A lending Modaraba, having enabling clause for resource mobilization in its prospectus, with the approval of the Commission, may raise funds through issuance of Certificates of Musharakah (COM) after complying with the laid down requirements by the Commission.
According to the draft of the Modaraba Regulations, 2019 issued by the SECP for the stakeholders, the Modaraba shall seek prior approval of the Commission for any invitation for investment in COM either through advertisement by print, electronic or social media outlets or any other form or channel.
The "Certificate of Musharakah (COM)" means an instrument to raise finance through the modes and instruments approved by the Religious Board but does not include redeemable capital issued under section 66 of the Companies Act; finance obtained from a financial institution; advance or application or subscription money for certificates of the Modaraba; cash margin or security deposit received in respect of a finance provided by the Modaraba; subordinated funds and finance obtained from major shareholders, sponsors and associated companies.
Provided that the Commission shall be final authority to notify whether any money raised falls under the definition of COM or otherwise.
Under the regulations, the "Certificate of Musharakah (COM) raising Modaraba" means a lending Modaraba with a valid permission to raise funds through issuance of COM or any other modes or instruments approved by the Religious Board or have outstanding COM on its books.
A lending Modaraba may raise funds through issuance of COM after complying with the following requirements: Firstly, the Modaraba is undertaking activities as a lending Modaraba for a minimum period of three years and has been, as per the audited accounts, making and distributing profits for last two years. Secondly, the Modaraba meets the minimum equity requirement of Rs 500 million. Thirdly, the Modaraba complies with the capital adequacy ratio as specified in Schedule VI and fourthly the Modaraba, or any other Modaraba in which its sponsors had a stake of more than 10 percent, has not defaulted on, or obtained write off on finance availed from any financial institution or investor in any of its redeemable capital instruments within the last five years. Fourthly, the operations of the Modaraba and the conduct of its Modaraba company and its directors with respect to the Modaraba has been in accordance with law. Fifthly, the Modaraba has been assigned a credit rating of minimum "A-" from a credit rating agency registered with the Commission. Sixthly, any other requirements as may be imposed by the Commission.
A Modaraba which is in compliance with the provisions of this regulation shall make an application to the Commission along with the evidence of compliance with this regulation. If the Commission is satisfied that the Modaraba fulfills the requirements prescribed in sub-regulation, it may grant permission to such Modaraba to issue COM.
A Modaraba, which has been granted permission to issue COM, shall comply with the following requirements: The Modaraba shall raise funds by way of issuing "certificate of Musharakah" or any other modes or instruments approved by the Commission only. The Modaraba shall at all times maintain a minimum credit rating of "A-" and the same shall be updated at least once every year. The Modaraba shall publish its credit rating in financial statements, website, advertisements and brochures published in relation to the promotion of its business. The COM shall be registered in the name of the person to whom it is issued and the maturity period of COM shall not be less than three months. Provided that the COM shall only be redeemable after 45 days of its issuance on the terms and conditions laid out in the COM agreement or product disclosure statement.
Provided that these instruments or investments are for the benefit of the COM holders only and these instruments shall be kept un-encumbered and disclosed separately in the financial statements of the Modaraba:
Provided further that this requirement shall also be applicable to a Modaraba whose permission to issue COM has been suspended or cancelled till the time all the COM have been repaid;
The SECP has also proposed that the Modaraba companies shall be allowed to distribute 90 percent of their net annual profits after appropriation to reserve, if any. The dividend for any year may be omitted or passed on if the distribution of dividend is un-economical and hence is not in the interest of certificate holders.
Every Modaraba shall create reserve fund to which shall be credited an amount not less than 20 percent and not more than 50 percent of its after tax profits till such time the reserve funds equals the amount of the paid up capital and thereafter a sum not less than 5 percent and not more than 20 percent of its after tax profits.
The issuance of bonus shares may be made from the said reserves or the reserves available after appropriation made whichever may be the case and since such bonus shares will increase the paid up capital, the Modaraba shall transfer further amounts to the reserves in order to comply with the laid down condition, the SECP added.