Hong Kong gazettes new laws to make way for Sukuk issuances - IFN

Hong Kong gazettes new laws to make way for Sukuk issuances

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HONG KONG: A meeting of the Executive Council of Hong Kong on the 7th January has resulted in the gazette of the Loans (Amendment) Bill 2014 to accommodate the issuance of Sukuk under the Hong Kong Government Bond Program (GBP). The bill was gazetted on the 10th January 2014 and will be tabled at the Legislative Council on the 22nd January 2014. The GBP has currently a total of HK$107.5 billion (US$13.86 billion)-worth of government bonds issued, with an outstanding total of HK$90 billion (US$11.60 billion). Whilst legislation has prohibited the issuance of Sukuk by the Hong Kong government, Sukuk issued overseas has been marketed to the country’s institutional investors, and international Sukuk have been listed on the Stock Exchange of Hong Kong including the 2010 and 2011 Sukuk issuances by the Malaysian government totalling US$3.25 billion. If approved, the Loans (Amendment) Bill 2014 will be the second change to the ‘AAA’-rated government’s laws within a year, to further Hong Kong’s entry to the Sukuk market. On the 10th July 2013, the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013 (IRO) was introduced providing a taxation framework for Sukuk, comparable to that provided for conventional bonds. Changes established under the IRO have been leveraged in the amendments proposed by the Loans (Amendment) Bill, the main of which include the introduction of the concept of “specified alternative bond scheme”. This will be used to cover a situation when the government raises funds via the issue of Sukuk. The expansion of the meaning and definitions of the terms ‘borrow’, ‘interest’ and ‘principal’, in the original loans ordinance and inclusion of a situation in which the government shall be regarded as ‘borrowing’ monies from the SPV set up to effect Sukuk issuance, will also be introduced. Legal advice received by the government suggests that this may not be regarded as a ‘borrowing’ in the current context of the regulations. In addition, amendments have been proposed to both the Bond Fund Resolution and the IRO, to establish changes ensuring that the treatment of coupon and redemption payments, payments of Sukuk issuance expenses, the profits tax exemption applied to coupon payments and disposal gains derived from any Sukuk issued in connection with the GBP, mirrors the current arrangement applied to conventional government bonds issued under the GBP. The Legislative Council hopes that the new bill will draw potential Sukuk issuers to Hong Kong. Speaking to Islamic Finance news, Davide Barzilai, partner and Asia Pacific head of Islamic finance in the Hong Kong office of global legal practice Norton Rose Fulbright, predicted that the issuance of a Hong Kong government Sukuk could now be measured in months rather than years, given the lack of complexity in the changes being made to the existing regulations.“This should pique interest among the banks and bond investors both in Hong Kong, the wider Asia Pacific region and the Middle East. It boosts the credibility of Islamic finance in the wider markets and shows that Hong Kong is able to react quickly to assist its financial services sector.”