SHARIAH PRONOUNCEMENT In the name of Allah, the Most Gracious, the Most Merciful All praise is due to Allah, the Cherisher of the world, and peace and blessing upon The Prophet of Allah, on his family and all his companions PETRONAS GLOBAL SUKUK LTD PROPOSED ISSUANCE OF UP TO US$ 2.0 BILLION TRUST CERTIFICATES (THE CERTIFICATES ) WITH PETROLIAM NASIONAL BERHAD (PETRONAS) ( PETRONAS ) AS THE OBLIGOR ( ISSUANCE ) UNDER THE PRINCIPLE OF WAKALAH BI AL-ISTITHMAR ( CERTIFICATES PROGRAMME ) CIMB Islamic Bank Berhad ( CIMB Islamic ) as the Shariah Adviser has reviewed the proposed structure and mechanism of the proposed Sukuk issuance by Petronas Global Sukuk Ltd. (the Issuer ) to ensure compliance with Shariah principles. Except where defined herein, defined terms used in this Shariah Pronouncement have the meanings given to them in the Principal Terms and Conditions ( PTC ) in connection with the proposed Sukuk Issuance. 1. STRUCTURE AND MECHANISM The structure of the proposed Certificates Programme is as follows: Issuance 1.1. On the transaction closing date ( Closing Date ), Petronas Global Sukuk Ltd., as Trustee, will declare a trust over the trust assets ( Wakalah Portfolio ) and as Issuer will receive the proceeds (the Sukuk Issue Amount ) from the Sukuk holders ( Sukukholders or Certificateholders ). In return, Petronas Global Sukuk Ltd. will issue the Sukuk holders Certificates representing the Sukukholders proportionate beneficial ownership and interest in the Wakalah Portfolio. 1.2. Petronas Global Sukuk Ltd., as Trustee will enter into a Wakalah Agreement to appoint PETRONAS as the trustee s agent ( Wakeel ) to perform duties set out in the Wakalah Agreement. As a Wakeel, PETRONAS shall be paid a nominal fee but would be entitled to retain all excess profits as incentive fee. PETRONAS in its capacity as the Wakeel shall manage the Wakalah Portfolio. This would include management of Leased Assets (defined below) of PETRONAS wholly-owned subsidiary Petronas Penapisan (Melaka) Sdn. Bhd. ( PPMSB ). The assets of PPMSB, which is a 100% owned subsidiary of PETRONAS, shall underlie the tangible portion of the issuance. In addition, PETRONAS, as Wakeel, shall ensure that the value of the Leased Assets is at least 33% of the nominal value of the Wakalah Portfolio. Moreover, under the Substitution Undertaking, PETRONAS
may, at its sole discretion, from time to time exchange/substitute the existing assets with other Shariah-compliant leasable assets having a value equal to or greater than the existing assets. 1.3. On the Closing Date, Petronas Global Sukuk Ltd. will use at least 33% of the Sukuk Issue Amount in the Wakalah Portfolio to acquire assets ( Leased Assets ) from the PPMSB (the Seller ) pursuant to the Purchase Agreement. On the Closing Date, Petronas Global Sukuk Ltd. shall then, as Lessor, lease the Leased Assets to PETRONAS ( Lessee ) under the Lease Agreement for a predetermined rental payment and lease period. Rental payments ( Rental Payment ) under the Lease Agreement would equal the periodic distributions to the Sukukholders ( Periodic Distribution Amount ) with the exception of the final rental payment which shall be reduced by the Mark-up Amount (defined below) on the commodity murabaha portion of the transaction USD [1 million] (see below) and would be paid by PETRONAS as Lessee to the Lessor on each semi-annual rental payment date. Also on the Closing Date, PETRONAS, as Obligor, will enter into an undertaking (the Purchase Undertaking ) in favour of Petronas Global Sukuk Ltd. to purchase and accept the transfer of all of the Trustee s (Petronas Global Sukuk Ltd. s) interests in the Leased Assets at the time of dissolution of trust ( Scheduled Dissolution Date ) or any earlier date of trust dissolution ( Early Dissolution Date ) at the Sukuk redemption price ( Exercise Price ). Arrangements / Transactions outside the Sukuk structure Lease of Leased Assets by PETRONAS to PPMSB On the Closing Date, PETRONAS shall lease the Leased Assets to PPMSB for a one-time rental payment, which is equivalent to the amount paid to the Seller for the sale of Assets. Also, on the closing date, PETRONAS Subsidiary PPMSB shall undertake a purchase undertaking in favour of PETRONAS ( Purchase Undertaking #2 ) to purchase and accept the transfer of all of the PETRONAS interests in the Leased Assets on the Scheduled Dissolution Date or any Early Dissolution Date at a nominal exercise price of USD100. 1.4. On the Closing Date, Petronas Global Sukuk Ltd., (or PETRONAS as Wakeel on its behalf) will use no more than 67% of the Sukuk Issue Amount in the Wakalah Portfolio to purchase certain commodities ( Commodities ) on spot basis from a commodity broker ( Commodity Broker #1 ). The Commodities shall then be sold to PETRONAS ( Buyer ) pursuant to the Commodity Murabahah Investment Agreement. PETRONAS, as Buyer, would pay for the Commodities on a deferred payment basis (the Deferred Sale Price ) according to the terms of the Commodity Murabahah Agreement. The Deferred Sale Price shall be the sum of the price paid to 2
Redemption purchase the commodities and the agreed mark-up of USD [1 million] ( Mark-Up Amount ). The Deferred Sale Price become payable on the earlier of the Scheduled Dissolution Date or the Early Dissolution Date. Also, on the Closing Date, PETRONAS, as Buyer, shall subsequently sell, on a spot basis, the Commodities to a commodity broker, ( Commodity Broker #2 ), different from the Commodity Broker #1, for an amount equal to the purchase price of the Commodities. Thus, on the Closing Date, PETRONAS would receive the entire Sukuk Issuance Amount. 1.5. At Scheduled Dissolution Date or Early Dissolution Date, pursuant to Purchase Undertaking, PETRONAS shall purchase and accept transfer of all of Petronas Global Sukuk (SPV) interests in the Leased Assets at the Exercise Price. 1.6. The Exercise Price and Deferred Sale Price along with the Rental Payment received from PETRONAS shall be paid by the Petronas Global Sukuk Ltd. to the Sukukholders to redeem the outstanding Wakalah Sukuk and any excess shall be retained by the Wakeel (PETRONAS) as an incentive fee. 1.7. Pursuant to Purchase Undertaking #2, Petronas Subsidiary PPMSB shall purchase and accept the transfer of all of the PETRONAS interests in the Leased Assets on the Scheduled Dissolution Date or any Early Dissolution Date at a nominal exercise price of RM100. 2. IMPORTANT HIGHLIGHTS 2.1. Wakalah bi Al-Istithmar: This arrangement has been approved by the Accounting and Auditing Organisation for Islamic Financial Institutions ( AAOIFI ) as provided in Shariah Standard No. 17: Investment Sukuk, page 312 Item 5/1/5/8 which provides that The issuer of these certificates is the investment agent, the subscribers are the principals and the realised funds are the entrusted capital of the investment. The certificate holders own the assets represented by the certificates with its benefit and risks, and they are entitled to the profits, if any. 2.2. Tangible Assets Portfolio: The Investment Wakeel shall invest at least 33% of the Sukuk proceeds, i.e., Wakalah Portfolio, into the tangible assets. This is in line with the decision of the Shari a Board of the Accounting and Auditing Organization For Islamic Financial Institutions ( AAOIFI ) whereby in its Shari a Standard No. 21 in relation to Financial Papers (Shares and Bonds), in particular item 3/19 where it states that if the assets of a corporation comprise of tangible assets, benefits, cash 3
and debts, the rule for trading in the shares of such a corporation will differ according to the primary asset, which conforms to the objective of the corporation and its usual activity. If its purpose and activity pertaining to trading in tangible assets, benefits and rights, trading in its shares is permitted without taking into account the rules of Sarf or transactions in debts; irrespective of their size as in such a case these are secondary. This is subject to the condition that the market value of the assets, benefits and rights are not less than 30% of the total assets which includes the tangible assets, benefits, rights, cash and debts. The following tradition of Prophet Muhammad (pbuh) as reported by Al-Bukhaari and Muslim is also being taken into consideration while deriving at the decision to use 33% benchmark on the Investment assets: The Prophet said regarding the portion of will: "Make a will in one-third (of your property), and one-third is many (i.e. the will must not exceed one-third of the whole property)". Based on this Prophet s tradition, 1/3 or 33% can be used as a guideline for the basis of formulating a benchmark to set floor limit of asset portfolio because the amount exceeding the percentage set will be considered as many and in our case here it can be construed as majority or significant composition of the asset portfolio. 2.3. Wakalah Portfolio: The Sukuk Assets will include: (a) (b) the leased assets ( Leased Assets ) to be leased by the Lessor to the Lessee pursuant to a Shariah-compliant lease agreement. The Leased Assets shall be more particularly described in the Offering Circular for the Issuance; and any commodities to be purchased by the Trustee (or by the Wakeel on its behalf) to be sold to PETRONAS pursuant to the Commodity Murabahah Investment Agreement. 2.4. Details on Utilisation of Proceeds by Issuer: The Issuer will use the proceeds from the issuance of the Certificates to purchase the Leased Assets from PETRONAS and/or its subsidiaries and to buy Commodities under the Commodity Murabahah Investment Agreement. PETRONAS and/or its subsidiaries will use the proceeds it receives to finance capital expenditures and for general corporate purposes which are Shariah-compliant. 2.5. Substitution of Leased Assets: In the event of partial loss, PETRONAS or any of its wholly-owned subsidiaries may substitute Leased Assets in accordance with the relevant provisions of the Substitution Undertaking, provided that the aggregate value of any new assets is equal to or greater than the aggregate value of the substituted assets that are Shariah-compliant and approved by the Joint Shariah Advisers. 4
It is not permitted under Shariah to have non Shariah-compliant assets as underlying assets, hence from a Shariah perspective, it is permissible for the Issuer to substitute the Tangible Assets which are no longer Shariah-compliant with other qualified Shariah-compliant assets under the Substitution Agreement in order to avoid any disputes regarding the permissibility of a component of the Assets. 2.6. Purchase Undertaking: The Purchase Undertaking is a unilateral promise based on the Shariah principle of Wa ad and not a guarantee of capital. A separate and individual sale and purchase agreement shall be executed for the respective tranches by the Obligor to purchase the Sukukholders undivided beneficial ownership and interest in the Tangible Assets based on formula mutually agreed by both parties. The permissibility of the purchase undertaking at a pre-determined price or formula is further supported by the following arguments:- (i) A purchase undertaking in general is a promise to enter into sale and purchase transaction to be held in future to purchase the underlying asset of an investment. Both parties must observe the essential elements of a sale contract together with its necessary conditions. Among others, the subject matter of sale i.e. underlying assets must exist. If the underlying assets no longer exist due to loss or damage, the purchase undertaking will not have any effect as purchase of non-existence (Bai al-ma dum) is prohibited by the Shariah. This will not happen in a guarantee (dhoman). Guarantee will continue to have its effect throughout the investment tenure regardless of the conditions of the underlying assets. Furthermore if the guarantee is provided on the investment including the underlying assets, in the event of total or partial loss of the underlying assets, the guarantor needs to replace the underlying assets on its own account; (ii) Fixing of price for a future sale transaction is a matter of mutual agreement (taraadhi) between the contracting parties i.e. buyer and seller. This practice is comparable to fixing of price practised in Bai al-istijrar and Bai Bima Yanqathi Bihi Al-Si r. Both parties in this transaction are taking the risk of price fluctuation. In a purchase undertaking, fixing of the underlying assets price shall expose the seller and buyer to the same risk. The seller may gain from the sale transaction if the market price of the underlying assets depreciated and equally, the buyer may experience losses if the market price of the underlying assets depreciated; (iii) The seller i.e. the Issuer (acting on behalf of the Sukukholders) are not devoid of all risks as the performance of the Purchase Undertaking is still subject to the performance of the Tangible Assets and the credit standing of the Obligor respectively; and (iv) The principle of Urf or common practice in the industry and the expectation of investing in fixed income instruments as long as they are free from riba, gharar and other prohibition which will render the contract invalid. The Securities Commission Shariah Advisory Council ( SC SAC ) in its 77 th meeting has resolved that the purchase undertaking during the event of default is a 5
conditional promise (al-wa d al-mu`allaq) and must be kept by the promisor (issuer who gives the promise). The purchase undertaking is not considered as a condition in the contract between the issuer and the investors. This is due to the Purchase Undertaking clause not being included in the main sukuk contract. 2.7. Wakalah and Incentive Fees: Incentive fee is given based on the principle that the Investment Wakeel is entitled to a fee for his services and in addition, any profit made above an agreed profit rate may be paid to the Investment Wakeel as an incentive fee pursuant to the terms of the Declaration of Trust and Agency Agreement. This is in line with AAOIFI Shari a Standard No. 23, Item 4/2 (e) and (f) in relation to the Paid Agency under Wakalah Standard, which states: (e) Remuneration for agency may be any gain in excess of a specific amount of output of the operation, or a share of the Sukuk output. (f) A certain share of the output may be added to the specific remuneration of the agent as a motivation. 2.8. Commodity Murabahah Investment: This is in line with AAOIFI Shari a Standards for Islamic Financial Institutions No 17, Item 3/5, page 302 which states These are certificates of equal value issued for the purpose of financing the purchase of goods through Murabahah so that the certificate holders become the owners of the Murabahah commodity. 3. DOCUMENTATION 3.1 The Shariah Adviser has reviewed the Shariah aspects of the documentation in respect of the Certificates. The documentation shall be executed as per the sequence below: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) Declaration of Trust; Agency Agreement; Costs Undertaking; Global Certificates; Purchase Agreement; Wakalah Agreement; Lease Agreement; Servicing Agency Agreement; Sale Undertaking; Purchase Undertaking; Substitution Undertaking; and Commodity Murabahah Investment Agreement. 6
4. APPROVAL 4.1. CIMB Islamic as the Shariah Adviser is of the view that, given the prevailing circumstances and the jurisdiction under which the Issuer is established, the structure and mechanism as set out above are acceptable within the principles of Shariah, subject to satisfactory documentation and proper execution of the same. 4.2. In arriving at the decision, CIMB Islamic also took into consideration of the following issues: (i) The legal constraints under which the Sukuk Issuance is being developed; (ii) The need to develop the Islamic finance industry, particularly in respect of the issuance of Islamic securities; (iii) The need to facilitate the increasing needs of corporations and financiers to mobilise funds according to Shariah principles; and (iv) The prevailing conditions and affairs of the Ummah and the need to remove them from the shackles of riba. And He knows best. Endorsement by the Chairman of the Shariah Committee of CIMB Islamic Bank Berhad I, Dr. Mohamed Azam, hereby confirm that all members of the Shariah committee have been consulted and made aware of all Shariah issues in relation to this proposal. DR MOHAMED AZAM MOHAMED ADIL Chairman Shariah Committee CIMB Islamic Bank Berhad Date: 27 February 2015 7