To: Mufti Abdullah Siddiqi – Resident Shariah Board Member

From: Corporate & Investment Banking Division

Date: Rabi' Al-Thani 7, 1439 | Tuesday, December 26, 2017
Issuer: Pak Elektron Limited (PEL or the Issuer)
Lead Advisor and
Arrangers AlBaraka Bank Pakistan Limited and Pak Brunei Investment Company

Shariah Advisor Albaraka Bank (Pakistan) Limited

Subject: Sukuk Al Musharaka Shirkat-ul-Milk
Shariah Structure Process Flow- (Sale and Lease Back mode)
Background

Pak Elektron Limited (PEL) is a large growing public limited listed Company quoted on Pakistan Stock
Exchange. It is involved in the business of manufacturing and selling of electrical equipment and white
goods. PEL is among the market leaders in Home Appliances Business with a very good presence and
market share since year 1987. The products produced in the home appliance section include
refrigerators, air conditioners, deep freezers and microwave oven. The Power Division of the Company
is among the Pioneers of Electrical Capital Goods and has been serving the Power utilities, Industries,
individual Customers, housing and commercial projects. The electrical capital goods range comprises of
Power Transformers, Distribution Transformers, Switch Gears, EPC Contracting and Energy Meters.

Present Request
The business of PEL is increasing and the Company is experiencing significant growth. PEL is seeking
Islamic financing solution of up to PKR 1,500 Million in order to pay off certain conventional financing
and for construction of new facilities for power transformers and washing machines for business growth
(Transaction). Pak Elektron Limited (“PEL” or the “Issuer” or the “Company”) has mandated Al Baraka
Bank Pakistan Limited to act as Lead Advisors and Arrangers for the Rated, Privately Placed and Secured
Islamic Certificates Issue (“Sukuk” or the “Issue” or the “Transaction”) of up to PKR 1,500 Million. Al
Baraka Bank (Pakistan) Limited has been appointed as the Shariah Structuring Agent for the Transaction
(ABPL or the Shariah Advisor).
Fund Utilization
1. The funds will be used to pay down around PKR 1,200 Million of the existing conventional loans of
the Company. The investment agent will provide supporting evidence to the Sukuk Shariah Advisor
with respect to settlement of particular conventional facilities.

2. The rest of the Proceeds will also be utilized for construction of new facilities for power transformers
and washing machines for regular business operation growth requirements of the Company.

Shariah Structure
Considering the above financing request, the Transaction is structured under Musharaka sale and lease
back mode based on Sukuk as purpose of financing is to pay off conventional debt through Islamic
financing.

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Sukuk feature enhances the transaction salability through broader participation and its subsequent
tradability.
The underlying Musharaka mode will be on Shrikat-ul-Milk between PEL and the Investment Agent
(representing the group of participating Financial Institutions). Investment Agent on behalf of the
participants will purchase a proportionate beneficial share in Musharaka Assets from PEL. Assets are
under the ownership of PEL.
Underlying Assets for the Transaction
The Investment Agent will acquire 69.92% (approx.) ownership in the assets (list given below) comprising
of the land and the building on which the company is situated.

Asset Value Description

Land 1,022,000,000/ PEL Unit -II land is spread over an area measuring 511 kanals
-
situated at Mouza Keat and Mouza Kot Islampur, 34 Kilometers,
Ferozepur Road, Lahore.
Building 1,722,551,200 Building located at PEL Unit II, situated at Mouza Kaeth and Kot
Islampur, 34 K.M. Ferozepur Road, Lahore. The building includes
Main Machinery Hall, Main Hall of Workshop, Store Area, Office
Area, Utility and Sub Station, Electroplating Room, Car Parking,
Motorcycle Shed, Generator Area and Other Civil Works.
Total 2,744,551,200

As of date, the fixed assets of the Company are under charge of other financiers as security; the total
fixed assets (Land, Building, and Plant & Machinery) of the company are worth PKR 18,264 Million having
financing exposure of PKR 10,278 Million. The existing financiers will be notified by the Company
regarding the creation of this Musharaka on the assets on behalf of Sukuk holders. Further, the
Musharakah asset shall not be given in future under any conventional banking charge. Commented [KAA1]: Please add: “Customer will ensure that
Musharkah Assets should be encumbered”.
Process Flow of the Transaction:

Investment Agency Agreement

Pursuant to an Investment Agency Agreement, Certificate Holders will appoint an Investment Agent. To
carry out the following:

1. to enter into the Musharaka and all relevant Transaction Documents with PEL on behalf of the Sukuk
Musharaka Participants herein after referred to as “Certificate Holders”;

2. to secure the commitments of the certificate holders under the Investment Agency Agreement to
own the proportionate share in the Musharaka Assets; and

3. to agree on the distribution mechanism of payments from the Musharaka to the certificate holders).

4. to distribute the following among the certificate holders:

a) periodic profit amounts on quarterly distribution dates

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 b) the dissolution profit distribution amounts on the Musharaka Dissolution Date; and
c) Partial dissolution profit distribution amounts on Partial Musharaka Dissolution Date.
5. to also distribute the following among the Sukuk holders:

a) the Musharaka Dissolution Amount (Facility Redemption amounts); and

b) Partial Musharaka Dissolution Distribution Amounts (comprising of payments arising under the
unilateral Purchase Undertaking and Sale Undertaking) among the Sukuk Holders.
Trust Deed

PEL will declare a Trust in favor of the Trustee for the following:

6. to facilitate the Issuer in respect of the Assets and issue of Sukuk certificates under Section 66 of the
Companies Act 2017, to certificate holders representing undivided ownership in the assets of the
Company.

7. to hold the Trust Assets for the Certificate Holders. The legal title of the Musharaka Assets will be
held by PEL as Title Agent.

8. to secure the rights and obligations of the Issuer PEL in respect of the Sukuk, including but not
restricted to the obligations to redeem the Sukuks.

9. to hold the Trust Assets and Security absolutely for the benefit of Certificates Holders.

Musharaka Agreement

10. The Sukuk Certificate Holders will enter into a Musharaka (through a “Musharaka Agreement”) with
PEL to jointly own the undivided share in the Musharaka Assets.

11. Initially the Certificate Holders will acquire an undivided ownership (to the extent of Certificate
Holders share) in Musharaka Assets from PEL through “Asset Purchase Agreement” on the date of
“Musharaka Contribution Request”

12. The legal title of the Musharaka Assets will be in the name of PEL who will hold the title of the
Musharaka Assets on behalf of Certificate Holders in respect of their undivided share.

13. The Musharaka Sukuk will be in the form of Shirkat-ul-Milk with PEL and Certificate Holders in joint
ownership in the Musharaka Assets.

14. The Musharaka will be for a period of Fifteen (15) Months.

15. Certificate Holders will contribute their Musharaka Investment in cash which will be made through
Musharaka Contribution Request as and when demanded by PEL in single or multiple tranches.

16. Certificate Holders’ share in the ownership of the Musharaka Assets will be undivided and shall for
the purpose of more particular determination, constitute “Musharaka Units”. The Musharaka Assets
should be clearly identified along with location in the Musharaka Agreement.

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17. The total value of Musharaka Assets is around PKR 2,745 Mn. out of which Certificate Holders share
will be PKR 1,500 Mn. i.e. 54.64% and 45.36% will be the share of PEL and will be considered as the
Musharaka share of PEL.

18. Certificate Holders through Musharaka Agreement will appoint PEL as Managing Co-Owner of the
Musharaka Assets and will be responsible for structural maintenance, Takaful, security and payment
of ownership expenses and taxes in respect of the Musharaka Assets on behalf of the Co-Owners.

19. The costs actually incurred on account of the aforementioned services by Managing Co-owner in
respect of Certificate Holders share of Musharaka Assets (to be called as Asset Service Charge
Amount) during any rental period will be reimbursable to Managing Co-owner on the immediately
succeeding rental payment date. In the final rental period, the Asset Service Charge Amount will be
based on the forecast provided by PEL before the beginning of the final rental period. Any variation
in actual value from the forecasted amount of the service charge amount. for the final period will
be shared proportionately through an adjustment payment, after the confirmation of the actual
expense from PEL, as per Certificate Holders’ share of such variance.

20. The Musharaka Assets are already under the PEL existing group insurance policy from conventional
insurance companies as the Company does not have firm Takaful arrangements in place for its assets
coverage. The Insurance will be arranged by PEL for the entire period of the DM Sukuk. The
mechanism of insurance will be that PEL will pay the full insurance cost of that period including
Certificate Holders share as Certificate Holders’ partner.
21. In case of total loss/ destruction of the Musharaka Assets, the insurance claims received will be
shared between Certificate Holders and the Company in the ratio of their Musharaka contributions
except in case the loss is due to gross negligence of Managing Co-owner.
Commented [KAA2]: Clause should be rephrased considering
below:
The Musharakah Assets should be covered from reputable
companies offering insurance protection under the Islamic concept
of Takaful. However, Musharakah Assets may be covered through
conventional insurance companies subject to prior approval of
Shariah Advisor.
Commented [KAA3]: Please replace with ‘Takaful’.

Payment Agreement

22. Investment Agent will enter into a Payment Agreement with PEL, whereby, the investment Agent,
on behalf of the Certificate Holders, will agree to rent their share in Musharaka Assets to PEL and
PEL will agree to take on rent the same for the fifteen (15) Months tenor the of the Musharaka Sukuk.

23. The rental amount shall be calculated by using 3 Months KIBOR + 1.20% with floor of 10% and cap of
15% on 3 Months KIBOR. Rentals will be paid on quarterly basis.

24. The rental payment will also include a supplemental Rental (except in case of first rental period)
that will be equal to Asset Service charge amount (reimbursable to PEL under Musharaka agreement;
pt.19 above) for the preceding quarterly period. Receipt of and payment by PEL of Asset Service
Charge amount and supplemental rent will be settled on net basis. However, the supplemental Rental Commented [KAA4]: This portion and 24 clause should be
shall be subject to a Floor and Cap of 25% (+/-). [The benchmark Asset Service Charge amount will deleted.

be determined on the basis of preceding three quarterly management accounts. Illustration to be

made available in the Payment agreement].

25.24. If in any particular period the supplemental rental breach the flooring and capping limit a specific
opinion will be obtained from transaction Shariah Advisor.

Musharaka Unit Purchasing

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26.25. The total period of the Musharaka will be fifteen (15) months, including 12 months of mandatory
grace period for the purchase of units from the date of last drawdown. Unit purchase will begin after
the expiry of the grace period.

27.26. Unilateral undertaking to purchase Certificate Holders DM units will be given by PEL in favor of
Certificate Holders and will cover

a) the single tranche purchase of DM units at maturity (representing Certificate Holders undivided
beneficial ownership in the Musharka assets)
b) The purchase of all outstanding DM units of Certificate Holders in case of an event of default.

28.27. The purchase of units will be after the grace period subsequent to the disbursement of funds at
the completion of 15th month from the musharaka commencement date.

29.28. Unit Sale receipt will be issued at the time of purchase of DM Sukuk Units by PEL as evidence of
Certificate Holders sale of Musharaka units to the PEL.

30.29. The ownership of the assets will immediately stand transferred from the Sukuk Certificate
holders to PEL through the sale of DM Units.

Undertaking to Sell

31.30. Investment Agent (on behalf of Sukuk holders) will undertake to sell Assets to PEL in the following
circumstances:

a) At the end of the Tenor of the Sukuk Issue.

b) On receipt of 30 days advance Exercise Notice (call option) from PEL. Sale against such Exercise
Notice will be allowed after expiry of 12 months from the Assets Purchase Date and will be in
multiples of PKR 1 Million equivalent or whole of the balance thereof at par. Upon such Sale, a
sale receipt shall be issued by the investment Agent evidencing the total percentage of Sukuk
Holders’ share that has been sold to PEL.

Notes

 As per Sukuk (Privately Placed) Regulations S.R.O. 836(I)/2017 dated 21st August 2017:
a) Section 12: A Shariah compliance inspection of the Sukuk Asset will be arranged annually to
ensure that Sukuk assets are in proper condition.
b) Section 6(3): Special Purpose Vehicle (SPV) is not required in the above structure because the
title of the assets will remain with the issuer as title agent.

 This Shariah structure has been based on the information provided and in lieu to the Shariah and
Islamic finance aspects of the transaction only. The security, credit / financing risk, internal approval
and regulatory requirements / approvals (if any) must be obtained and checked by all the concerns
involved in the transaction.

 The Shariah structure has been based on information and details provided by the Transaction
Arranger (Al Baraka Bank and Pak Brunei Investment Company).

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 The Investment Agent will be required to ensure meticulous compliance with the above mentioned
Shariah structure. In case of any deviation from the Shariah structure the same should be brought in
the notice of Transaction Shariah Advisor. Approval of deviation in the Shariah structure shall be
acquired in this regard from Shariah Advisor.

 The entire Shariah structure should be discussed with; and understood by the Issuer before
proceeding with the transaction.

 The Shariah structure must be shared with all the concerned authorities including legal counsel for
drafting and preparing of financing and security legal agreements/documents.

 The financing agreements / documents (including but not limited to) must be executed in the above
sequence. All documents should be completely & accurately filled without any over writing.

 The final approval (Shariah Certificate) of the proposed Sukuk Issue will be issued after review
of legal documentation being drafted by Transaction Lawyer.

________________________ ________________________
Aamir Zaidi Muhammad Saad Faruqui
Unit Head Head Shariah Compliance
Investment Banking Group

Approval:

_____________________
Mufti Abdullah Siddiqui
Resident Shariah Board Member

Reviewed and Accepted by:

______________________________________
For and on Behalf of Pak Elektron Limited

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