The past few weeks have seen frenetic activity in key legislative developments being released in Oman. Hot on the heels of the publication of Oman's new Sukuk Regulations on 5 April 2016 came the introduction of new listing categories on the Muscat Securities Market (MSM).
Why are the Sukuk Regulations significant?
The Capital Market Authority (CMA) Decision 3/2016 issued on 5
April 2016 introduced the CMA's long-awaited Sukuk Regulations
(the Regulations).
These Regulations mark the culmination of more than three years of
drafting, re-drafting and consultation with industry players both
locally and internationally. The CMA has worked hard behind the
scenes to take on board comments of key stakeholders to achieve the
objectives of having a framework which will further promote capital
market issuances in Oman.
As an interim measure pending release of the Regulations, an
amendment to the Capital Markets Law was promulgated in November
2014 (Sultani Decree 59/2014) which added licensing and regulation
responsibility of SPVs to the CMA as well as the identification of
the terms and conditions of financial trusts and issuance, listing
and trading of Sukuk instruments and their Shariah
supervision.
The absence of a dedicated Sukuk regulatory framework, along the
lines of the Regulations, did not hamper the ability of the
Government of Oman to launch its debut Sukuk in 2015, nor the
ambitions of a number of key corporations in planning their
issuances. However, those of us who are working on structuring
Sukuk transactions for a range of Omani issuers drawn from a broad
spectrum of industries and sectors welcome a more formal
legislative basis, which brings more certainty for both issuers and
investors.
What are some of the key features of the Sukuk Regulations?
The SPV
The ability to issue through an Omani limited liability company
SPV with significantly lower minimum capital requirements, rather
than through a joint stock company which requires minimum paid-up
capital of OMR 500,000 (approximately USD 1,300,000).
Not only must the SPV be a company registered at the Ministry of
Commerce and Industry, but the CMA must also grant a separate
licence to the SPV (terms and conditions have yet to be disclosed),
which will mean a fee of OMR 1,000 with further fees on renewal of
the licence every five years.
The prospectus
The Regulations refer to issuances taking place with a
"draft prospectus as per the form prepared by the CMA".
Currently, no such form exists for Sukuk issuances and the current
practice to date has been to adapt the model form of prospectus for
equity issuances. This is not ideal and there are a number of areas
of uncertainty in trying to fit bond and Sukuk issuances within
that framework. It remains to be seen whether a new dedicated model
form will be released for Sukuk issuances but this would certainly
assist issuers.
The Regulations mention no requirement that the prospectus must be
issued in Arabic form, thus providing a greater degree of
flexibility to potential issuers in terms of both the cost and
timing of a launch. In practice, however, the CMA is still
insisting that the Arabic prospectus is filed and signed by the
various advisers and the issuer.
Credit rating
The CMA may request a credit rating of the obligor but this is not a strict requirement.
Sukuk programmes
The Regulations anticipate both standalone Sukuk issuances as well as programmes. This marks a positive development and one designed to encourage issuers to have the programme establishment completed with the flexibility to take advantage of favourable market conditions and issue quickly and regularly.
Shariah Supervisory Board
There appears to be no requirement for the beneficiary/obligor to have its own Shariah Supervisory Board, hence issuers may be able to engage the services of an independent Shariah consultancy firm. Further clarification will be required from the CMA as to how this is reconciled with annual reporting obligations confirming that the Sukuk is Shariah-compliant. The requirement of an annual certification by a Shariah Supervisory Board introduces further obligations on the issuer which were not included in previous drafts of the Regulations.
Financial trust
The formal introduction into Oman law of the detailed requirements for constituting financial trusts in the context of Sukuk transactions.
Subscription by Omanis only
The CMA may restrict subscription and trading to Omani nationals in certain circumstances and further clarity will be required on these provisions.
What else?
New listing categories on the Muscat securities market
The other key development of the past few days relates to a
further amendment of the Executive Regulations of the Capital
Market Law of 1998. Decision No. 5/2016 came into force on 6 June
2016.
One of the notable features is the introduction of a new "Bond
and Sukuk Market" on the MSM. The CMA intends to have existing
and future bonds and Sukuks listed on the MSM to be placed into
this new category over time and we therefore expect the CMA to
disclose the associated transitional arrangements.
The Bond and Sukuk Market does not yet have US Dollar capability
but we understand that this facility is being developed quickly. It
remains to be seen what additional administrative requirements will
be implemented by the MSM and whether privately placed bonds and
Sukuk will be subject to public disclosure requirements or whether
there will be an equivalent of a Third Market framework where bonds
are traded OTC.
Together with the Bond and Sukuk Market, there are a number of
other new categories also being introduced, such as "Under
Monitoring Market" and a "Rights Issue
Market".
The new and updated categories are also intended to serve as an
upgrade and to facilitate the review of market information in line
with the CMA's mandate to promote capital markets in Oman.
What next in relation to Sukuk issuances?
The Regulations refer to further forms and directives to be
issued by the Executive President of the CMA to prescribe their
implementation and we will continue to consult with the CMA as to
the implications for potential issuers, arrangers and
investors.
Whilst not all industry recommendations have made their way into
the Regulations – for example, the disapplication of the
prohibition on issuing bonds in excess of issued share capital (in
the context of Sukuk issuances), or related party approval
exemptions (as the SPV will likely be a subsidiary of the Obligor),
the Regulations do provide a number of key concessions not
previously available under Oman law.
The Regulations therefore mark a significant and positive step
forward in the promotion of Sukuk issuances in a market that has
grown by more than 50% over the past year alone. There is certainly
more to come and these legislative developments signal the much
needed steps being taken to facilitate issuances in and from the
Sultanate of Oman.
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