CHITTAGONG INDEPENDENT UNIVERISTY

ASSIGNMENT
ON

SUKUK BOND AND COUNTRIES THAT ISSUE THOSE

THE DIFFERENCE BETWEEN OLD AND NEW IPO SYSTEM

SUBMITTED TO: DR. SYED MANZUR QUADER

SUBMITTED BY: NORIN TABASSUM

COURSE NAME: INVESTMENT MANAGEMENT

ID:

DATE OF SUBMISSION: 15-08-2021

TABLE OF CONTENTS
SUKUK BOND AND COUNTRIES THAT ISSUE THOSE--------------------------------------
DEFINITION--------------------------------------------------------------------------------------------
Elements in sukuk--------------------------------------------------------------------------------
Differences between sukuk and conventional bonds-----------------------------------
Types of sukuk-------------------------------------------------------------------------------------
Presentation and disclosure-------------------------------------------------------------------
Issues of sukuk-------------------------------------------------------------------------------------
Countries that issue Sukuk-------------------------------------------------------------------
SUKUK BOND AND COUNTRIES THAT
ISSUE THOSE
DEFINITION:

SUKUK ‫ صكوك‬IS THE PLURAL FORM OF THE ARABIC TERM ‫صكوك‬ SUKUK , WHICH
MEANING LEGAL INSTRUMENT , DEED, OR CHECK.

SUKUK IS A CERTIFICATE OF EQUAL VALUE REPRESENTING UNDIVIDED SHARES IN THE

OWNERSHIP OF TANGIBLE ASSETS, USUFRUCTS, AND SERVICES, OR (IN THE OWNERSHIP OF)
THE ASSET OF PARTICULAR PROJECTS OR UNIQUE INVESTMENT ACTIVITIES, ACCORDING TO
AAOIFI AND MIA.

SUKUK ARE ISSUED AND TRADED IN COMPLIANCE WITH THE PRINCIPLES OF SHARIA, WHICH
PROHIBIT RIBA OR INTEREST

ELEMENTS IN SUKUK

Special Purpose Vehicle (SPV)

Investor
- Special purpose entity
- Buy the certificate sukuk
- It is a bridge that helps the
- Share reward and risk of the
parties, involved in the contract to
underlying asset and may not get
get their shares accordingly and to
all their initial investment back
monitor their rights

Underlying asset

Company - Be used to identify the item within the

- A business firm requiring capital
can be mudarib, obligator and
other depending on the project the
sukuk is financing
agreement that provides value to the
contract
- Support the security involved in the
agreement, which the parties involved
agree to exchange as part of the derivative
product
 DIFFERENCES BETWEEN SUKUK AND
BONDS:
Subject Bonds Sukuk
Asset Ownership Does not provide the investor with a Sukuk allows the investor to
stake in the asset, project, business, or possess a portion of the assets.
joint venture that they are supporting.
Investment criteria Comply with the laws of the The asset used to back sukuks
jurisdiction in which they were issued. must be sharia-compliant.
Pricing The face value of a bond price is based The face value of sukuk is
on the issuer credit worthiness based on the market value of
(including its rating) the underlying asset
Issue unit Share of debt Share of underlying asset
Effects of cost Investor are not affected by the cost Sukuk investors are affected
related to the asset, project, business, by the cost related to the
or joint venture they support underlying asset
Sale Sale of debt Sale of ownership in the assets
backing them
 TYPES OF SUKUK

SUKUK MUDARABA
What it is?
- Profit sharing contract between two parties- an investor and the issuer
- All profits in the venture will be shared based on a pre-agreed profit sharing ratio.
However, in the case of loss- all will be borne by the investor unless there it was
due to negligence or mismanagement of the venture where the loss will then be borne
by the issuer

BASIC STRUCTURE OF MUDARABA

SUKUK
Issues mudarabah sukuk
Investor Issuer
Contract of mudarabah
(Rabb al Mal) (Amil/Mudarib)

Y%to rab al
mal

Profits shared in
according to pre
agreed
proportions
Capital

Outcome of Invests in project

project
Loss borne
totally by rabb al
maal
SUKUK MUSHARAKA

What it is?
- A Partnership between two or more parties to finance a business venture
- All parties contribute capital to it either in the form of cash or kind for the purpose of
financing this venture
- The profits for the venture will then be distributed based on a pre-agreed profit sharing
ratio. However, losses are shared based on the basis of capital contribution.

How it works?

- The Musharaka contract supports a joint business venture. All parties contribute capital
either in cash or in kind for the purpose of financing a project or business venture(that
must be shariah compliant)
- The process begins with an obligatory signs a Musharakah contract. A Musharakah
contract is a contract between partners whether the contract is between the issuer and the
Sukuk holders, or a Musharakah contract among the Sukuk holders.
- The contract specifies a profit-sharing ratio and indicates that the obligator will contribute
assets (such as cash or property) to the joint venture.
- Profit from the venture is shared based on a pre-agreed profit sharing ratio, but losses are
shared based on the capital contribution.
- With Sukuk Musharakah the Sukuk holders are the owners of the project.
 BASIC STRUCTURE IF MUSHARAKAH
SUKUK
Issues Sukuk
INVESTORS ISSUER
Contract of Musharakah Capital
contribution
- Profit
shared
according
to agreed
ratio or CAPITAL
according
to ratio of
capital
contributi
on
- Loss
REVENUE OF INVESTS IN
shared
according PROJECT PROJECT
to ratio of

SUKUK MURABAHAH

What it is?

- A contract of sale and purchase of assets where the cost and the profit margin are made
known to all parties
- Same characteristics are Murabahah
- Sukuk proceed from investor may be applies by issuer to acquire commodities and on
sell such commodities to the originator to generate revenue from the murabahah deferred
price which would be distributed to the investors throughout the term of sukuk al
How it murabahah.
works

- A Murabahah contract is an agreement between a buyer and seller for the delivery of an
asset.
- For example, the Sukuk holder buys an asset in order to supply it to the Sukuk issuer who
has no capacity to purchase the asset directly.
- The holder then sells the asset to the issuer do the cost plus profit – a markup that both
have agreed to upfront.
 WAKALAH SUKUK
This type of Sukuk stems from the concept of wakalah which means an agreement whereby one
party entrusts another party to act on its behalf.

- AAOIFI Shariah Standard no 23. Defines Wakalah as ’the act of one party delegating the
other to act on its behalf on what can be a subject matter of delegation.’

STRUCTURE OF WAKALAH SUKUK

- An investors appoints an agent (wakeel) through SPV to invest funds provided by the
investor into a pool of investments or assets and
- The wakeel lends his expertise and manages those investments in behalf of the principal
duration to generate an agreed upon profit return.
- The SPV and wakeel enter into a wakalah agreement, which will govern the appointment,
scope of services and fees payable to the wakeel, if any .
- The wakeel thereby uses its expertise to select and manage investments on behalf of the
investor to ensure that the portfolio will generate the expected profit rate agreed by the
principal

KEY FEATURES OF WAKALAH SUKUK

- The scope of the wakalah arrangement must be within the boundaries of sharia
- the subject matter of the wakalah arrangement must be clear and unambiguous
- Must be set out in the wakalah agreement. Mote that the wakeel must be paid a fee, even
if nominal, in order to wakalah to be valid.
- The principal (the issuer SPV) can only receive the expected profit. Any excess will be
held by wakeel for his benefit.
 IJARAH SUKUK

- In the Islamic finance industry, the term ’ijarah’ is broadly understood to mean the ’transfer
of the usufruct of an asset to another person in exchange for a rent claimed from him’
- The basic idea of Ijarah is that the investors (sukuk holder) are the capital providers of the
asset and are entitled to receive a return when that asset is leased.
- In this type of sukuk, the SPV (lessor) receives the sukuk proceeds from the investors; in
return, each investor gets a portion of ownership in the asset to be leased.
- The spv buys the asset from a seller. SPV then lease it back under an ijarah contract. The
company that use the asset and pays rental fee to the SPV is called the lessee. However, the
ownership of the asset itself is not transferred and will always remain with the SPV (lessor)

- IN this scenario, the SPV (lessor) receives the sukuk proceeds from the investor,
- In return, each investor gets a potion of the ownership in the asset to be leased
- The SPV buys the asset from the seller
- SPV then lease it back under an IJARAH contract
- The company that use the asset and pays rental fee to the SPV is called the lessee. However,
the ownership of the asset itself is not transferred wadn will always remain with the SPV
(lessor)
 KEY FEATURES OF IJARAH SUKUK
- The consideration (rentals) must be at an agreed rate and for an agreed period;
- The subject of the ijarah must have a valuable use
- The ownership of the assets must remain with the Trustee and only the usufruct right may
be transferred to the originator
- As ownership of the assets must remain with the trustee, the liabilities arising from the
ownership must also rest with the trustee (as owner)

SALAM SUKUK
- This type of sukuk stems from the concept of a Salam contract involves the purchase of
assets by one party from another party on immediate payment and deferred delivery
terms.
- The purchase price of the assets is typically referred to as the Salam capital and is paid
the time of entering into Salam contract.

STURCTURE OF SALAM SUKUK

- The proceed from the sales are returned to the sukuk holders. Salam sukuk are used to
support a company’s short-term liquidity requirements.

SALAM SUKUK
KEY FEATURES OF THE UNDERLYING STRUCTURE
- There must be no uncertainty between the originator and the issuer as to the currency,
amount and manner of payment of the salam capital ;
- Payment of the salam capital must be made immediately at the time of entry into the
salam contract;
- The salam assets must be in terms of fungible gods that can be weighed, measure or
counted and the individual articles of which do not differ significantly, or assets
manufactured by companies that can be identified by standardized specifications and are
regularly and commonly available at any time;
- The salam assets cannot be
- 1. Specific asset;
- 2. Gold, silver or any item which the originator may not be held responsible and
- 3. Any asset or item for which the originator may not be held responsible and
- 4. Any assets or item whose value can change according to subjective assessment

RECOGNITION AND MEASUREMENT

- MFRS requires sukuk be recognized at the point when proceeds are received
- It is measured at amortized cost
- The originator would account for sukuk similar to a second borrowing and would be
classified as a liability
- Sukuk liabilities should be subsequently measured at amortized cost under MFRS 9
unless it is measured at fair value through profit or loss. This is because un MFRS 9,
sukuk is classified under financial liabilities which are held to maturity. Accordingly. The
amortized cost will be used to measure support.
 PRESENTATION AND DISCLOSURE
- Under MFRS 132, in the statement of the financial position , sukuk would most likely be
classified as a financial asset by the investor and as a financial liability by the issuer.

ISSUES OF SUKUK
- Sukuk debt or equity
- Rebate in sale based sukuk- the inclusion of ibra may affect the contract as the contract is
uncertain in term of price
- Resource to the underlying asset- sensitivity issue in terms of transferring the asset to the
foreign investors, corporates did not have suitable assets, or the assets were not sufficient
or already encumbered

COUNTRIES THAT ISSUE SUKUK

BAHRAIN
BANGLADESH .
BRUNEI
EGYPT
INDONESIA
IRAN.
MALAYSIA
KAZAKHSTAN
KUWAIT
PAKISTAN
QATAR
SAUDI ARABIA
SINGAPORE
SOMALIA
TURKEY
UNITED ARAB EMIRATES
UNITED KINGDOM

IPO Valuation in the New and Old Economies

Introduction
Initial public offerings, or IPOs, are valued in accounting and finance because they provide
capital market players with their first opportunity to value a set of corporate assets. The
valuation of initial public offerings (IPOs) is equally important from the standpoint of economic
efficiency: it provides the first opportunity for managers of such (typically young) enterprises to
monitor price signals from the capital markets. Such indications can either confirm or refute
management's expectations about the company's future growth prospects, with clear
ramifications for employment and corporate investment in the real economy. The valuation of
initial public offerings (IPOs) in the late 1990s piqued the interest of both the financial and
popular press. The public's enthusiasm in the "new e-economy" contributed to the surge in
interest in IPO valuation in the late 1990s. The stock market witnessed tremendous increases in
the latter half of the 1990s, fueled by technology businesses. According to Baily and Lawrence
(2001), both old and new enterprises produced considerable breakthroughs during this time
period, much of it connected to information technology, resulting in major increases in
productivity and economic growth. This new e-economy has piqued the interest of academics
and the general public. Equity values, particularly those of technology and internet companies,
reached new highs in the late 1990s. Several observers have questioned whether traditional
valuation methodologies are still applicable in the new e-economy as a result of these massive
price increases. McCarthy (1999) cites a statement by Jerry Kennelly, Chief Financial Officer of
Inktomi, as an illustration of this concern: “Early profitability is not the key to value in a
company like this (Inktomi)”. Such allegations were particularly widespread in the context of
initial public offerings (IPOs), which are more difficult to appraise than publicly traded
companies due to their shorter financial history. “But appraisals are just as often dependent on
gut feel,” Gove (2000) observes. “It's as if everyone just decides on a number that they are
comfortable with,” one entrepreneur said.

Differences in IPO valuation across time-periods and industries

So far, the regressions constrain the coefficients to be constant across time-periods and
industries. Next, we relax this constraint and examine how the valuation function changed in
the recent boom and crash periods relative the 1980s. Additionally, we examine whether tech
firms and internet firms are valued differently and whether loss firms are valued differently. The
second column in Table 5 contains the main findings of the paper. To accomplish our
aforementioned objectives we use a dummy variable design. The base group consists of firms
whose IPO was completed in the years 1986-1990 which are profitable and which belong to
non-tech industries. Dummies for the boom period (January 1997 through March 2000), the
crash period (April 2000 through December 2001), technology firms, internet firms, and loss
firms allow us to asses whether these periods and / or types of firms are valued differently and
whether accounting variables, growth, and retention related to these periods and / or firms are
valued differently. We begin by organizing our findings around specific variables (income, sales,
etc.). We then provide a different perspective by emphasizing inter-period and inter-industry
differences. Because most of the coefficients have t-statistics that are greater than 4.50 in
absolute value, we comment on statistical significance only when a variable is not statistically
significant. Our findings are as follows: · Income for profitable non-tech firms was valued
positively in the 1980s (coefficient = 0.24). Recall that in the earlier regressions the coefficient
on income was negative. The reversal in the sign of the coefficient can be attributed to the
inclusion of the interaction between the dummy for loss firms and income. The coefficient on
the latter is -0.52, consistent with the findings of Hand (2000) and BMS for internet firms. Thus,
for loss firms, increases in income are actually penalized by investment bankers. We believe
that this is attributable to the possibility that losses reflect strategic expenditures such as
marketing costs. Additionally, loss firms, on average, are valued less than are profitable firms as
indicated by the negative coefficient on the loss dummy (coefficient = -0.20). · In both the boom
and crash periods, income was valued higher relative to the 1980s (coefficients = 0.05). This
finding is rather surprising in light of the claims in the financial press that the value relevance of
accounting income declined in the new e-economy period. Income of tech firms and internet
firms are valued higher than income of non-tech firms. This is again surprising and contrary to
our expectation because firms from these two industries tend to have prospects that are more
uncertain. 35 · Sales for profitable non-tech firms was valued positively in the 1980s (coefficient
= 0.21). In the boom period, sales were valued less relative to the 1980s (coefficient = -0.13). As
discussed earlier, sales is both a proxy for firm size and an indicator of value. Thus, on the one
hand the lower coefficient on sales is consistent with smaller firms being assigned higher
valuations in the boom period; on the other hand, contrary to views articulated in the popular
press the results also indicate that sales became a less important value-indicator in the boom
period. In contrast to boom period sales, sales from the crash period have valuations very close
to those from the 1980s as indicated by the insignificant coefficient on the interaction between
sales and the crash dummy. Consistent with the notion that tech and internet firms have more
risky prospects, sales of firms from these industries have lower coefficients than those of non-
tech firms. · Book value of equity for profitable non-tech firms is not significantly related to
offer values in the 1980s (coefficient = 0.008). In the boom period, it was valued less compared
to the 1980s, whereas in the crash period its valuation was similar to that of the 1980s. While
the valuation of book value of equity of tech firms is very similar to non-tech firms, internet
firms’ book values are valued higher. · R&D of profitable non-tech firms in the 1980s is
positively related to offer values (coefficient = 0.20). In both boom and crash periods, R&D is
valued less compared to the 1980s. R&D of tech firms is valued less than that of non-tech firms.
For internet firms, however, the valuation of R&D is indistinguishable from that of non-tech
firms. · Price-to-sales comparable of profitable non-tech firms were valued positively in the
1980s (coefficient = 0.06). In the boom period, investment bankers weighted comparable more
positively. However, in the crash period, industry-comparable were actually valued negatively,
as indicated by the difference between the coefficient for the base period and the 36 crash
period (0.06 – 0.22). Comparable of tech and internet firms are not valued differently from
those of non-tech firms. · Insider retention of profitable non-tech firms was valued positively in
the 1980s. In the boom period, insider retention was valued higher than it was in the 1980s. In
the crash period, retention was valued less than it was in the 1980s, but the difference is not
statistically significant. Consistent with our expectation, insider retention of tech firms and
internet firms is valued higher than for non-tech firms. This suggests that investment bankers
weigh nonfinancial indicators like insider retention for tech and internet firms more heavily
because financial variables for these firms are less reliable indicators of future performance.
Additionally, as predicted, insider retention of loss firms is valued more than that of profitable
firms (coefficient = 0.91). We interpret this is evidence that investment bankers perceive
retention as a more credible signal of management confidence about firm prospects when the
firm is losing money. · Lastly, the coefficients on the dummy variables for the boom and crash
periods are positive (respectively 0.62 and 2.07), suggesting that valuations in these two recent
sub-periods were higher relative to the 1980s. The dummies for tech firms and internet firms
are both negative, indicating that after controlling for fundamentals these firms are valued less
than are non-tech firms. One explanation for this finding is that investment bankers perceive
these firms as riskier investments than non-tech firms. Overall, for profitable non-tech firms in
the 1980s, with the exception of book value of equity, all the independent variables in our
valuation model were valued positively. In the boom period (January 1997 through March
2000), relative to the 1980s, while income, industry comparable, and insider retention were
valued more, sales, book value of equity and R&D were valued less. Of these findings, the most
surprising result is that income was valued more because this is contrary to assertions in the
financial press that income became a less important value indicator in the new e-economy
period.

Summary and conclusions

We examine the valuation of accounting variables, growth opportunities, and insider retention
for a sample of 1,625 IPOs from three time-periods: 1986-1990, January 1997 through March
2000 (designated as the boom period), and April 2000 through December 2001 (designated as
the crash period). Specifically, we test for valuation differences in the boom and crash periods
relative to the more stable 1980s. Additionally, we investigate whether accounting variables,
growth, and insider retention for technology IPOs and internet IPOs are valued differently. Our
major findings are as follows. For profitable non-tech firms in the 1980s, income, sales, R&D,
industry-comparable, and insider retention are positively related to offer values. In the boom
period (January 1997 through March 2000), relative to the eighties, income, industry
comparable, and insider retention are valued more. Sales, book value of equity, and R&D are
valued less. The finding on income is surprising and contrary to claims made in the financial
press. In the crash period (April 2000 through December 2001), relative to the eighties, income
is valued more, but R&D and industry comparable are valued less. We also document that,
relative to the boom period, crash period sales were valued more, whereas insider retention
and industry comparable were valued less. Relative to non-tech firms, tech firm earnings and
insider retention are valued more, but their sales and R&D are valued less. Internet firms’ sales
are valued less; but their income, book value, and insider retention are valued more. We also
investigate whether first-day investors and investment bankers agree on the weights assigned
to income, book value of equity, sales, R&D, industry comparable, and insider retention. We
find that while the two groups value accounting variables and growth proxies differently, these
differences are not economically important for the most part. With respect to insider retention,
first day investors valued it less in the 1980s and during the crash period and more in the boom
period, than do investment bankers. Additionally, investors value insider retention of tech,
internet, and loss firms more than do investment bankers. First-day investors assign lower
valuations to tech firms, internet firms, and loss firms than do investment bankers.