A Report on Resolutions of Shariah Board of Securities & Exchange Organization (SEO ) Dr. G. Mesbahi Moghaddam

1. A Report on Resolutions of Shariah Board of Securities & Exchange Organization (SEO) Dr. G. Mesbahi Moghaddam Chairman of Shariah Board Securities & Exchange Organization (SEO)

2. Introduction • The great diversification of financial instruments and institutions prompted the SEO, the regulatory authority of the national capital market, to establish a shariah Board on Islamic jurisprudential issues. • In May 2007, the Board was established in order to study and introduce religious interpretations on financial instruments, markets, and institutions within the national capital markets and provide the required amendatory recommendations.

3. Members of the Board • According to article 4 of the Regulations Governing the Formations and Mission of the Shariah Board is composed of eight members who shall be appointed as follows: • Five religious jurists (Motajazzi jurists) who are knowledgeable about capital market as approved by the Board of directors; • One financial specialist • One lawyer • One economist

4. Functions and Powers of the Board • The functions and powers of the Committee are set out as follows: • To evaluate new financial instruments from the Islamic jurisprudential perspective; • To survey religious doubts and skepticism concerning the financial instruments and present the proper solutions and mechanisms; • To assess the applicability of financial instruments to ensure good performance of such instruments; • To design Islamic financial instruments for the capital market; • To provide cooperation with the Committees and councils of similar nature within other domestic and foreign organizations; • To provide cooperation towards development of training programs and scientific publications; • To provide cooperation in the organization of scientific conferences on the Islamic finance; • To study the Islamic jurisprudential aspects of the capital market issues.

5. Resolutions of the Board First: Sukuk • Sukuk are such securities which are issued in accordance with Islamic rules and indicate the holders' joint ownership in the underlying asset. • Today, Islamic financial specialists have been able to design different types of Islamic securities in accordance with the financial needs of the Islamic societies. • The Board has studied a number of securities to present to the capital market and is going to investigate some other instruments. Those instruments which have been investigated and approved by the Board are:

6. Resolutions of the Board Ijarah Sukuk • Ijarah Sukuk is issued in accordance with Ijarah contract and indicates the holders' joint ownership in the underlying asset of issue which is so given on lease. Ijarah Sukuk are usually issued in different purposes which include: 1- Ijarah Sukuk for asset financing: 2- Ijarah Sukuk for liquidity purpose 3-Mortgage Ijarah Sukuk for securitization of assets

7. Resolutions of the Board Murabaha Sukuk • The owners of Murabaha Sukuk are jointly the owners of the financial asset (debt) achieved upon the Murabaha contract. • These securities are fixed income and traded in the secondary market. Deferent types of Murabaha Sukuk are as follows: • Murabaha Sukuk for purchase purpose • Mortgage Murabaha Sukuk

8. Resolutions of the Board Istisna Sukuk • In this type of sale, the manufacturer undertakes to manufacture and deliver some specified goods or a particular project against a specified fee and in a specific period of time. • Ministries, municipalities, private and state-owned companies which intends to execute or develop a particular project, but needs to raise cash, may use Istisna' Sukuk and gradually pay for it by using their annual budget or selling the finished projects.

9. Resolutions of the Board Istisna Sukuk (Con ’d) • According to most Shi'a and Sunni jurists' opinion, Istisna' contract is Shari'ah-compatible and quite permissible. • As far as the Shi'a jurist's point of view is concerned, Istisna' contract may be presented in form of an independent contract, independent sale, Salam sale, Ijarah, Ju'alah, and Sulh. • If Istisna' contract is presented as an independent contract, or in form of a Sulh contract, it should only meet the general provisions of contracts. • Committee decided to study deferent operational models of Istisna' Sukuk, in accordance with the provisions of independent contract, independent sale or Sulh.

10. Resolutions of the Board Istisna Sukuk (Con ’d) Parallel Istisna' • The originator (ministry, municipality or private company) uses an SPV and transfers the process of finance and execution of the project to this company through an Istisna' contract and pays for the project by giving Istisna' Sukuk with specified maturity dates. • The SPV, upon a second Istisna' contract, offers the execution of the project and undertakes to pay the price of the project within a specified timetable, then the SPV sells the Istisna' Sukuk, which indicates the originator's debt, and pays for its debts to the contractor.

11. Resolutions of the Board Istisna Sukuk (Con ’d) Istisna' and financial lease • The originator uses an SPV and undertakes to buy particular goods produced or projects completed by the SPV, in form of a financial lease contract. The SPV, in accordance with the provisions of Istisna contract, offers the manufacture or execution of the project, then by getting required permits, issues the Istisna' Sukuk and offers to the public. The collected funds would be paid for the price of the project on behalf of investors. • SPV receives the project and gives it to the originator through a financial lease then • pays for the principal and profit of Sukukholders in ijarah legal framework.

12. Resolutions of the Board Mudarabah Sukuk • Mudarabah Sukuk is a security designed in accordance with Mudarabah contract. Here, the issuer offers the securities to the public, pools the investors' funds and gives it to the originator as per the provisions of Mudarabah contract and the originator, at the end of each transaction or end of each financial period, distributes the profit in accordance with the proportions stated on securities, between itself and the investors. The owners of securities are the owners of capital and the originator is the “Mudarib". • Mudarabah Sukuk may be designed for different purposes.

13. Resolutions of the Board Special Mudarabah Sukuk • The originator (commercial company uses an SPV and applies for issuance of Mudarabah Sukuk to finance its commercial activities. The SPV issues the securities to the public, then gives the funds to the originator. The originator, after deducting a specified portion, distributes the profit among investors. • The owners may keep their Sukuk and receive the profit or sell them in the secondary market.

14. Resolutions of the Board General Mudarabah Sukuk with maturity • The originator is a commercial company which is specialized in trading of particular goods. Uses an SPV and applies for issuance of general Mudarabah Sukuk with specified maturity date and specified installments for profit payment. • The SPV receives required permits, issues and offers securities to the public and gives the collected funds to the originator. The originator starts a commercial activity and after deducting a specified portion, distributes the profit among the Sukukholders at the end of each financial course. The principal would be paid back to Sukukholders on maturity date.

15. Resolutions of the Board Ju'alah Sukuk • Ju'alahSukuk is a security which is designed upon a Ju'alah contract. The issuer offers the securities to the public, pools the funds and provides the originator with services stated on such securities in form a second Ju'ala. • Ju'alahSukuk has different utilizations among which we explain the financing of tourism industry as an example:

16. Resolutions of the Board Ju'alahSukuk for repair of ancient buildings • The originator (Iranian Cultural Heritage Organization) uses , establishes an SPV, enters a Ju'alah contract and asks the SPV to accomplish the project of repairing the building and pays a specified reward to the SPV; • The SPV receives required permits and issues the Ju'alah Sukuk, pools the investors' funds and signs, on behalf of Sukukholders, the second Ju'alah contract with a contractor for repairing the ancient building; • The contractor delivers the project to originator, in accordance with provisions of the contract. The specified reward is paid to the SPV out of the project return or a combination of return and annual budget of the organization. The Sukukholders' principal and profits will be paid and settled.

17. Resolutions of the Board Ju'alahSukuk for construction • This type of Ju'alah Sukuk is used for building of hotels and cultural and resort centers. • The originator uses an SPV and signs a Ju'alah contract with the SPV as the agent to start for operation. The SPV applies for required permits, issues the Ju'alah Sukuk, pools the investors' funds and signs a second Ju'alah contract with a contractor on behalf of Sukukholders. The specified reward will be paid to the contractor at the end of each step. • The contractor, at the end of the project, delivers it to the originator. The finished project will be transferred to the private sector in form of selling by installments or financial lease. The installments will be distributed among Sukukholders.

18. Resolutions of the Board Qard Sukuk • Qard Sukuk are securities which have been issued based on qard contract in Islam. The issuer is in debt to sukukholders and should repay in installments. • These Sukuk carry no profit for investors. • These Sukuk are tradable in the secondary market.

19. Resolutions of the Board Salam Sukuk • Salam Sukuk are securities which are issued based on Salam contract. The issuer has sold specified amount of specified commodity to the investors and will deliver them at the maturity. • These Sukuk are not tradable. • Parallel Salam is a suitable way to solve illiquid market for these securities.

20. Resolutions of the Board Parallel Salam • Bai' al-salam is a contract for deferred delivery of goods in mercantile exchange, in order to hedge the price risk. This contract should have some conditions: • Full advance settlement of the agreed trade price is required at the time of signing the contract; • The goods of Bai' al-salam can not be sold before the delivery date; but • In most transactions in mercantile exchange, there is no full advance settlement of the agreed trade price and also the purchasers of goods usually sell the goods and give the documents to new purchasers. • Committee proposes the following solutions:

21. Resolutions of the Board Parallel Salam (solutions) 1- Article added to the contract It is possible to sell a part of the goods through a salam contract and pay in cash the whole price of that part with a condition to sell the other part at a certain price; 2- Parallel salam In this technique, buyer of the first Salam contract sells a new Salam, although the qualifications and quantity of this contract is equal to that of the first Salam contract;

22. Resolutions of the Board Parallel Salam (solutions) 3- Sulh contract Here, the seller signs a Sulh contract for a certain quantity of goods against a certain amount of money which is paid in a specified period of time; 4- Combination of first and second solutions The buyer of the first salam contract undertakes to sell the other part of goods at a certain price when paying the price of the contract.

23. Resolutions of the Board Mortgage-Backed SecuritiesIn Islamic jurists' opinion, most facilities rendered by Islamic banks may be changed into securities but facilities of selling by installments and financial lease would be of particular priority because of the followings: • These facilities are fixed income and most proper start for securitization of bank assets. • The particular asset remains at the banks' ownership until the last lease payment or bank may receive an equal amount as the mortgage; so, these facilities may be at the lowest risk. • These facilities have a specific timetable and banks may chose a most proper package in accordance with maturity date and present it to the market.

24. Resolutions of the Board Construction fund • It is a fund that issues units with certain base values to pool the investors' funds and invest, on behalf of the owners of securities, in construction and selling of buildings. Then the principal and the profit would, after deducting the attorneyship fee, be distributed among unitholders. • The fund manager, on behalf of investors, signs a guarantee contract with a third person and pays a sum of money to take the following guarantees: • Liquidity of units; • Investors' principal; • A minimum profit for units.

25. Resolutions of the Board Gold fund • It is a fund in which the fund manager issues the units to pool investors' money and invests exclusively in equal proportions of gold bullion. So, holders of units are joint owners of the fund's assets which include gold and cash. • The rules governing the said funds include: • The holders of units can, in proportion to their investments, receive gold or net asset value of their units; • If there is an article added to the contract, the fund manager may give gold or market price of which to the investors; • The fund is open-ended; • The fund may appoint a market-maker to guarantee the liquidity of units;

26. Resolutions of the Board Foreign exchange funds • A number of LCs opened by Iranian banks are usually UsanceLCs which requires payment a certain number of months (e.g. one year) after appropriate documents are presented and an Iranian bank guarantees the payment; • Most foreign sellers refer to branches of Iranian banks to discount time LCs. In most cases, Iranian banks are in lack of enough liquidity. Foreign exchange funds may discount these documents directly or via that particular bank.

27. Resolutions of the Board Short sale • Short sale is the borrowing of a security from the owner of security and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the other party. Short selling is a technique used by investors who try to profit from the falling price of a stock. • Board's Opinion • The Committee believes that this contract is based on Riba (usury) and is not permissible.

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