SBP to auction Ijarah Sukuk for M1 project to identify investors


Islamic financing to gain mileage

Amanullah Khan


The State Bank of Pakistan issued, Thursday, the transaction structure to facilitate issuance of Ijarah Sukuk on the M1 Motorway. The State Bank of Pakistan (“SBP”) will conduct an auction through which Sukuk Investors (“Investors”) will be identified.
The documentation for this structure will include a Certificate Subscription Undertaking, Certificate Issuance Undertaking, Purchase Agreement, Declaration of Trust, Agency Agreement, Ijarah Agreement, Service Agency Agreement, Purchase Undertaking and Cost Undertaking.
The Highway Land together with all constructions and improvements thereon on the M1 Motorway (“Assets”) have been identified as the proposed Assets to facilitate issuance of GoP Ijarah Sukuk (“Sukuk”). The valuation of the assets is to be carried out by a PBA approved independent valuator to determine the sale price of the Assets.
The State Bank of Pakistan (“SBP”) will conduct an auction through which Sukuk Investors (“Investors”) will be identified.
The Investors will execute the Certificate Subscription Undertaking to record the commitments of the Investors to subscribe to the Sukuk to be issued by PDSCL.
Under the Certificate Subscription Undertaking, the Investors may appoint PDSCL as Investment Agent of FIs (Financial Institutions). Under the Certificate Issuance Undertaking, Investment Agent will also give its acceptance to appointment as Agent of Investors. A Certificate Issuance Undertaking will be executed by PDSCL in favor of the Investors, whereby PDSCL will undertake to issue the Sukuk to the Investors.
Subsequent to the auction for the Sukuk, the Investors will provide their funds to SBP BSC (Paying Agent) enabling it to pay (on behalf of the Investors/ Investment Agent) the purchase price of the Assets to GoP upon execution of Purchase Agreement. Each Sukuk to be issued will represent an undivided share in the ownership of the identified/ purchased portion of Assets.
The PDSCL, acting on behalf of the Investors will enter into a Purchase Agreement with GoP (acting through MoF) for purchase of undivided ownership (expressed in terms of percentage) in M1 motorway (‘the Assets’) at an agreed price (“Purchase Price”) equivalent to the Sukuk issue amount (being the amount agreed under the Sukuk Subscription Undertaking).
Pursuant to the Purchase Agreement, ownership of the Assets will be transferred to Investors while the registered title will remain with NHA. NHA will execute a Declaration of Trust in favour of the Investors to the effect that the NHA is holding the registered title in trust for the Investors. Once the ownership of the Assets is transferred to the Investors, a document (Schedule 3 of Purchase Agreement signed by PDSCL (as Investment Agent and Purchaser) and GoP acting through Ministry of Finance (as Seller) should be executed to prove that the possession of the Assets is handed over to PDSCL as Agent for and on behalf of the Investors which will legally confirm that all the risks and rewards of the Assets have passed on to the Investors. 6. Under the Declaration of Trust, NHA will delegate its duties and powers under the trust to PDSCL, with the exception of holding the registered title to the Trust Assets.
SBP-BSC may also be made delegate for the specified purposes. The National Highway Authority ( NHA) acting as the Trustee (through its Agent or Delegate Trustee i.e. PDSCL), and SBP’s Banking Services Corporation (SBP BSC) will execute an Agency Agreement whereby Trustee will appoint SBP BSC as its Agent (Paying Agent) to collect proceeds from the Investors, collect the rentals from GoP and distribute the same to the Investors, and act as Reference Agent and Registrar for the Investors.
Following the purchase of an undivided share in the Assets and obtaining possession through the above mechanism, the Trustee (acting through PDSCL as its Delegate) will enter into an Ijarah Agreement with GoP (as Lessee acting through MoF) wherein these Assets will be leased to GoP for a fixed period (3 years), against Lease Rental Payment in accordance with the terms and conditions as specified in the Ijarah Agreement. Under the terms and conditions of the Ijarah Agreement, GoP will be allowed to nominate any of its affiliates e.g. NHA to use, operate and maintain the proportionate share of Sukuk holders in this identified/specified Assets as its nominee.
The Lease Rentals for each Rental Period will comprise an amount equal to the product of In case of Variable Rental Except for the first rental period, Supplementary Rental for each subsequent period being an amount equivalent to the expenses incurred by the Service Agent in respect of maintenance, repair and insurance / takaful of the Sukuk Assets equal to the amount payable by the Trustee (as Lessor) under the Service Agency Agreement (as notified to Trustee by the Service Agent) in respect of the most recently completed rental period.
A Service Agency Agreement will be executed between Trustee and GoP (acting through MoF) whereby GoP will be appointed as Service Agent to undertake Services relating to the leased assets during the term of the lease in consideration for a nominal fee.