You are currently viewing Introduction of the Shariah-Compliant Preference Shares by the Securities Commission (SC) of Malaysia  

Introduction of the Shariah-Compliant Preference Shares by the Securities Commission (SC) of Malaysia  

  • Post author:
  • Post last modified:February 8, 2025
  • Post comments:0 Comments

Issuance of preference shares (PS) is one of the methods for a company to raise capital and obtain funding. The Shariah Advisory Council of the Securities Commission Malaysia (SAC) had resolved on the features of preference shares and its related Shariah issues which are applicable for the issuance of Shariah-compliant preference shares by companies listed on Bursa Malaysia. Based on the provision in Section 2(1) of the Companies Act 2016, preference shares are defined as follows:

a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise”.

The appropriate takyif fiqhi for Shariah-compliant PS is the principle of musharakah. Musharakah in Shariah-compliant PS is between PS holders and ordinary shares (OS) holders where both parties contribute capital to the company. PS holders are treated as new musharik (partner) in the existing musharakah (i.e. musharakah among OS holders), whereby they invest in an existing musharakah venture (i.e. general business of the same company).

PS holders are subject to different terms as compared to OS holders. The execution of the musharakah contract in PS is done through subscription of the PS by the PS holders after they have agreed to the terms and conditions in the relevant document of the PS. Entitlement of PS Holders to Dividend is up to the Declared Profit. From Shariah perspective, it is permissible for PS holders to receive dividend up to the declared profit by the company based on the concept of taradhi (mutual consent).

In implementing the PS, there are two waiver of rights that should be observed namely 1) Waiver of Right by the OS holders to the PS holders; and 2)   Waiver of right by the PS holders to the OS holders. The former concerns the Distribution of Dividend and the latter concerns the Dissolution or Winding-up of Company. For Dividend, the OS holders waive their right (Tanazul) to receive dividend after profit is realised by giving preference to the PS holders. The OS holders also promise to waive their right through hibah (al-Wa`d bi al-Hibah) to receive dividend after profit is realised by giving preference to the PS holders.

With regards to the dissolution or winding-up of Company, the OS holders waive their right (Tanazul) to receive any amount pursuant to the dissolution or winding-up of the company by giving preference to the PS holders. The OS holders also promise to waive their right through hibah (al-Wa`d bi al-Hibah) to receive any amount pursuant to the dissolution or winding-up of the company by giving preference to the PS holders.

Other Related Matters that need to be observed in structuring the Islamic Preference Shares is firstly, the Shariah status of PS whereby its underlying shares must be Shariah-compliant. Secondly, the utilisation of PS Proceeds Issuance must be utilised for Shariah-compliant purposes only. Next, if there is a change of Shariah-compliant Status for Securities of Company related to PS which then re-classified as Shariah non-compliant by the SAC, the status of PS for such company is also classified as Shariah non-compliant. Lastly, PS issuers that would like to obtain the status of Shariah compliant PS, such PS must obtain the endorsement from the SAC.

Reach out to us at Faz Advisors if you want to know more about Islamic Preference Shares and let us assist you on how your company could offer products and services in Islamic way.

Leave a Reply