Selling Before Maturity

Maturity
Who withholds the
What is the process of tax?
calculating
profit/(loss) if selling
11
before maturity?