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Turkey: New sukuk regulation

Işıl ÖktenErdi Yıldırım

Sukuk issuances were regulated under the Communiqué on Lease Certificates and Asset Lease Companies Serial III, number 43 (Former Communiqué) dated April 1 2010, by the Capital Markets Board of Turkey (CMB). Three years later, the CMB published the new Communiqué on Lease Certificates III-61.1 (New Communiqué) dated June 7 2013, which introduced new types of sukuk (lease certificate) issuances.

The New Communiqué introduced globally recognised sukuk structures based on ownership (ijara), management (wakala), trading (murabaha), partnership (mudaraba/musharaka) and EPC contracts (istisna). However, it is also possible to use combined structures through other sukuk types. In addition, for lease certificates based on ownership, partnership and EPC contracts, appraisal is required under the New Communiqué.

Lease certificates are issued by asset lease companies (ALCs) in Turkey. Before the New Communiqué, intermediary institutions, banks and originators incorporated as joint-stock companies were entitled to establish ALCs. Under the new Communiqué, only the following types of institution are entitled to establish ALCs: banks; intermediary institutions operating in either portfolio brokerage, general custody services or underwriting activities; mortgage finance institutions; listed real estate investment companies; public companies included in the first and second groups that are determined within the framework of the CMB's corporate governance regulations; companies with a long-term investment grade rating in the currency denomination of the issuance; and, companies that are 51% or more owned by the Undersecretariat of the Treasury.

ALCs are allowed to make multiple issuances and issuances for companies other than the originator. Moreover, ALCs are required to appoint an independent member within their board whose affirmative vote is required in order for certain decisions to be made. The New Communiqué has also introduced monitoring and auditing requirements for ALCs. It has also broadened the scope of the definition of 'asset' as set forth in the Former Communiqué, and now 'rights' may also be an underlying asset for issuances.

Finally, the New Communiqué imposes the asset protection principle. Accordingly, until the redemption date, it is not possible to dispose of, pledge or collateralise the assets and rights within the portfolio of an ALC for any other purpose. Neither can the assets and rights be confiscated, assigned to bankruptcy estates or be subject to interim injunctions for any purpose including the collection of public receivables.

In light of the above-mentioned reforms, and the tax incentives set out in Turkish tax legislation for lease certificates, the market expects to lure more Islamic financing to Turkey in future years.

Işıl Ökten and Erdi Yıldırım

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