CHITTAGONG INDEPENDENT UNIVERISTY

ASSIGNMENT
ON

SUKUK AND WHICH COUTRIES ISSUE THOSE

THE DIFFERENCE BETWEEN OLD AND NEW IPO SYSTEM

COURSE NAME: INVESTMENT MANAGEMENT

SUBMITTED TO: DR. SYED MANZUR QUADER

SUBMITTED BY: SAKIBUR RAHMAN

ID: 17201080

DATE OF SUBMISSION: 15-08-2021

Table of contents
Sukuk and which countries issue those……………………………………………… 3
Definition………………………………………………………………………………………………………3
Differences between sukuk and conventional bonds……………………………………..3
Elements in sukuk……………………………………………………………....4
Types of sukuk……………………………………………………………………………………………….5
Presentation and disclosure………………………………………………………………………….13
Issues of sukuk……………………………………………………………………………………………..13
SUKUK AND WHICH COUNTRIES
ISSUE THOSE

DEFINITION:

Sukuk comes from Arabic word ‫صكوك‬, the plural of ‫صك‬, which means legal instrument,
deed, check.

Sukuk is a certificate of equal value that represents undivided shares in the ownership of
tangible assets, usufructs, and services, or the asset of specific projects. or unique
investment activities, according to AAOIFI and MIA.

Sukuk are issued and exchanged in accordance with sharia norms, which restrict the
payment of Riba or interest.

DIFFERENCES BETWEEN SUKUK AND

CONVENTIONAL BONDS:

Subject Bonds Sukuk

Asset Ownership Does not provide the investor with a
stake in the asset, project, business, or
joint venture that they are supporting.
Investment criteria Comply with the laws of the
jurisdiction in which they were issued.
Pricing The face value of a bond price is based
on the issuer credit worthiness
(including its rating)
Issue unit Share of debt
Effects of cost Investor are not affected by the cost
Sukuk allows the investor to
possess a portion of the assets.
The asset used to back sukuks
must be sharia-compliant.
The face value of sukuk is
based on the market value of
the underlying asset
Share of underlying asset
Sukuk investors are affected
 related to the asset, project, business,
or joint venture they support
Rewards and risks Return from the bond correspond to the
fixed interest
Their principal is guaranteed to be
returned at the bond’s maturity date
Sale Sale of debt
by the cost related to the
underlying asset
Sukuk holder receives a share
of profits from the underlying
assets
Sukuk holder accepts any loss
incurred
Sale of ownership in the assets
backing them

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
underlying asset and may not get
to get their shares accordingly
all their initial investment back
and to 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
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 event of a loss, the investor is responsible for the entire amount
unless the loss was caused by the issuer's incompetence or mismanagement of the
endeavor.

How it works
- The investor will supply the entrepreneur with funds for his business venture. In
return , the investor will get a return in the funds he puts in based in the profit
sharing ratio
- The main le in a sukuk mudarabah is the investors are dormant business partners
who do not participate in the management of the underlying asset, business or
project. The party which utilizes the funds on the other hand , is the working
partner.
- The profit form the investment inactivity is shared between both parties based on
a pre-agreed ratio depending on how well the asset or the project performs. Losses
suffered will be borne by the investor
- However, Sukuk Mudabarah should not contain a guarantee from the issuer for the
capital or a fixed profit, or a profit based on any percentage of the capital
 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 Capital
proportions

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. Losses, on the other hand, are divided based on capital contribution.

How it works?

- The Musharaka contract supports a joint business venture. For the goal of funding a
project or business venture, all participants contribute money, either in cash or in kind
(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 murabahah.
How it works

- A Murabahah contract is an agreement between a buyer and seller for the delivery of
an asset.
- For example, a Sukuk holder might purchase an asset in order to sell it to a Sukuk issuer
who lacks the financial means to do so.
- The holder then sells the asset to the issuer do the cost plus profit – a markup that both
have agreed to upfront.
- After that, the issuer sends installment payments to the holder.

WAKALAH SUKUK
This sort of Sukuk is based on the notion of wakalah, which refers to a contract in which one
party entrusts another to act on their behalf.

- No. 23 of the AAOIFI Shariah Standard. Wakalah is defined as 'the act of one party giving
authority to the other to act on its behalf on a subject matter of delegation.'

STRUCTURE OF WAKALAH SUKUK

- Through an SPV, an investor appoints an agent (wakeel) to invest funds provided by the
investor in a pool of investments or assets.
- The wakeel contributes his skills and manages those investments on behalf of the
principal for the agreed-upon period of time in order to achieve a 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 Islamic finance, the term 'ijarah' refers to the 'transfer of the usufruct of an asset to
another person in exchange for a rent demanded from him.'
- The primary concept behind Ijarah is that the investors (sukuk holders) are the asset's
capital providers and are entitled to a return when the asset is leased.
- In this type of sukuk, the SPV (lessor) receives the sukuk proceeds in exchange for a share
of the leased asset's ownership. A seller sells the asset to the SPV
- The SPV then leases it back to them under an ijarah agreement. The lessee is the company
that uses the asset and pays the SPV a rental fee. The asset's ownership, on the other
hand, is not transferred and will always be held by the SPV (lessor)
 - The SPV (lessor) receives the sukuk proceeds from the investor in this situation.
- In return, each investor gets a portion of the ownership in the asset to be leased
- The asset is purchased by the SPV 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 using Sukuk

Bahrain
Bahrain is a prominent sukuk issuer.

Bangladesh
Bangladesh Bank started steps in August 2020 to expand sukuk with the support of national private
Islamic banks.

Brunei
Brunei's government began issuing short-term Sukuk Al-Ijarah securities in 2006.

Egypt
Egyptian President Muhammad Morsi signed a bill on May 8, 2013, allowing the government to issue
sukuk; however, the applicable regulations have yet to be formed, and the law has been updated by
adding certain additional elements to the capital market law and its executive regulations. In 2016,
Egypt's government stated that "new financial tools for implementation" would be used.

Gambia
Gambia took the position of Sudan as one among the ten countries issuing sukuk in 2007. It has one
of the lowest sukuk issuance rates, with $12.6 million issued in 2008.

Indonesia

Iran

Malaysia
The Malaysian ringgit accounts for more than half of all sukuk issued worldwide, with the US dollar
coming in second. Malaysia is one of the few countries that requires the rating of sukuk and other
debt securities
Kazakhstan
Kazakhstan completed its first sukuk, which will be issued on the Malaysian market by the
Development Bank of Kazakhstan (DBK), in June 2012. The DBK, which is 100 percent controlled
by Kazakhstan's government, is managing the ringgit-denominated issuance, which is effectively a
quasi-sovereign offering, in collaboration with HSBC and Royal Bank of Scotland (RBS).The
issuance will be listed on the Kazakhstan Stock Exchange, which has developed the infrastructure to
list Islamic financial products such as Ijara and Musharaka Sukuk and investment funds.

Kuwait
Pakistan
Pakistan issued a $1 billion sukuk with a 5% return to offset a trade imbalance.

Qatar
Qatari authorities and government-affiliated firms are considering issuing Sukuk to fund
infrastructure projects. Qatar issued 11% of all global Sukuk in 2011.

Saudi Arabia
On April 6, 2017, Saudi Aramco, the Saudi Arabian national petroleum and natural gas enterprise,
released its first ever Sukuk. The action, which raised around 11.25 billion Riyals ($3 billion), was
spurred by low oil prices.

The Saudi government raised $9 billion in sukuk later that month. The first half were five-year sukuk
with a swap spread of 100 basis points, while the second half were ten-year sukuk with a swap
spread of 140 basis points. The government sold another 7 billion riyals worth of domestic sukuk in
September 2017.
Singapore
In 2009, Singapore became the first country with a non-Muslim majority to issue a Sovereign Sukuk.
It's known as the MAS Sukuk in Singapore, and it's issued by Singapore Sukuk Pte Ltd, a wholly
owned subsidiary of the Monetary Authority of Singapore. In terms of compliance with liquidity
requirements, the Singapore MAS Sukuk is classified comparable to traditional Singapore
Government Securities ("SGS").

Somalia
The Somalia Stock Exchange (SSE) is the country's stock exchange. The SSE signed a
Memorandum of Understanding in August 2012 to help it with technical development. Identification
of necessary knowledge and support is part of the agreement. As the young stock market develops,
sukuk bonds and halal equities are also expected to be part of the agreement.

Turkey
In October of 2012, Turkey issued its first sukuk. The October 2012 issuance was a dual issuance,
with one in US dollars (issued on October 10, 2012 for $1.5 billion) and the other in Turkish lira
(issued on October 10, 2012 for $1.5 billion) (issued on 2 October 2012 for 1.62LRY). The US
Dollars issuance was oversubscribed, according to Sukuk.com, and was originally expected to be for
$1 billion. But because of strong demand from the Middle East it was increased to $1.5 billion

United Arab Emirates

As of January 2015, NASDAQ Dubai had listed 18 sukuk for a total of $24 billion. The most recent of
these is Fly Dubai.

Both GE and Goldman Sachs have invested in the UAE, with GE selling a $500 million 5-year sukuk
in 2009[108] and Goldman Sachs becoming the first conventional U.S. bank to issue sukuk in 2014.

United Kingdom
Hong Kong
Hong Kong had issued two sovereign Sukuk as of the middle of 2015. Its first issuance, a five-year
$1 billion Ijara Sukuk with a profit rate of 2.005 percent, was released in September 2014. It used an
innovative Wakala structure to issue its second sovereign Sukuk in June 2015, this time for $1 billion
with a 5-year maturity and a profit rate of 1.894 percent.
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.