1. Iran’s Experience in Ijarah Sukuk 4 th International Course on Islamic Capital Markets Fereshteh Rahimi Almasi Financial Expert Supervision on Primary Market Securities and Exchange Organization (SEO) May 2012

2. Parts of the speech Part 1: Regulations history Part 2: The Regulations governing the activities of SPVs Part 3: The Regulations Governing the Issue of Ijarah Sukuk Part 4: Operational procedure of Ijarah Sukuk issuance Part 5: Statistics of issuance 4 th International Course on Islamic Capital Markets- May 2012

3. Part 1: Regulations history

4. Regulations history 1.The Securities Market Act of Islamic Republic of Iran (November 2005) 2.The Regulations Governing the Issue of Ijarah Sukuk (January 2008) After Sharia Board establishment in 2006 3.The Law for Development of New Financial Instruments and Institutions (November 2009) 4.The Regulations Governing the Issue of Ijarah Sukuk (August 2010) The Regulations Governing the activities of SPVs (August 2010) 5.Amendment of the Regulations Governing the Issue of Ijarah Sukuk (2011) and Regulations Governing the Financial Reporting of SPVs and Originators (2012) 4 th International Course on Islamic Capital Markets- May 2012

5. The Securities Market Act of Islamic Republic of Iran (to be continued …) The public offering of securities in any manner whatsoever shall be forbidden without applying the provisions of this Act. Some securities shall not require registration at the discretion of the Council. Registration of securities with the SEO shall not entail confirmation of any privileges, guarantee of profitability or any recommendation and advice. The securities public offering shall take place within the period of time specified by the SEO. 4 th International Course on Islamic Capital Markets- May 2012

6. The Securities Market Act of Islamic Republic of Iran (… continued) To approve new financial instruments, was set out as one of the functions of the Council. To propose the utilization of new financial instruments in the securities market, was set out as one of the functions of SEO's board of directors; 4 th International Course on Islamic Capital Markets- May 2012

7. The definition of Ijarah Sukuk and it’s procedure: The procedure of approving the securities definition: The definition of Ijarah Sukuk : The transferable securities which bear the name of the holder and each certificate proves the joint ownership of its holder in the underlying assets of Ijarah Sukuk issuance. 4 th International Course on Islamic Capital Markets- May 2012 SEO CouncilSharia Board

8. The Regulations Governing the Issue of Ijarah Sukuk (January 2008) Not implemented, because of: – Some executive matters – Tax ambiguity 4 th International Course on Islamic Capital Markets- May 2012

9. The Law for Development of New Financial Instruments and Institutions Permitting the SPVs establishment as one of the financial institutions under the Securities Market Act, Control of the process by SEO: – The funds raised shall be pooled in a special account and any withdrawal from such account shall take place under the supervision and with the approval of SEO. Clarifying the tax problems with tax related rules. 4 th International Course on Islamic Capital Markets- May 2012

10. T ax related rules (to be continued …) Tax advantages for SPVs: – The SPV shall be exempt from payment of any tax Tax advantages for investors: – No tax whatsoever shall be claimed for the transfer, issuance and redemption of the foregoing securities. 4 th International Course on Islamic Capital Markets- May 2012

11. Tax related rules (… continued) Tax advantages for Originators: – The proceeds gained from selling assets to the SPV so as provide financial resources through public offering of securities shall be exempt from tax. – BUT, the depreciation expenses arising from assets value appreciation in the repurchase of the same assets by the seller, in whichever manner, shall not be regarded as parts of the tax deductable. – The profit and fees paid or allocated for securities on the condition of registering these securities with the SEO, shall be regarded as parts of acceptable expenses for assessment of taxable income of such securities issuer. 4 th International Course on Islamic Capital Markets- May 2012

12. Part 2: The Regulations Governing the activities of SPVs

13. SPV's ownership structure 4 th International Course on Islamic Capital Markets- May 2012 Others (2%)TSE (20%)Iranian OTC (29%)CSD (49%) AMC (99%)CSD (1%) SPV

14. The Regulations governing the activities of SPVs (to be continued …) 4 th International Course on Islamic Capital Markets- May 2012 The “Central Assets Management Company” is established as a private joint-stock entity for the purposes of assets management and administering the SPV. The SPV is established in the form of a “limited liability company” by the Central Assets Management Company.

15. The Regulations governing the activities of SPVs (to be continued …) 4 th International Course on Islamic Capital Markets- May 2012 All logistical services for the SPV shall be handled by the AMC. The SPV shall not be allowed to engage in other activities whatsoever. A different SPV is specified for each issuance/project. The opening, closing, withdrawal and transfer of monies from the account in which the funds derived from Sukuk issuance is done according to the standards approved by the SEO.

16. The Regulations governing the activities of SPVs (… continued) 4 th International Course on Islamic Capital Markets- May 2012 The use of proceeds derived from sale of securities by the SPV for other purposes shall be forbidden, excluding for the implementation of the project connected with the Ijarah Sukuk issuance. After the issuance and use of the funds earned for the project connected with such issues, the investing of cash flows shall be allowed solely in the securities which shall bear the guarantee of repaying the principal amount and its accrued interest as well as in the bank deposits. The SPV shall have to manage the funds available while protecting the interests and rights of investors.

17. Part 3: The Regulations Governing the Issue of Ijarah Sukuk

18. General Model for Ijarah Sukuk 4 th International Course on Islamic Capital Markets- May 2012 Originator SPV 3. Sells asset Sukukholders 1. Issues Sukuk 4. Pays money 2. Pays money

19. Two types of Ijarah Sukuk regarding the bodies 4 th International Course on Islamic Capital Markets- May 2012 Seller and lessee are different persons Seller and lessee are the same (sell and leaseback)

20. Seller and lessee are different persons 4 th International Course on Islamic Capital Markets- May 2012 Manufacturer SPV 3. Sells asset Sukukholders 1. Issues Sukuk 4. Pays money 2. Pays money Paying agent 7. Paying rentals as agent of SPV Originator 6. Paying rentals 5. Asset leasing as agent of investors

21. Seller and lessee are the same (sell and leaseback) 4 th International Course on Islamic Capital Markets- May 2012 Originator SPV 3. Sells asset Sukukholders 1. Issues Sukuk 4. Pays money 2. Pays money Paying agent 5. Asset leasing as agent of investors 6. Paying rentals 7. Paying rentals as agent of SPV

22. Legal relationship between investors (Sukuk holders) and SPV 4 th International Course on Islamic Capital Markets- May 2012 The client-attorney relationship: Possession of Ijarah Sukuk shall be deemed as the acceptance of the issuer's procuration and such procuration shall remain valid and irrevocable until the final settlement of Ijarah Sukuk. The SPV, on behalf of the Sukukholders, has to spend the funds derived from sales of Ijarah Sukuk on acquiring the assets connected with the issue and leased them to the originator. The holders of Ijarah Sukuk shall not be allowed to request the division of the assets underlying the issuance of Ijarah Sukuk.

23. Two types of Ijarah Sukuk regarding the lease contracts 4 th International Course on Islamic Capital Markets- May 2012 Lease-purchase (lease-based possession) contract; Lease contracts with SPV's authority to sell assets on the due date of rent payment at the fixed price.

24. Organs or bodies for Ijarah Sukuk Issuance 4 th International Course on Islamic Capital Markets- May 2012 Originator/Seller SPV Selling agent Underwriter Guarantor Market maker Paying agent (CSD)

25. The following agents can raise money through Ijarah Sukuk issuance: 4 th International Course on Islamic Capital Markets- May 2012 The non-governmental legal entity that: – has been legally formed as joint-stock, cooperative, investment fund or non-governmental public entities except municipalities; The public or governmental legal entities which include: – The municipalities; – The governmental institutes or companies.

26. The non-governmental legal entity as an originator shall meet the following requirements: 4 th International Course on Islamic Capital Markets- May 2012 Registered and active in Iran; the total cash flow derived from its operations must be positive in the two recent fiscal years; its maximum total liabilities to assets ratio is ninety (90%) percent; the opinion expressed by the company auditor concerning the financial statements for the two recent fiscal periods should not be "adverse" or "disclaimer“.

27. The guarantor shall be appointed merely from among the following entities as being acceptable to the SEO. 4 th International Course on Islamic Capital Markets- May 2012 The banks, Credit and financial institutions regulated by the Central Bank of I.R.I., Insurance companies regulated by the central Insurance of I.R.I., Investment banks, Investment companies, Public entities and the governmental institutes or companies. The guarantor shall not be under the control of the originator and this matter shall be confirmed by the originator's auditor. Where the Ijarah Sukuk has a credit rating approved by the SEO, it shall not be required to appoint a guarantor.

28. Assets General Specifications 4 th International Course on Islamic Capital Markets- May 2012 Utilization of the assets within the area of originator's activity shall result in cash flows or prevent cash outflows; There shall not exist any legal, contractual or judicial restrictions or whatsoever on transfer of the assets as well as the accrued interests and the rights thereupon; Possession and exercise of ownership rights thereof shall not impose any restriction whatsoever on the SPV; There will not exist any joint ownership (except the whole ownership is transferred); Transfer of assets to another party will be possible; The assets shall, until the time of transferring the assets ownership to the issuer, have proper and adequate insurance coverage.

29. Type of acceptable assets 4 th International Course on Islamic Capital Markets- May 2012 Land; Buildings and installations; Machinery and equipment; Means of transportation.

30. Assets general specifications 4 th International Course on Islamic Capital Markets- May 2012 The assets value and its economic life shall be appraised by the experts designated by the Association of Official Experts of the Judiciary or other reliable ways approved by the SEO. Assets with determined formal prices, which the SPV buys them directly from a producer, are except from pricing again. The approximate assets value shall not be lower than about 4 million dollars.

31. The payments related to the Ijarah Sukuk shall be made in two manners 4 th International Course on Islamic Capital Markets- May 2012 Full payment of rents on the due dates until the final maturity; Partial payment of rents on the due dates until the final maturity and clearance of the remainder at the final maturity. The final profit arising from rentals management until the final maturity shall be calculated at the maturity of Ijarah Sukuk and paid to the holders.

32. Part 4: Operational procedure of Ijarah Sukuk issuance

33. Operational procedure of Ijarah Sukuk issuance 4 th International Course on Islamic Capital Markets- May 2012 1.The originator consults with a licensed financing advisor about the appropriate financing method and its overall parameters. 2.The advisor hands in the necessary documents. 3.The primary permission is issued and the SPV is allotted to the Ijarah Sukuk. 4.Necessary contracts in addition to other documents such as the registration statement and the prospectus are handed in by the advisor. 5.The final permission of the Ijarah Sukuk issuance is given and Securities are offered. 6.The selling contract and Ijarah contracts are signed.

34. 1- The originator consults with a licensed financing advisor about the appropriate financing method and its overall parameters. It includes these events 4 th International Course on Islamic Capital Markets- May 2012 1.The originator signs the financing and Ijarah Sukuk offering contract with the advisor. 2.The advisor investigates the compliance of rules and regulations about the originator, asset, contracting parties and so on. 3.The originator prepares the necessary reports to be considered by the auditor. 4.The advisor negotiates with different parties and gets their admission.

35. 2-The advisor hands in the necessary documents according to rules and regulations, such as: 4 th International Course on Islamic Capital Markets- May 2012 1.The financing and Ijarah Sukuk offering contract; 2.Application for primary agreement; 3.The financial feasibility study of the project to be done by money raised through Ijarah Sukuk and the auditor's special report about it. This report shall concern the fulfillment of the conditions of the assets general specifications; 4.Originator's audited financial statements for the two recent fiscal periods; 5.The report of the originator's board of directors on the recent fiscal period; 6.The originator's articles of association; 7.The sellers agreement letter on selling the asset; 8.Asset ownership documents; 9.The report of the expert(s) on the assets value and its economic life; 10.The confirmation of State Registration for Deeds and Landed-Estate Properties; 11.Asset insurance agreements; 12.The organs agreement letter on willingness to take the responsibilities.

36. 3-The primary permission is issued by the SEO and the SPV is allotted to the Ijarah Sukuk. At this phase the following contracts must be signed: 4 th International Course on Islamic Capital Markets- May 2012 1.Commitment to sell the asset (if the seller and lessee are different persons); 2.Commitment to lease the asset by the originator; 3.Ijaras Sukuk selling, Underwriting, Paying, Guaranteeing and Market making contracts;

37. 4-The following documents are submitted by the advisor: 4 th International Course on Islamic Capital Markets- May 2012 1.Contracts between involved organs; 2.Application for registering the securities; 3.The registration statement and the prospectus; 4.The bank account opened considering the SEO's rights on it.

38. The registration statement shall, as the case may be, contain the following items: 4 th International Course on Islamic Capital Markets- May 2012 1.The originator's and the securities specifications; 2.The types of lease contracts, rentals and the payment manner; 3.The report on the risk analysis associated with the originator's area of activity; 4.The securities credit rating, if any.

39. The SEO's agreement: 4 th International Course on Islamic Capital Markets- May 2012 1.If the information and documents are incomplete, the SEO shall, within 30 days, reflect the matter to the issuer and request for an amendment. 2.Where the documentation has been completed, the SEO shall, within 30 days at the latest as of the date of filing the application, announce its agreement or disagreement with the securities registration to the issuer.

40. 5-The final permission of the Ijarah Sukuk issuance is given and Securities are offered. 4 th International Course on Islamic Capital Markets- May 2012 1.The underwriter will take up the securities which have not been sold within the subscription period. 2.Within 15 days after the expiry of the public offering period, the results of securities sales and distribution must be disclosed to the SEO. 3.The SEO confirms the completion of the public offering process.

41. 6-The selling contract and Ijarah contracts are signed. 4 th International Course on Islamic Capital Markets- May 2012 1.The selling contract according to the confirmed format is signed. 2.Simultaneously the utilization of the funds so collected will be authorized by the SEO. 3.Then Ijarah contract is signed according to the confirmed format.

42. Information disclosure of the originator, if it has not been registered with the SEO, includes the following items: 4 th International Course on Islamic Capital Markets- May 2012 The audited annual financial statements prepared according to the Regulations Governing the Financial Reporting of SPVs and Originators; The important information such as: – The events affecting the activities, financial standing and outcomes of the originator's performance; – The decisions and conditions influencing the capital structure and raising the funds for the originator; – The change in the originator's ownership structure; – The material information affecting the securities price issued to raise the finance.

43. Part 5: Statistics of issuance

44. Statistics of issuance 4 th International Course on Islamic Capital Markets- May 2012 originatordateasset volume (million dollars) rate (percent) life (years) Mahan Air co.2010/03/111 Airbus airplane28204 Saman bank2011/06/128 Buildings85204 Omid investment management co. 2011/08/16 3 pieces of lands (for building) 103204 Mahan Air co.2011/08/234 Airbus airplanes86204 Joopar Passenger & Freight Trains Co 2012/01/08 293 Passenger & Freight Trains 37204 340

45. Thank You For Your Attention