Demystifying Oman’s New Regulations relating to issuance of bonds and sukuk

November 2024 | EXPERT BRIEFING | BANKING & FINANCE

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Resolution No. Kh/21/2024 titled ‘The Regulation Governing Bonds and Sukuk’ (the New Regulations) was published on 21 March 2024 by the Sultanate of Oman’s Financial Services Authority (FSA). The new regulations repeal Resolution No. 3/2016 titled ‘Issuing the Sukuk Regulations’ (the Old Regulations).

The New Regulations apply to the issuance of bonds and sukuk within Oman and include provisions for the issuance of green and sustainable securities. The New Regulations apply to both public and private placement issuances of debt securities in Oman. Government bonds and sukuk, and short-term bonds and sukuk issued by the Central Bank of Oman (CBO) to entities subject to its supervision, the duration of which does not exceed one year and issued for the purposes of implementing monetary policy and managing liquidity, are excluded from the purview of these new regulations.

Currency of the issue

The New Regulations allow for bonds or sukuk to be issued in Omani rials (OMR) or in any foreign currency that is convertible to OMR.

Retention of documents

The issuer is required to retain all documents relating to an issue for a period of 10 years from the date of closing of such issue as provided.

Approval requirements and timeline on approvals

The New Regulations mandate the FSA to issue its decision to approve the prospectus with respect to the issue within five working days after verifying the application materials submitted along with prospectus. The issuer must, within two working days from the date of approval of the prospectus for public subscription, and from the date of closing of the subscription for private offerings, provide the FSA with a protected electronic copy of the approved prospectus for online publication. With respect to initial public offering (IPO) issuances, the issuer is required to publish the issuance announcement electronically after approving the prospectus in at least one daily Arabic newspaper at least three working days before the date of the commencement of the subscription.

Application submission for prospectus approval

The application for approval of the prospectus, along with the prescribed fees, is to be accompanied by the recommended documents. The FSA has the discretion to accept the English prospectus for some private placement issuances if the public interest so requires. Under the New Regulations, the FSA may permit the issue manager, on request, to present a draft prospectus to some investors, prior to receiving formal approval, in order to confirm they are on structure and conditions of the issue.

Amendment to the prospectus

Prior to the closing of a subscription, should the issuer seek to amend any information in the prospectus, it must request the FSA’s approval on the proposed amendment, immediately. Once approved, the issue manager must publish the amendment in at least one daily Arabic newspaper.

Private placement

In the case of issuances on a private placement basis, credit rating certificates must be submitted in specified cases. Re-evaluation of credit rating may be requested by the FSA at the expense of the issuer. An issuer that seeks to submit a credit rating certificate to the FSA is required to enter into a contract to conduct a continuous rating of the issuer or the bonds, as the case may be.

Introduction of preferential right to subscribe to bonds or sukuk

The New Regulations introduce new provisions establishing the right of a shareholder to subscribe to bonds or sukuk in proportion to the number of shares in the issuer or beneficiary which are held by such a shareholder. Such preferential rightholders may opt to waive their right of subscription in all or some of the securities. Preferential rightholders may, during the period of subscription, assign their preferential right to subscribe to all or some of the debt securities. The issuer is required to publish the issuance announcement which is to include information on the date of acquiring the subscription preferential right and the period during which the preferential rights are waived or subscribed. The date of acquisition of the right of preference is determined in the prospectus by the decision of the competent authority. The subscription application would include the option for the shareholder to obtain additional bonds or sukuk if the required bonds or sukuk are not fully covered.

Various critical changes

Under the Old Regulations, an application for forming a special purpose company (SPC) was made by the beneficiary. The New Regulations permit either the issuer or the beneficiary to make an application to the FSA for forming an SPC. The application no longer requires the submission of a plan on how the SPC would be managed. In a welcome departure from previous practice, the validity of an SPC’s licence has been increased from five years to the duration of the issuance, with the option to extend the licensed period beyond this. The collection and distribution of sukuk proceeds to the sukukholders is no longer in the list of functions undertaken by an SPC; additionally, an SPC may now also carry out supporting activities crucial to achieve its objectives.

Sharia supervision

The New Regulations provide several considerations in relation to Sharia supervision. These include presenting the decision to be issued to all members of the Sharia supervisory committee along with necessary documents for examination, recording the position of each member (in case of rejection by a member, including such member’s explanation for the rejection) and presenting the decision taken in the next meeting of the committee and presenting and discussing any reservations of the members.

Agent of the bondholders or sukukholders

The New Regulations state that the agent of the bondholders or sukukholders must be a licensed entity operating in the securities field, and that this may be the Muscat Depositary Company. An agent must not be a related party to the issuer or beneficiary or have a direct or indirect interest in the issuer or beneficiary and must not have an interest that conflicts with the interest of the bondholders or sukukholders. In the case of any such connection, the contract between the agent and the bondholders or sukukholders may be terminated immediately.

General Assembly

While the new regulations do not specify the form of general assembly that must be conducted with respect to the issuance of debt securities, the New Regulations provide that the resolution for the assembly (General Assembly) of bondholders and sukukholders for a single issue will be binding on all bondholders or sukukholders.

A general assembly of bondholders or sukukholders may request the amortisation of bonds or sukuk and redeem their value before their maturity date if they are made in violation of the terms and conditions stated in the prospectus. The prospectus and issuance documents of the bonds or sukuk must specify the matters that the general assembly is competent to decide on.

The New Regulations specify that a general assembly meeting of bondholders or sukukholders will not be valid unless attended by a number of bondholders or sukukholder representing at least two-thirds of the bonds or sukuk issued, and if this quorum is not completed, the general assembly shall be invited to another meeting, and this meeting shall be valid if attended by a number representing one third of the bonds or sukuk, provided that the meeting takes place within 30 days from the date of the first meeting.

In all cases, decisions of the general assembly must be issued by a two-thirds majority of the bondholders or sukukholders in attendance. The FSA must ratify five copies of the minutes upon payment of a prescribed fee and deliver a certified copy of the minutes to the agent, the stock exchange, the depository company, the issuing or beneficiary body, and the SPC.

Disclosure report

The disclosure report no longer requires a report on the status of an instrument’s assets and on investments made.

Sustainable finance

Importantly, the New Regulations introduce a chapter on green and sustainable bonds or sukuk, reflecting the growing awareness and popularity of these debt securities. The New Regulations specify that an issuer must not refer to its securities as ‘green’ or ‘sustainable’ without prior approval from the FSA.

The issuer of green or sustainable debt securities must clarify in the prospectus the objectives it seeks to achieve, which may include preserving the environment, rationalising energy consumption, encouraging use of renewable energy, reducing greenhouse gas emissions, seeking to achieve positive social outcomes, improving the quality of life of society or developing endowment real estate and assets.

An independent external auditor accredited or designated by the FSA is to be appointed to evaluate and submit a report on the compliance of projects financed through the green or sustainable debt securities with international standards approved by the FSA. The external auditor’s report is to be published on the website of the electronic publishing system approved by the FSA.

Fees of bonds

The fee for the FSA’s review of a prospectus remains at 0.05 percent of the nominal value of debt securities issued, in line with the old regulations. However, a new minimum and maximum amount due has been introduced, with a minimum amount due of OMR 2000, up to a maximum of OMR 5000 (as opposed to a maximum cap of OMR 2000 in the old regulations). The FSA’s fee for the supervision and oversight of bonds or sukuk is 0.01 percent of the nominal value of the debt securities issued with, again, a minimum amount due of OMR 2000 and a maximum of up to OMR 5000.

Key changes in definitions

The definition of ‘sukuk’ has been revised to: “Financial securities, of equal value issued for a specified period by the beneficiary through the special purpose company, and representing a common share in the ownership of objects, benefits, services, rights or a mixture thereof, or in the assets of a specific project or an existing investment activity, or to be created from the subscription proceeds, through which the beneficiary undertakes to pay the value of the instrument upon amortization (if any) and a periodic return to its owner throughout the issuance period.”

Introduction of certain definitions

The New Regulations introduce certain new definitions, some of which are outlined below.

Bonds. Financial securities of equal value, issued for a specified period by the issuer in the form of a debt or obligation document, through which the issuer undertakes to pay the value of the bond upon amortisation (if any) and a periodic return to the bearer throughout the issuance period.

Issue manager. A bank licensed in the Sultanate of Oman or companies operating in the field of securities, licensed by the FSA to practice the activity of managing issues.

Competent authority. The body legally authorised to approve the issuance of bonds or sukuk shall be the board of directors for joint stock companies, the partners’ assembly for limited liability companies, the fund management for investment funds, the general assembly of joint stock companies if the bonds or sukuk are convertible into shares, or any other entity that has the authority to approve the issuance of bonds or sukuk.

Firefighting. Conversion of an instrument or bond into shares, units or shares or cancellation thereof upon the expiry of the issuance period or before, in accordance with the cases specified in these regulations.

Right of preference. It is the right of the shareholder to subscribe to several bonds or sukuk at a rate equivalent to the number of shares, units or shares he owns in the issuer or beneficiary on the date of acquiring the right.

Preference holders. Shareholders registered in the records of the issuer or beneficiary on the date of acquiring the right.

Green bonds and sukuk. Bonds or sukuk that are used to finance environmental or climate-related projects.

Sustainable bonds and sukuk. Bonds or sukuk whose proceeds are used exclusively to finance any activities or transactions in projects related to the goals announced by the UN for sustainable development.

Next steps

The New Regulations represent a significant advancement in the development of debt capital markets in Oman – they help bring the regulatory framework for debt securities in Oman closer in line with international market standards and bring clarity to the process and requirements of a debt offering.

This is a welcome step, and we believe that the introduction of the New Regulations will help boost activity within the debt capital markets sector in Oman and make issuances of securities more attractive to prospective issuers.

Salman Ahmed is a partner, Debopam Dutta is a senior associate and Kasab Vora is an associate at Trowers & Hamlins LLP. Mr Ahmed can be contacted on +968 2468 2912 or by email: sahmed@trowers.com. Mr Dutta can be contacted on +968 2468 2901 or by email: ddutta@trowers.com. Mr Vora can be contacted on +968 2468 2932 or by email: kvora@trowers.com.

Salman Ahmed, Debopam Dutta and Kasab Vora

Trowers & Hamlins LLP