Debt securities vs Sukuk
- Debt securities like bonds and debentures are debt obligations
- Sukuk involves asset ownership
- Bond investors depend on credit rating of the issuer
- Sukuk are priced according to value of the underlying tangible asset
- Traditional interest from debt securities are not halal for Muslims
- Sukuk are Shariah-compliant financial instruments
Beximco Ltd has announced to issue the first-ever private sector asset-backed Islamic securities, also known as Sukuk, in Bangladesh and the company said the proceeds will be invested in its solar and textile businesses.
The planned Tk3,000 crore Sukuk will be the largest ever issuance of securities in the private sector of Bangladesh.
The government recently issued the country's first-ever Tk8,000 crore Sukuk for a safe water supply project.
Beximco on Tuesday said the proceeds from the Sukuk would be invested mainly in implementing solar projects of Teesta Solar Ltd and Korotoa Solar Ltd – both are subsidiaries of Beximco Ltd's subsidiary Beximco Power Company Ltd.
With the remaining money, the company will also finance and refinance the machinery and equipment required for the expansion of Beximco's textile division.
Unlike bonds where the company directly issues debt securities, Beximco will have to form a Special Purpose Vehicle (SPV) with regulatory approval from the Bangladesh Securities and Exchange Commission (BSEC).
The SPV will issue the Sukuk as it will look after the asset-investment relationship.
Beximco Group Vice Chairman Salman F Rahman told The Business Standard, "We were planning for traditional bonds, but Shariah-compliant banks said they need Sukuk to park their huge liquid assets."
"In primary marketing of the issuance plan, we observed great interest among local non-Shariah investors and Islamic banks abroad," he added.
Fifty percent of the Sukuk would be privately placed while 25% would be reserved for Beximco Ltd shareholders and the remaining 25% would be floated through public offers as the Sukuk would be listed on the local bourses upon getting the regulatory approval.
The Sukuk units will have a face value of Tk100 each, while an investor can buy a single lot with Tk5,000 only in public offer. Sukuk holders will receive their periodical profits twice a year.
Investment banking sources said City Bank Capital Resources Ltd is working as the advisor, arranger, and issue manager for the Sukuk.
The base rate of the Sukuk was set at 9%, which means investors would be getting 9% secured annual return.
The margin was set at 10% of the difference between the base rate and the annual dividend that Beximco will pay in a specific year.
The margin would be added to the base rate if Beximco's dividend for the specific year surpasses the base rate. If the dividend is lower than the base rate, there would be no negative margin.
Investors can gradually convert their Sukuk to Beximco shares over its five-year tenure, but they can convert a maximum of 20% of the total in a year.
Unexercised options to convert in a year can be exercised in the following year as well, along with the current year's option.
If someone does not convert, they will get the principal back after the fifth year.
The conversion would lead to an increase in Beximco's paid-up capital and that might dilute the listed company's asset and earnings per share.
Salman said, "We have done our math. We are confident that the revenue and profit impacts of the Sukuk-financed projects will surpass the dilution effects."
The textile division would enjoy increased revenue within six months, while the ongoing solar projects will see high revenue within a year, he added.