‘Upcoming UK Sovereign Sukuk Issue’, Journal of International Banking Law and Regulation

by Scott Morrison

The Prime Minister’s announcement

At the World Islamic Forum in London in October 2013 (the Forum) the UK Prime Minister, David Cameron, announced that his Government wanted to be the first to offer a sovereign sukuk outside the Islamic world (1 — see end of post for notes). Hoping to launch as early as 2014, the promised issuance would be worth about 200 million pounds sterling(2). Whether compared with sovereign or corporate sukuk in other jurisdictions, or those 53 issuances previously listed on the London Stock Exchange (LSE) (3), the proposed size is modest. The UK issuance should be interpreted as a market-signalling device;; and there is some evidence corporates are already prepared to respond (4). Since the Forum there has been a subtle effort to moderate expectations, with Sajid Javed MP the Financial Secretary to the Treasury, saying this would be a one-off issuance mainly intended to bolster the United Kingdom as a financial centre (5).

Despite false starts in 2011 and 2012 (6) the Government has implemented a series of regulatory policy and tax reforms as elements of a more comprehensive effort, commencing in 2003, “to ensure a ‘level playing field’ for both retail and wholesale Islamic finance products against existing financial products”(7). Budget measures in 2007 specifically targeting sukuk (and applying to both corporate and sovereign varieties) (8) accompanied the package of measures advancing the policy objective of increasing the competitiveness of the United Kingdom (the City of London foremost) in global Islamic banking and finance (9).

Sukuk are differentiated from one another by their underlying contractual structure. The Manama, Bahrain based Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) (10) recognises 14 contract types that may be used individually or in combination in a sukuk offering. The recent article by Abdullah Saeed and Omar Salah in this journal sets out the common sukuk structures and their operation (11) In Britain the relevant authorities (12) considered two types of nominate contracts: ijarah and mudarabah (13). In 2008, a plain vanilla ijarah sukuk was selected for the sovereign issuance (14) After providing further detail on the origins of the modern sukuk, the present article analyses some of the preparations for the upcoming UK sovereign sukuk.

Sukuk: history, authorities and precedents

Qur’an to the Ottoman Nineteenth Century Majallah

The Qur’an lays emphasis upon the sanctity of contract and honouring contractual commitments (15). And upon reducing contracts and obligations to writing (16). The word “sukuk” itself does not appear in the Qur’an (17). However, the sukuk is an instance of an attempt to conform to the Qur’anic ethos of documentation;; the Arabic word “sukūk” is the plural of the word “sakk” which means “contract”, “legal instrument, document, deed” or “cheque” (18). In the social history of the Umayyad period (661–750 CE), the salaries of government officers and military were paid in sukuk which were redeemable as cash or commodities;; in the Middle Ages they were a means of transferring obligations in connection with trade (19). In the Ottoman Empire the charitable trust—already established at Islamic law as the waqf (pious foundation)—came to resemble those sukuk that are based on a lease agreement, the ijarah (20).

A doctrinal precedent appears at the end of the reforms undertaken in the Tanzimat era (c 1839–1876 CE) and the Ottoman effort to codify Islamic law. Promulgated by Royal Decree in 1293 H/1876 CE, al-Majallāt al-Ahkām al-‘Adalliyah (“Majallah”; literally translated as Journal of Judicial Rules) resulted (21). Inspired by Islamic traditions it makes available to contemporary jurists a reduction of Islamic legal principles into a catalogue of rules facilitating the modern application of shari’ah values in commerce and trade, and banking and finance (22).

The 20th century: asset securitisation and the ijarah sukuk

A subsidiary of the Organisation of Islamic Cooperation (OIC) (23), the International Islamic Fiqh Academy based in Jeddah Saudi Arabia (the “IIFA”) established the justificatory foundation for securitisation in Islamic finance. The opinions (fatāwā) of the IIFA do not possess binding force of law in any jurisdiction. However, they are persuasive authorities. In 1988, the IIFA ruled that any asset or combination of assets can be represented by writing (in a note or bond) and that the paper generated thereby may be sold at a market price—provided that the assets are comprised of a majority of physical assets and financial rights (excluding debts and cash) (the “1988 IIFA ruling”) (24).

Rights of user, or usufruct (manfa‘a in Arabic)—which is the asset of choice in the ijarah sukuk (25)—is one of several express elements in a form of securitisation compatible with Islamic law. An early economic engineer Monzer Kahf defined ijarah sukuk as “securities of equal denomination for each issue, representing physical durable assets that are tied to an ijarah contract as defined in the shari’ah” (26). As to the ijarah contract itself (the lease agreement), it is trite Islamic law (27).

The AAOIFI definition

The process of standards-setting and harmonising in Islamic finance has been gradual and remains uneven due not least to the large and diverse number of jurisdictions into which the industry has expanded over a short interval, and due to variations among the Islamic legal schools themselves (28). Like those of the IIFA the opinions of the AAOIFI lack the force of law. However the AAOIFI exercises influence through published and sporadically updated sets of accounting, auditing, shari’ah, governance and ethics standards pertinent to Islamic financial institutions’ operations (29). Responding to emergent practice in sukuk structuring (30), and following the 1988 IIFA ruling, the AAOIFI published its definition of investment sukuk:

“certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects of special investment activity.” (31)

The United Kingdom issue

Islamic banking began in Britain in the early 1980s (32). The Government’s first analyses of sukuk appear in 2007 (33). The aim of amending primary and secondary legislation since then has been to treat Islamic financial instruments in the same manner as those conventional instruments the economic substance of which is similar (34). To this end, ijarah sukuk are deemed conventional debt securities and treated as bonds, disregarding the differences in the legal and risk structures distinguishing the two instruments. Inserted into existing “alternative finance arrangements” is a new category: “alternative finance investment bond” (AFIB).

AFIBs

In order for a security to be classified an AFIB, it must manifest the following characteristics (35):

• Capital payment: Payment of a sum of money (the capital) by the “bond-holder” to the “bond-issuer”.

• Asset(s): The bond-holder acquires assets or a class of assets (the bond assets) for the purpose of generating a return.

• Fixed term: The “bond term” is specified in advance.

• Payment structure:

—  The bond-issuer repays the capital (the redemption payment) to the bond-holder at the end of the bondterm, and

—  The bond-issuer makes additionalpayments before the end of the bond term (the additional payments).

• Commercial return: the additional payments do not exceed a reasonable commercial rate of return on a loan of the capital (36).

• Listing:the security must be listed (“the listing requirement”) (37)

The anticipated sovereign ijarah sukuk and similarly structured private issues would be deemed AFIBs. The following two sections of this article consider the effect of classification as an AFIB with respect to Collective Investment Schemes (CIS) and taxation.

CIS

UK law countenances a broad range of financial arrangements in which investors’ contributions are pooled and invested collectively. Section 235 of the Financial Services and Markets Act 2000 (FSMA 2000) defines a CIS as any arrangement with respect to property (which includes money) the purpose or effect of which is to receive profits or income from that property, provided the investor does not have “day-to-day control” over the management of the property and either (or both) of the following: the investor contributions and profits are pooled and/or the property is managed by or on behalf of the scheme operator.

Depending upon its precise structuring ,without more, the proposed UK sovereign sukuk would likely qualify as a CIS. As such the issuance would require individual authorisation by the relevant authorities and would be subject to additional controls including restrictions on the range of eligible assets, gearing and marketing (38); also the UK operator would have to be an authorized person (39). In consequence, the sukuk would be at a disadvantage relative to conventional bonds or asset-backed securities (ABS) (40). By contrast if the sukuk were treated as an unregulated CIS (one which the authorities do not individually approve) then it may only be offered to professional or institutional investors which would also render sukuk less competitive than their conventional counterparts. In the interest of regulatory parity AFIBs were exempted from CIS status (41).

The listing requirement distinguishes the regulatory treatment of AFIBs from those of conventional bonds which are subject to no such requirement (42). HM Treasury justifies the disparity and the listing requirement as a necessary precaution against regulatory arbitrage;; the

concern being that there would be an incentive to secure the exclusion from classification as a CIS for those instruments not intended to be exempt with the result that investors (especially retail investors) would be exposed to greater risk, in the absence of full oversight and regulatory control (43).

Sukuk and tax

The policy aim with regard to taxation has been the neutral tax treatment of public and private sukuk, as compared with conventional debt securities (44). HMRC has deployed the same legislative technique to produce neutrality of result regarding tax as the Treasury has regarding the exclusion of sukuk from CIS: an alternative finance category exempt from the relevant taxes, the alternative finance investment bond (AFIB) (45). The regulatory and tax definitions of AFIBs whilst not identical are very similar (46).

An ijarah sukuk issuance would be disadvantaged relative to a conventional bond issue due to the Stamp Duty Land Tax (SDLT). As a transaction tax, SDLT would be payable at three stages (the SDLT payments): at the transfer of the asset(s) from originator to issuer, at the transfer back from issuer to originator, and at the issue and re-sale of sukuk bonds (47) SDLT would in effect be payable as a consequence of the Islamic legal requirement of a true purchase/sale;; and the re-purchase of the asset(s) at maturity pursuant to a purchase undertaking (48) On the basis of self-certification AFIBs have been exempted from the SDLT payments (49).

Summary and conclusion

There is some indication that the legislative reforms characterised above have encouraged corporate issuance of sukuk, with the first such issuance (in the form of a joint venture—a musharaka sukuk) having been made in the United Kingdom in 2010 (50).

The Prime Minister’s speech is one landmark along a road upon which his and predecessor governments have travelled for over a decade, and the culmination of a history of Islamic banking and finance that (at however a modest level) exceeds three decades. Inevitably, progress along that road will be measured quantitatively, in volume of issues, trades, deposits, assets and so forth. However, it should be remembered that what promises the longer term and greater gains (and the global position in the world of Islamic finance sought by the current government) is the legislative reform and the accumulating awareness, analysis and improving regulation of Islamic financial instruments—with sukuk merely being the most prominent among them. The consultations of HMRC and the Treasury and other involved authorities to date have left a number of questions (whether technical or practical) unanswered—questions which most probably will be adequately resolved before the sovereign issue occurs.

The period preceding that issue has and continues to be characterised by caution and gradualism, no doubt due in some measure to the potential political sensitivity of (however ill-founded) fears about the incorporation of Islamic law into English law or into the UK legal system.

In this regard, the policy decision to remain aloof from religious questions is a sensible one, as are the several reform efforts that combine together to increase legal certainty, clarify and reduce compliance and transaction costs—and by doing so to facilitate both sovereign and corporate sukuk issuances in this jurisdiction. The result of the deliberate and incremental approach to the anticipated UK sovereign issue is that the playing field (as the oft-repeated metaphor goes) whilst not completely level, is levelling.

NOTES

1 In fact the German Land of Saxony-Anhalt issued the first sovereign sukuk in Europe in 2004 for €100 million: Hans Visser, Islamic Finance: Principles and Practice, 2nd edn (Cheltenham: Edward Elgar, 2013), 80–81. Zawya, “Saxony-Anhalt Sukuk” at http://www.zawya.com/sukuk/profile/6516428/SaxonyAnhalt_Sukuk/ [Accessed April 7, 2014]. The Prime Minister’s speech is available at https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech [Accessed April 7, 2014]. A sovereign issue by Luxembourg may precede Britain’s as an enabling draft bill has already been presented to the Luxembourg Parliament. Abhinav Ramnarayan, “Luxembourg moves closer to debut sukuk” Reuters Middle East January 7, 2014.

2 Prime Minister’s speech. The currency of the issuance between US dollars or pounds sterling was dealt with and settled in favour of the latter by HM Treasury and the Debt Management Office (DMO), “Government sterling sukuk issuance: a response to the consultation” (June 2008) (“June 2008 Consultation”), 3.16 and 4.15.

3 Whether through the Main Market or the Professional Securities Market, the total volume listed on the LSE exceeds US$38 billion;; LSE, “Islamic Finance” at http://www .londonstockexchange.com/specialist-issuers/islamic/finance.htm [Accessed April 7, 2014]. The first listing (Tabreed Finance) in London took place in 2006;; Gillian Walmsley, “London as an international centre of Islamic finance” in Sohail Jaffer (ed), Islamic Investment Banking (London: Euromoney, 2010), 47–53, 47.

4 Kanika Saigal, “UK Corporates ready to follow sovereign into sukuk” Euromoney November 1, 2013. See below.

5 Chris Wright, “Islamic finance: UK’s maiden sukuk comes over all coy” Euromoney March 2014.

6 Dana El-Baltaji and Camilla Hall, “UK Cancels Sukuk, Focus on Economic Growth: Islamic Finance” Bloomberg January 17, 2011. Mushtak Parker, “UK Treasury to rule out sukuk on ‘not-value-for-money basis”’ Arab News January 23, 2012. The first feasibility study took place in 2007—according to HM Revenue and Customs (HMRC), “Stamp duty land tax: Commercial sukuk” (June 26, 2008) (“SDLT June 2008 Consultation”), 8.

7 SDLT June 2008 Consultation, 3.2.

8 SDLT June 2008 Consultation, 3.3;; 3.5: “The Government measures enable sukuk to be held, issued, and traded in the same way as corporate bonds”. However it is not the case that all sukuk instruments can be traded due to the requirement of shari’ah compliance, according to which only some of the nominate contract types permit secondary trading. AAOIFI Shari’ah Resolutions: Issues On Sukuk (February 2008), first and second resolutions. As a practical matter, according to Peter Casey, the regulator of the Dubai International Finance Centre (“DIFC”), sukuk are “traded to only a very limited extent;; partly because demand exceeds supply, there is a general pattern of their being held to maturity” “Regulatory lessons on sukuk financial products, an opinion”’ in Mohamed Ariff, Munawar Iqbal, and Shamsher Mohamad (eds), The Islamic Debt Market for Sukuk Securities (Cheltenham, Edward Elgar, 2012), 99–118, 100.

9 For evidence of that intention: UK Trade & Investment URN13/1161 “UK Excellent in Islamic Finance” (October 2013). Also, UK Islamic Finance Secretariat, “UK, The Leading Western Centre for Islamic Finance” (October 2013) at http://www.londonstockexchange.com/specialist-issuers/islamic/downloads/islamic-finance-2013-f.pdf [Accessed April 7, 2014].

10 AAOIFI Shari’ah Standard 17 on “Investment Sukuk”. However, 8 of these have never been issued;; Moinuddin Malim “Innovation in Sukuk structures”, in Jaffer (ed), Islamic Investment Banking, 104–138, 105;; Malim reports that only 5 are in significant use: ijarah, mudarabah, musharaka, murabaha and istithmar which together comprise 90% of the market share.

11 Abdullah Saeed and Omar Salah, “The Development of Sukuk: pragmatic and idealist approaches to sukuk structures” (2014) 1 J.I.B.L.R. 141–152.

12 HM Treasury, the DMO, HM Revenue and Customs (HMRC);; and the Financial Services Authority (FSA) prior to its replacement by the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) on April 1, 2013.

13 HM Treasury and the DMO, “Government sterling sukuk issuance: a consultation” (November 2007) (“‘the November 2007 Consultation”), Annex A.

14 The June 2008 Consultation, p.5;; also para.4.13, and on advantages, para.5.1.

15 17:34, 5:1, 2:177, and 23:8. On UK authorities’ reception of the principles of contract in Islamic law, as well as the Islamic values of risk and profit/loss sharing, and fairness. FSA (by Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman and Ali Ravalia), “Islamic Finance in the UK: Regulation and Challenges” (November 2007) (“FSA November 2007 Consultation”), 4–5. The sine qua non of the entirety of Islamic banking and finance is its consistency with Islamic law. That consistency is generally termed “shari’ah compliance”. Such compliance is a result of the relevant Islamic legal authorities recognising a financial product, contract or (series of) transaction(s) as lawful. For the purposes of this article, historical and terminological complexities will be put aside and shari’ah and fiqh will be treated as synonymous with “Islamic law”.

16 2:282–2:283. In the late formative era the Hanafī jurist Abū Ja‘far al-Tahāwī (d 933 CE) dealt with legal formalities (shurūt) in connection with debts, pledges and sales in two works: Kitāb al-Shurūt al-awsat and Kitāb al-Shurūt al-saghīr. On al-Tahāwī’s scholarly works: Nurit Tsafir chapter in Oussama Arabi, David S. Powers and Susan A. Spectorsky (eds), Islamic Legal Thought: A Compendium of Muslim Jurists (Leiden: Brill, 2013), 123–145.

17 In neither the singular nor the plural—“Al-Tafsir Qur’an navigator” (Arabic) at http://www.altafsir.com/Quran_Search.asp [Accessed April 7, 2014]. There are, however, instances from the second source of Islamic law after the Qur’an, the hadith (the aphorisms Muslims attribute to their Prophet Muhammad). Hadith quoted in Raditya Sukmana, Muhamad Abduh, and Azmi Omar, Fundamentals of Islamic Money and Capital Markets (New York: Wiley, 2013), 78.

18 J. M. Cowan, The Hans Wehr Dictionary of Modern Written Arabic, 4th edn (NY, Ithaca: Spoken Language Services). The word is the likely origin of the cognate “cheque” known today. Abraham L. Udovitch, Partnership and Profit in Medieval Islam (Princeton: Princeton University Press, 1970), 86.

19 Aly Khorshid (ed),The Dictionary of Islamic Finance (London: Euromoney, 2011), 41.

20 Murat Çizakça referenced by Atif Haneif and Julian Johansen “Sukuk” in Craig R. Nethercott and David M. Eisenberg (eds), Islamic Finance: Law and Practice (Oxford: Oxford University Press, 2012), 254–270, 256.

21 The Majallah follows the Hanafi legal school. Arabic edition: Bassām ‘Abd al-Wahhāb al-Jābī, (ed) (Beirut: Dar Ibn Hazm, 2004). The Majallah remains a residual code and an historical basis for the civil codes of a variety of Arab jurisdictions;; Chibli Mallat, Introduction to Middle Eastern Law (Oxford: Oxford University Press, 2009), 245.

22 Article 118 pertains to the re-purchase undertaking in ijarah and mudaraba sukuk—as that article is considered in the November 2007 Consultation at A4. Section VI arts 396–403 of the Majallah deals with the sukuk-related topic of a sale that is subject to a right of redemption. For discussion of these articles and their application in modern Islamic finance, Rafic Yunus al-Masri, “Renting an Item to Who Sold It—Is It Different from Bay’ Al-Wafa’ Contract?” Islamic Economics Research Centre King Abdulaziz University Jeddah, Saudi Arabia, Journal of King Abdulaziz University: Islamic Economics Vol.19 No.2 (1427 H/2006 CE) 39–42.

23 The Organisation of Islamic Cooperation, the “OIC Charter” at http://www.oic-oci.org/oicv2/page/?p_id=53&p_ref=27&lan=en [Accessed April 13, 2014]. The OIC is also referenced as the Organisation of the Islamic Conference (Charter at http://www.comcec.org/TR_YE/Yeni_Site_Dokumanlar/Basic_Documents/OIC_Charter.pdf [Accessed April 13, 2014]. The former is a more faithful rendering of the Arabic (munazima al-ta‘āwūn al-islāmī).

24 5th fatwā of 1988 at http://www.fiqhacademy.org.sa/qrarat/4-5.htm (Arabic only) [Accessed April 13, 2014] Muhammad al-Bashir Muhammad al-Amine articulates a critique of the IIFA, including the limitations on accessibility due to Arabic-only proceedings—“Sukūk Market: Innovations and Challenges” (January 2008) Islamic Economic Studies Vol.15 No.2 1–22, 16–17.

25 Ijarah simply means “lease” and “sukuk” means “certificates”. Therefore “sukuk al-ijarah” literally means “certificates of the lease” or in more fluent English “lease certificates”. For simplicity the English word order is retained throughout this article: ijarah sukuk.

26 Monzer Kahf, “The Use of Assets Ijarah Bonds For Bridging the budget gap” (May 1997) Islamic Economic Studies Vol.4 No.2, 77–90, 82. The convergence with common, contemporary understandings of securitisation is brought out by considering the definition in Alastair Hudson, Law of Finance, 2nd edn (UK: Sweet and Maxwell, 2013), para.47-02: “the process by which a range of cash receivables or similar assets are grouped together and offered to investors in the form of a security in return for a capital payment from the investors”.

27 See treatment in Wahbah al-Zuhayli, al-Fiqh al-Islāmī wa Adillatuh (Islamic Jurisprudence and its Proofs) part IV (‘aqd al-ījār);; also available in English translation by Mahmoud A. El-Gamal (revised by Muhammad S. Eissa), Financial Transactions in Islamic Jurisprudence, 2nd edn (Beirut: Dar al-Fikr al-Mouaser, 2007).

28 In Sunni Islam: Hanafī, Shāfi‘ī, Mālikī, and Hanbalī;; Joseph Schacht, An Introduction to Islamic Law (Oxford: Clarendon Oxford University Press, 1982), 56–68. The distinctive figure of the Imām and the institution of the imamate ensures the formation of distinctive legal traditions in the minority sects of Islam, the Shi’a—Nicholas J. Coulson, A History of Islamic Law (Edinburgh, Edinburgh University Press, 1964;; reprinted Piscataway NJ, Transaction Publishers, 2011), 103–116. The Shi’a legal schools include the Ja‘afarī (encompassing the Twelver and Ismā‘īlī sects) and the Zaydī.

29 AAOIFI states its mission as the “Standardization and harmonization of international Islamic finance practices and financial reporting in accordance to sharia” at http:/ /www.aaoifi.com/en/about-aaoifi/our-mission.html [Accessed April 13, 2014].

30 The first sukuk after the 1988 IIFA ruling took place in 1990, originated by Shell MDS Sdn. Bhd;; Bank Negara Malaysia (The Malaysian Central Bank) “Financial Stability and Payment Systems Report 2007” at http://www.bnm.gov.my/files/publication/fsps/en/2007/cp02_001_whitebox.pdf [Accessed April 13, 2014]. The next major issues were in 2001, those of: Bahrain’s sovereign sukuk, and the Malaysian publicly listed company Kumpulan Guthrie Berhad. Aly Khorshid, Dictionary at 41. Also Mohamed Ariff, Meysam Safari, and Shamsher Mohamad, “Sukuk securities, their definitions, classification and pricing issues” in Ariff, Iqbal and Mohamad (eds), The Islamic Debt Market for Sukuk Securities, 11–41, 29.

31 Effective January 1, 2003, s.2 AAOIFI Shari’ah Standard 17 on “Investment Sukuk” Saeed and Salah (at 50–51) consider the well-known objection by Sheikh Muhammad Taqi Usmani published as Sukuk and their Contemporary Applications (Manama, Bahrain: AAOIFI Shari’ah Council, 2008) and the AAOIFI resolution that responded and in part adopted it: AAOIFI Shari’ah Resolutions: Issues On Sukuk (February 2008).

32 Rodney Wilson, “Islamic Banking in the United Kingdom” in M. Fahim Khan and Mario Porzio (eds), Islamic Banking in Europe (Cheltenham: Edward Elgar, 2010), 212–221. Omer Masood and Mondher Bellalah, “‘Development and Scope of Islamic Bank Bonds (Sukuk)” in Bellalah and Masood (eds), Islamic Banking and Finance (Cambridge: Cambridge Scholars Publishing, 2013), 126–159 on Islamic home financing in the UK (at 142–145) and offerings in the UK since the opening of the Islamic Bank of Britain (IBB) in 2004, 143–148.

33 The DMO and Treasury feasibility study conducted in consultation with the Islamic Finance Experts Group (IFEG);; IFEG was established in April 2007 (June 2008 Consultation, 1.1). On regulatory adjustments in the UK: Ahmed Belouafi and Abderrazak Belabes, “Islamic Finance in Europe: the regulatory challenge” (January 2010) Islamic Economic Studies Vol.17 No.2 , 33–53, 45–48. What follows will consider only ijarah sukuk as the UK reforms to date do not cover all types of sukuk or even all those currently exhibited by global markets.

34 HM Treasury and FSA, “Legislative framework for the regulation of alternative finance investment bonds (sukuk): summary of responses” (October 2009) (“October 2009 consultation”), A66.

35 The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 (SI 2014/86).

36 On the interpretation of this clause, October 2009 Consultation at 2.17 cross-references FSA 09/25 “Quarterly consultation” (No.22) October 2009, 7–11 and the contained amendments to the Perimeter Guidance Manual (“PERG”). Also HM Treasury and FSA, “Consultation on the legislative framework for the regulation of alternative finance investment bonds (sukuk)” (December 2008) (“December 2008 Consultation”), 3.10.

37 This subsection—art.77A(2)f of the Order allows listing on either an official list or trading on a regulated market, cross referencing Directives 2001/34 on the admission of securities to official stock exchange listing and on information to be published on those securities [2001] OJ L184/1 and art.4.1(14) of Directive 2004/39 on markets in financial instruments amending Council Directives 85/611 and 93/6 and Directive 2000/12 of the European Parliament and of the Council and repealing Council Directive 93/22 [2004] OJ L145/1, and recognised investment exchanges within the meaning of FSMA 2000 s.285.

38 December 2008 Consultation, 2.10.

39 FSA November 2007 Consultation, 25.

40 December 2008 Consultation, 2.11.

41 Financial Services and Markets Act 2000 (Regulated Activities) (Amendments) (No.3) Order 2009 (SI 2009/1342) art.3 amends Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) so that AFIBs under art.77A of the Order are treated in a manner equivalent to conventional bonds which are specified investments under Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) art.77. Explanatory note at p.21, October 2009 Consultation.

42 October 2009 Consultation, 2.24. See above.

43 October 2009 Consultation, 2.31. HM Treasury also contends that the listing requirement does not discriminate within the European Economic Area (EEA) and that the requirement accordingly advances the objective of the EU’s Financial Services Action Plan (“FSAP”) as at http://ec.europa.eu/internal_market/finances/actionplan/index _en.htm [Accessed April 13, 2014]. Further some (although not all of the authorised) listings would have favourable tax consequences.

44 Note that for lack of space what follows is not a comprehensive treatment of the taxation of sukuk or of compliance requirements. Also questions for which there are no standard answers remain—e.g. regarding VAT.

45 Finance Act (FA) 2005 s.48A. The scope of legislation was extended by FA 2006;; FA 2007 further extended to encompass AFIBs. SDLT June 2008 Consultation, 22;; December 2008 Consultation, Annex C.

46 Regarding the justification for preserving 2 distinct but overlapping definitions (in lieu of cross-listing): October 2009 Consultation, 2.35.

47 HMRC, “Stamp duty land tax: Commercial sukuk: A response to the Consultation” (February 12, 2009) (“‘SDLT February 2009 Consultation”), 11.

48 As envisaged by the sovereign issue (see above). For a comparative look at the purchase undertaking, Andrew Coats and Habib Motani, “Purchase Undertakings in Recent Sukuk Issuances: Different Objectives and Approaches” in S. Nazim Ali (ed), Islamic Finance: innovation and authenticity (Boston, MA, Islamic Finance Project, Harvard University, 2010), 193–212.

49 FA 2009 Sch. 61 Alternative Finance Investment Bonds Pt 3 sets out conditions that must be satisfied for relief from SDLT. For explanation of policy: SDLT February 2009 Consultation, 11–12.

50 Millennium Private Equity invested in UK’s International Innovative Technologies issued through a Cayman Islands Special Purpose Vehicle (SPV), “Regulatory reform pushes UK corporate sukuk” September 6, 2010) International Financial Law Review. And David Oakley, “First UK Islamic bond launches” Financial Times, August 16, 2010.

This post above contains an uncorrected draft of a manuscript forthcoming as an article in J.I.B.L.R. — the Journal of International Banking Law and Regulation, Issue 7 (July 2014). Kindly refrain from quoting or citing without the express permission of the author.

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