Resolutions of the SC Shariah Advisory Council

Resolutions of the Securities Commission Shariah Advisory Council, Second Edition (pdf)
Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia, 31 December 2019 (pdf)

Bahasa Malaysia

Keputusan Majlis Penasihat Syariah Suruhanjaya Sekuriti Malaysia, Edisi Kedua (pdf)
Keputusan Majlis Penasihat Syariah Suruhanjaya Sekuriti Malaysia, 31 Disember 2019 (pdf)

New Resolutions of the SC Shariah Advisory Council

The 233rd and 234th Shariah Advisory Council Of The Securities Commission Malaysia Meetings (29 June 2020 and 20 July 2020)

Digital Assets from Shariah Perspective

Background Digital assets as regulated under the jurisdiction of Securities Commission Malaysia (SC) consist of digital currency¹ and digital token (Digital Assets). The definition and scope of digital currency and digital token which were defined as securities are as prescribed under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019.² Several issues from Shariah perspective in relation to Digital Assets were presented to the Shariah Advisory Council of SC (SAC). Issue Since there are Digital Assets which are categorised as capital market instruments, the SAC had discussed the following issues from Shariah perspective:
(i)	Whether Digital Assets can be recognised as mal (asset)³ from Shariah perspective?;
(ii)	Whether Digital Assets can be classified as currency or`urudh (goods)⁴?; and
(iii)	How to determine the Shariah status of a digital token?
Resolution SAC in a series of its meetings had discussed issues in relation to Digital Assets from Shariah perspective. The discussions on Digital Assets in the SAC meetings are limited to Digital Assets that are regulated by the SC. The SAC had, at its 233rd meeting held on 29 June 2020 and its 234th meeting held on 20 July 2020, resolved the following:
(A)	Digital Currency Digital currency is recognised as mal from Shariah perspective. The SAC had viewed digital currency from two scopes, as follows:
	(1)	Digital currency that is based on technology without any underlying
		Digital currency in this form is categorised as `urudh and it is not a currency from Shariah perspective. Such digital currency is not categorised as ribawi items. Therefore, the trading of such digital currency is not subject to the principle of bai` al-sarf (currency exchange).
	(2)	*Digital currency that is backed by ribawi* items**
		(i)	Digital currency that is backed by gold, silver and currency
			If a digital currency is backed by ribawi items comprising gold, silver and currency, it is categorised as a currency from Shariah perspective. Hence, the trading of such digital currency is subject to the principle of bai` al-sarf.
		(ii)	*Digital currency that is backed by ribawi* items other than gold, silver and currency**
			If a digital currency is backed by ribawi items other than gold, silver and currency, it is categorised as amwal ribawiyyah (ribawi items). Therefore, the trading of such digital currency is subject to the Shariah requirements of ribawi items.
(B)	Digital Token Digital token is recognised as mal under the category of `urudh from Shariah perspective. In determining the Shariah status of a digital token, the following matters must be fulfilled:
	(i)	The proceeds raised from the issuance of the digital token must be utilised for Shariah-compliant purposes;
	(ii)	The rights and benefits attached to the digital token must be Shariah-compliant; and
	(iii)	In the event that the utilisation of proceeds under item (i) and the entitlement of rights and benefits under item (ii) above are for mixed activities of Shariah compliant and Shariah non-compliant purposes, the existing SAC resolution on utilisation of sukuk proceeds and the business activities benchmark under the Shariah screening methodology for listed companies on Bursa Malaysia are applicable.
	If a digital token is backed by ribawi items, the trading of such digital token is subject to the Shariah requirements for trading of ribawi items.
This resolution is not applicable to any Digital Assets which are outside the jurisdiction of SC. The SAC has also resolved that investment and trading of Digital Assets that fulfil the above requirements and which are traded on Digital Asset Exchange (DAX) registered with SC are permissible.

Refers to a digital currency that is approved by the SC for trading on Digital Asset Exchange (DAX).

The definition and scope of digital currency and digital token are as prescribed under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 which can be retrieved at the following SC’s website: https://www.sc.com.my/api/documentms/download.ashx?id=8c8bc467-c750-466e-9a86-98c12fec4a77

According to the majority of Islamic scholars, mal refers to something that has value, can be traded and shall be subject to compensation for anyone who damage it, al-Suyuti, al-Asybah wa al-Naza’ir, 1983, p. 409.

⁴

Ibn Qudamah defines`urudh as mal other than currency such as plants, animals, lands and others. Meanwhile, for al-Bujairimi, anything that is exchanged with currency, it is considered as`urudh. Ibn Qudamah, al-Mughni, v. 4, p. 249, al-Bujairimi, al-Bujairimi `ala al-Khatib, v. 3, p. 55.

The 229th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (24 February 2020)

Conversion of Sukuk and Redeemable Convertable Unsecured Islamic Debt Securities (RCUIDS) Into New Ordinary Shares of the Issuer

Background Several industry proposals relating to convertible sukuk structured based on the Shariah principles of ijarah and wakalah bi al-istithmar and redeemable convertible unsecured Islamic debt securities (RCUIDS) structured based on the Shariah principle of murabahah were presented to the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC). The main Shariah issue discussed in those proposals was related to the conversion of sukuk and RCUIDS into new ordinary shares of the issuer (Conversion Shares). Issue Several issues in relation to the conversion of convertible sukuk and RCUIDS into the Conversion Shares were discussed as follows:
1.	*Convertible sukuk structured based on the Shariah principle of ijarah* (Convertible Sukuk Ijarah)**
	(a)	Whether the conversion of the Convertible Sukuk Ijarah into the Conversion Shares is permissible and whether a leased asset could be considered as capital contribution in-kind by the sukukholders into the business of the issuer for the purpose of such conversion? and
	(b)	Is there any specific Shariah mechanism that should be applied to convert the Convertible Sukuk Ijarah into the Conversion Shares?
2.	*Convertible sukuk structured based on the Shariah principle of wakalah bi al-istithmar* (Convertible Sukuk Wakalah)**
	(a)	Whether the conversion of the Convertible Sukuk Wakalah into the Conversion Shares is permissible if the ratio of non-debt investment assets is less than 33% of the aggregate value of the total wakalah investments portfolio (“Wakalah Portfolio”), which is applicable at the point of initial investment of the Convertible Sukuk Wakalah?
	(b)	Whether the conversion of the Convertible Sukuk Wakalah into the Conversion Shares is considered as capital contribution in the form of debt by the sukukholders if the ratio of non-debt investment assets is less than 33% of the Wakalah Portfolio? and
	(c)	Is there any specific Shariah mechanism that should be applied to convert the Convertible Sukuk Wakalah into the Conversion Shares?
3.	*Redeemable convertible unsecured Islamic debt securities structured based on the Shariah principle of murabahah* (RCUIDS Murabahah)**
	(a)	Whether the conversion of the RCUIDS Murabahah into the Conversion Shares is permissible since RCUIDS represent debt and whether debt could be used by the RCUIDS holders as capital contribution into the business of the issuer? and
	(b)	Is there any specific Shariah mechanism that should be applied to convert the RCUIDSMurabahah into the Conversion Shares?
Resolution The SAC had, at its 229th meeting held on 24 February 2020 resolved as follows:
1.	Convertible Sukuk Ijarah
	(a)	The conversion of the Convertible Sukuk Ijarah into the Conversion Shares is permissible. In this regard, a leased asset can be considered as capital contribution in-kind by the sukukholders into the business of the issuer.
	(b)	The conversion of the Convertible Sukuk Ijarah into the Conversion Shares is effected by:
		(i)	giving notice of conversion; and
		(ii)	a conversion arrangement,
		as agreed by the contracting parties.
2.	Convertible Sukuk Wakalah
	(a)	The conversion of the Convertible Sukuk Wakalah into the Conversion Shares is permissible even though the ratio of non-debt investment assets is less than 33% of the Wakalah Portfolio.
	(b)	The conversion of the Convertible Sukuk Wakalah would not be considered as capital contribution in the form of debt by the sukukholders into the business of the issuer since the Convertible Sukuk Wakalah represents ownership in the Wakalah Portfolio provided that the non-debt investment assets must at all time be a component of the Wakalah Portfolio.
	(c)	The conversion of the Convertible Sukuk Wakalah into the Conversion Shares is effected by:
		(i)	giving notice of conversion; and
		(ii)	a conversion arrangement,
		as agreed by the contracting parties.
3.	RCUIDS Murabahah
	(a)	Direct conversion of RCUIDS Murabahah into the Conversion Shares is not permissible since RCUIDS Murabahah represents debt. However, the conversion of RCUIDS Murabahah into the Conversion Shares is permissible via specific Shariah mechanism in accordance with the requirements as set out in item 3(b) below.
	(b)	The requirements for the conversion of the RCUIDS Murabahah into the Conversion Shares are as follows:
		(i)	The issuer should exchange the RCUIDS Murabahah held by the RCUIDS holders with non-debt assets (the value must be known);
		(ii)	The RCUIDS holders shall subsequently contribute the non-debt assets as their capital contribution in-kind into the business of the issuer; and
		(iii)	The issuer shall thereafter issue the Conversion Shares to the RCUIDS holders.

The 226th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (13 November 2019)

Revised Resolution on Utilisation of Sukuk Proceeds for Refinancing of Outstanding Conventional Borrowings
Background
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, in series of its meetings, deliberated on the issue in relation to the utilisation of sukuk proceeds for refinancing of outstanding conventional borrowings that were used for Shariah non-compliant purposes. This issue was related to the previous SAC resolution on utilisation of sukuk proceeds for refinancing of outstanding conventional borrowings where the SAC had resolved at the 190th SAC meeting held on 27 October 2016 that the sukuk proceeds may be utilised to refinance (wholly or partly) outstanding conventional borrowings (Previous Utilisation of Sukuk Proceeds for Refinancing Outstanding Conventional Borrowings Resolution).

Issue
The issue in deliberation was whether the utilisation of sukuk proceeds for refinancing of outstanding conventional borrowings that were used for Shariah non-compliant purposes complies with the Previous Utilisation of Sukuk Proceeds for Refinancing Outstanding Conventional Borrowings Resolution.
Resolution
The SAC had, at its 226th meeting held on 13 November 2019, resolved that the sukuk proceeds may be utilised to refinance (wholly or partly) outstanding conventional borrowings provided that the outstanding conventional borrowings which were used for activities or purposes that are prohibited by Shariah is not more than 49% of the total outstanding conventional borrowings.

Notwithstanding the above, if a company that carries out Shariah non-compliant business activities is in the process of converting its business into a fully Shariah compliant business, the sukuk proceeds may be utilised to refinance (wholly or partly) its outstanding conventional borrowings.

This resolution is applicable to the issuer and the issuer’s group of companies and it shall supersede the Previous Utilisation of Sukuk Proceeds for Refinancing Outstanding Conventional Borrowings Resolution.
The 224th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (26 September 2019)
(1) Waiver of Sukukholders’ Right on the Capital and/or any Payment Obligation in Additional Tier 1 Sukuk and Tier 2 Sukuk
Background
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, at its 224th meeting held on 26 September 2019 discussed issues arising from the industry proposals relating to Additional Tier 1 Sukuk (“AT1 Sukuk”) and Tier 2 Sukuk.

Issue
The issues in deliberation were on the following matters which relate to the relevant policy document on capital adequacy framework issued by Bank Negara Malaysia:
whether there is any Shariah concept that may be applied in the situation that may require the AT1 Sukuk structured based on the Shariah principles of musharakah, mudharabah or wakalah bi al-istithmar, whichever is applicable, to be written-off at the point of non-viability or loss absorption events;
whether there is any Shariah concept that may be applied in the situation that may require the Tier 2 Sukuk structured based on the Shariah principles of wakalah bi al-istihmar, murabahah or ijarah, whichever is applicable, to be written-off at the point of non-viability event; and
whether there is any Shariah concept that may be applied in the situation whereby the payment of profit arising from the AT1 Sukuk structured based on the Shariah principles of musharakah, mudharabah or wakalah bi al-istithmar, whichever is applicable, to be waived at the periodic distribution date.
Resolution
The SAC has resolved as follows:
(1) Write-off of AT1 Sukuk at the point of non-viability or loss absorption events

AT1 Sukuk structured based on the Shariah principles of musharakah, mudharabah or wakalah bi al-istithmar, whichever is applicable, may be written-off (in whole or in part) at the point of non-viability or loss absorption events based on the following Shariah concepts (whichever applicable):
tanazul, whereby the sukukholders waive their rights or interests on the capital payment or profit payment (if any); or
ibra’, whereby the sukukholders release their rights of claim on any amounts due,
arising from the AT1 Sukuk.
(2) Write-off of Tier 2 Sukuk at the point of non-viability event
a. Tier 2 Sukuk structured based on the Shariah principle of wakalah bi al-istithmar may be written-off (in whole or in part) at the point of non-viability event based on the following Shariah concepts (whichever applicable):
tanazul, whereby the sukukholders waive their rights or interests on the capital payment or profit payment (if any); or
ibra’, whereby the sukukholders release their rights of claim on any amounts due,
arising from the Tier 2 Sukuk;
(b) Tier 2 Sukuk structured based on the Shariah principle of murabahah may be written-off (in whole or in part) at the point of non-viability event based on the Shariah concept of ibra’, whereby the sukukholders release their rights of claim on any amounts due arising from the Tier 2 Sukuk; and
(c) Tier 2 Sukuk structured based on the Shariah principle of ijarah may be written-off (in whole or in part) at the point of non-viability event based on the following:
the Shariah concept of ibra’, whereby the sukukholders release their rights of claim on any amounts due arising from the Tier 2 Sukuk; and
the Shariah principle of hibah, whereby the sukukholders give away their rights in the asset under the Tier 2 Sukuk (from the principal amount, in whole or in part) without any consideration.
(3) Cancellation of discretionary payment by the issuer of AT1 Sukuk
The payment of profit arising from the AT1 Sukuk structured based on the Shariah principles of musharakah, mudharabah or wakalah bi al-istithmar, whichever is applicable, that is due on the periodic distribution date may be waived (in whole or in part) by the sukukholders based on the Shariah concept of tanazul.
(2) Revised Resolution on Asset Pricing Requirements for Sukuk Issuance
Background
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, at its 224th meeting held on 26 September 2019 discussed on the amendments to the Shariah requirements for sukuk. One of the issues discussed was on the existing SAC of SC resolution on asset pricing requirements for sukuk issuance.

Issue
The issue in deliberation was whether the asset pricing requirements would also be applicable for sukuk structured based on any Shariah principles without limiting to sukuk structured based on `uqud mu`awadhat (such as bai` bithaman ajil, murabahah, istisna` and ijarah) or wakalah bi al-istithmar which involves the components of sale and purchase of assets or commodities murabahah.
Resolution
The SAC has resolved as follows:
(1) The asset purchase pricing of an identified asset for sukuk issuance that involve the sale and purchase of identified assets which are structured based on any Shariah principles is permissible subject to the requirements in item (2) below.
(2) The purchase price of an identified asset under sukuk issuance must not exceed 1.51 times of:
the fair value of the asset; or
any other appropriate value of such asset.
(3) The asset pricing requirements under item (2) above are not applicable for sukuk which are structured based on any Shariah principles that does not involve the sale and purchase of identified assets including but not limited to sukuk ijarah that involves the lease and lease-back of the identified assets.

The 219th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (25 April 2019)

1)	Guarantee of Profit by a Third Party, Sister Company and Associate Company of the Sukuk Issuer in Sukuk based on `Uqud Ishtirak and `Aqd Wakalah bi al-Istithmar
Background The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, in series of its meetings, deliberated on the following issues: in sukuk based on`uqud ishtirak and `aqd wakalah bi al-istithmar.
	(i)	guarantee of profit by a third party, sister company and associate company of the sukuk issuer; and
	(ii)	imposition of ujrah (fee) on such guarantee,
Issue
The issue in deliberation was on whether a third party, sister company and associate company of the sukuk issuer may guarantee profit and impose ujrah on such guarantee in sukuk based on `uqud ishtira and `aqd wakalah bi al-istithmar.
Resolution
The SAC had, at its 219th meeting held on 25 April 2019, resolved that it is permissible for a third party, sister company and associate company of the sukuk issuer:
	(i)	to provide guarantee on profit; and
	(ii)	to impose ujrah on such guarantee,
	in sukuk based on`uqud ishtirak and ` aqd wakalah bi al-istithmar.
2)	Collateral Assets in Islamic Capital Market Products
Background
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, in its 219th meeting held on 25 April 2019, deliberated on the issue of collateral assets in Islamic capital market (ICM) products, among others, are physical assets and financial assets.
Issue
The issue in deliberation was on whether an asset that can be used as collateral is limited to Shariah-compliant asset only or it can also involve Shariah non-compliant asset.
Resolution
The SAC resolved the following:
(1)	Asset which is valuable and recognised by Shariah may be used as collateral in ICM products. These assets include:
	(i)	A physical asset that is used to carry out activities which are Shariah compliant and/or Shariah non-compliant.
	(ii)	A financial asset that is Shariah compliant and/or Shariah non-compliant.
(2)	In the case where Shariah non-compliant financial asset is used as collateral, the SAC resolved as follows:
	(i)	Ordinary Shares and Preference Shares
		(a)	Shariah non-compliant ordinary shares and preference shares of companies listed on Bursa Malaysia; and
		(b)	Shariah non-compliant ordinary shares and preference shares of unlisted companies,
		may be accepted as collateral provided that the core business of the companies is Shariah compliant based on the confirmation by the Shariah advisers registered with SC. The total value of the Shariah non-compliant ordinary shares and preference shares may be accepted as the collateral value.
	(ii)	Shariah Non-Compliant Financial Asset other than Ordinary Shares and Preference Shares
	Shariah non-compliant financial asset other than the ordinary shares and preference shares as stated in item (2)(i)(a) and (b) above may be accepted as collateral provided that the value of the collateral is limited to the Shariah compliant portion only. In this regard:
		(a)	The collateral value of the Shariah non-compliant financial asset which is based on interest such as conventional fixed deposit certificate and conventional bond is limited to the principal amount of such instruments; and
		(b)	The collateral value of the Shariah non-compliant unit trust fund is limited to the initial investment and any additional investment by the investors.

The 217th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (25 February 2019)
Shariah Screening Methodology for Listed Securities of a Stock Exchange Holding Company (SEHC)

Background
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) had, in series of its meetings, deliberated on the Shariah screening methodology for an SEHC. Under the law, the SEHC has the obligation to facilitate capital raising and trading activities which include services for the listing, trading, clearing, settlement and depository of both Shariah-compliant and Shariah non-compliant listed securities (Activities Beyond Control). The SEHC also offers its own products comprising Shariah compliant and Shariah non-compliant products to be listed and traded on the stock exchange as well as other services and activities (Activities Within Control).

Issue
In determining the Shariah status of the SEHC that involved in Activities Beyond Control and Activities Within Control, what is the most appropriate Shariah screening methodology to be applied.
Resolution
The SAC had resolved that due to the nature of the SEHC as a national exchange that undertakes Activities Beyond Control and Activities Within Control, a specific two-tier business activities benchmark would be applicable in determining its Shariah status as follows:
5% Benchmark
For Activities Within Control, the contribution from the Shariah non-compliant activities to the group revenue or group profit before taxation (PBT) must be less than 5%; and
33% Benchmark
For Activities Beyond Control, the contribution from the Shariah non-compliant activities to the group revenue or group PBT must be less than 33%.
The financial ratio benchmark will continue to be applicable to the SEHC.
The 216th Shariah Advisory Council Of The Securities Commission Malaysia Meeting (31 January 2019)

Applicability of the Resolutions on Utilisation of Sukuk Proceeds to the Sukuk Issuer and the Sukuk Issuer’s Group of Companies
Background
The Shariah Advisory Council of the Securities Commission Malaysia (SAC) had, in series of its meetings, deliberated on the issue in relation to the previous SAC resolutions on utilisation of sukuk proceeds, which were resolved at the 190th SAC meeting held on 27 October 2016 (Existing Resolutions on Utilisation of Sukuk Proceeds).

Issue
The issue in deliberation was whether the Existing Resolutions on Utilisation of Sukuk Proceeds are applicable to the sukuk issuer only or it would also be applicable to the sukuk issuer’s group of companies.
Resolution
The SAC had, at its 216th meeting held on 31 January 2019, resolved that the Existing Resolutions on Utilisation of Sukuk Proceeds are applicable to the sukuk issuer and the sukuk issuer’s group of companies.