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Thailand: Regulatory Requirements for Sukuk Issuances and Tax Incentives

Siripen Kaodara, Senior Associate and Stephen Jaggs, Partner
Allen & Overy 
July 2011
 

Siripen Kaodara and Stephen Jaggs discuss the Thai laws that have brought advancement in the country’s Islamic finance industry.

Thailand has a Muslim population of approximately nine million and an Islamic banking system which dates back to 1998. However, it previously lacked the necessary legal infrastructure for high profile Islamic products such as sukuk. Today, Thailand has advanced a few further steps into the growing Islamic finance market by developing its laws.

Three years ago, Thailand passed the Act on Trusts for Capital Market Transactions (Trust Act) which introduced the concept of ‘trust’ into the Thai civil law system. This is a key piece of legislation that allows asset trustees to be established for the purpose of holding the assets on trust and issuing sukuk. The Securities and Exchange Commission (SEC) followed suit by issuing a set of regulations to accommodate the issuance of sukuk. The main regulation, which sets out the approval and filing requirements for sukuk, took effect on the 16th January 2011 (Sukuk Regulation).

In addition, last month the Cabinet approved a package of proposed tax changes for sukuk issuances (tax package). This proposed package is aimed at reducing the cost associated with sukuk issuances, which is the key impediment to the development of Islamic finance in Thailand. The tax package is currently being reviewed by the Council of State and will be submitted for vetting by parliament before being passed into law.

These two initiatives, the tax package and the sukuk regulation, are summarized below.

Tax package

The new legislation includes draft regulations to create the following tax exemptions:

  • The originator and trustee will be exempted from income tax, value added tax, special business tax and stamp duty in relation to sukuk issuances;
  • The trustee will be exempted from income tax on revenues derived from the trust assets;
  • The originator and trustee will be either exempted from or have to pay only a minimal amount of tax on the transfer of immovable property and lease of property;
  • An investor in sukuk will not be required to take into account the return on investment in sukuk or capital gain from selling the sukuk for the purpose of computing his/her annual income tax, provided that the payer (i.e. the issuer or buyer) has already withheld the 15% withholding tax.

Sukuk regulation

(a) Domestic public offerings
One-off approval and program approval: The issuer may apply for a single approval (i.e. to issue a single series of sukuk) or a program approval (i.e. to issue multiple series of sukuk under a program). To be able to go ahead with a sukuk issuance the issuer and, if they are not the same entity, the originator must jointly apply to the SEC for approval. The application must be prepared and certified by a financial advisor approved by the SEC. SEC approval will be granted if the following conditions are met:

  • The issuer obtains a legal opinion on the enforceability of the draft trust instrument (essentially an agreement that gives the trustee the authority and responsibility to manage the trust property for the benefit of the beneficiaries, namely the sukuk holders);
  • The issuer obtains a certificate from a Shariah advisor that the Sukuk structure is in accordance with Shariah principles.

Filing requirement: The issuer must file a registration statement and draft prospectus with the SEC prior to each issuance (except short-term sukuk issued under an approved program). An offer can only be made after the filing becomes effective, which is after 14 days after the SEC receives the complete filing documents.

Originator: The originator must be either (i) a private or public limited company incorporated under Thai law, (ii) a legal entity established in Thailand by special legislation, or (iii) a foreign bank with a branch in Thailand. The originator must obtain a board resolution approving the procurement of funds by issuing sukuk. If the originator is a public limited company, the resolution must be passed by a vote of not less than 75% or the total number of shareholders attending a meeting and having voting rights.

Issuer/asset trustee: The issuer must be a licensed asset trustee pursuant to the Trust Act. The issuer must also obtain a board resolution approving the issuance of sukuk. Only commercial banks and financial institutions incorporated in Thailand are eligible to become licensed trustees under the Trust Act.

Sukuk trustee: The sukuk trustee performs a role similar to that of a bond trustee and has a fiduciary duty to the investors. The sukuk trustee must obtain SEC approval to become a trustee pursuant to the SEC Regulation on Approval to Become a Trustee.

Underwriter: Subject to certain exceptions, the issuer must appoint an underwriter.

Rating requirement: The sukuk must be rated.

Listing requirement: The issuer must list the sukuk with the Thai Bond Market Association (TBMA).

Sukuk program: Once approval is obtained, the issuer may issue multiple series of short-term sukuk subject to the following conditions:

  • Each series of sukuk must be of the same class and subject to the same terms and conditions (although the rate of return and maturity period may be different);
  • The issuer must file a registration statement and draft prospectus with the SEC prior to the first issuance. Both documents must be prepared and certified by a financial advisor approved by the SEC;
  • The sukuk must be sold within one year from the date that the filing documents become effective, which is 14 days after the SEC receives the complete filing documents;
  • The aggregate value of each series and the outstanding amount of sukuk issued under the program must not exceed the amount specified in the registration statement.

(b) Domestic private placements
Under the new sukuk regulation a private placement is defined as:

  • An offer to institutional investors or high net worth investors of unlimited value during any four month period;
  • An offer to not more than 10 specific investors (including institutional investors and high net worth investors) during any four month period;
  • An offer to the issuer’s existing creditors as part of its debt restructuring; or
  • An offer for which a special waiver has been granted by the SEC.

Approval requirement: The issuer will be deemed to have received SEC approval once it registers the transfer restriction applicable to an issuance with the SEC. Registration of the transfer restriction is by the submission of a letter by the issuer confirming that it will not register subsequent transfers of sukuk if the transfer will cause the offering to fall outside the scope of private placement.

Filing requirement: There is no filing requirement for offers to not more than 10 specific investors. For offers to institutional investors or high net worth investors, the issuer must file a registration statement and draft prospectus with the SEC prior to each issuance. However, the documents need not be certified by a financial advisor. An offer to institutional investors or high net worth investors can only be made after the filing documents become effective, which is five days after the SEC receives the complete filing documents.

Originator/issuer/trustees: The same principles apply in respect of originator/issuer/trustees as for public offerings.

Underwriter: An underwriter is not required to be appointed for private placements.

Rating requirement: There is no rating requirement for offers to less than 10 specific investors. For offers to institutional investors or high net worth investors the sukuk must be rated.

Listing requirement: There is no listing requirement for offers to less than 10 investors. For offers to institutional investors or high net worth investors the sukuk must be listed with the TBMA.

Sukuk program: sukuk programs may be sold to either (i) institutional investors and high net investors or (ii) not more than 10 specific investors. For offers to institutional investors and high net worth investors (excluding offers to 10 specific investors), the issuer must comply with the following conditions:

  • Each series of sukuk must be of the same class and subject to the same terms and conditions (although the rate of return and maturity period may be different);
  • The issuer must file a registration statement and draft prospectus with the SEC prior to the first issuance;
  • The sukuk must be sold within one year from the date that the filing documents become effective, which is five days after the SEC receives the complete filing documents;
  • The value of each series and the outstanding amount of all sukuk issued under the program must not exceed the amount specified in the registration statement.

(c) International versus domestic issuances
The above summary is drafted from the perspective of domestic issuances. The main difference is that there is no filing requirement for international issuances which are sold entirely to investors off shore and denominated in a foreign currency.

Issuers who wish to make an offer to both domestic and foreign investors must comply with the approval and filing requirements applicable to domestic issuances (as set out under (a) or (b) above).

The criteria for SEC approval for international issuances is less stringent than for domestic issuances. The SEC will inform the applicant of the result within three business days of receiving application. Approval will be granted if the issuer can show to the SEC that (i) the sukuk will be offered entirely to investors off shore, (ii) subsequent transfers will be made off shore, and (iii) the issuer has complied with the sukuk regulation and taken measures to ensure that the trust instrument is enforceable.

Prior to each issuance, the issuer must submit the draft trust instrument to the SEC. The issuer must also (i) submit a sales report to the SEC within 15 business days of the closing date and (ii) inform the Bank of Thailand of the international issuance within three business days of the closing date.

 

 

Stephen Jaggs is partner of capital markets and Siripen Kaodara is senior associate at Allen & Overy.

 

This article first appeared in Islamic Finance News (15 June 2011, Vol 8, Issue 23, Page 18 – 19). For more information, please visit www.islamicfinancenews.com.

 

 
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