The latest UAE Securities and Commodities Authority (SCA) decision on the 19th July 2024 reaffirmed its backing for special purpose vehicles (SPVs) – which has been among the most appealing regulatory aspects for foreigners seeking to conduct business and investing in the Emirates.
In a statement issued on the 24th July 2024, SCA Chairman Mohamed Ali Al Shorafa said the decision aims to enhance the effectiveness of the securitization and Sukuk regulations, plus advance the investment funds industry in the UAE.
Without specifically mentioning current concerns swirling around Sukuk issuance and investments, Mohamed Ali said this latest decision is about “providing innovative and resilient mechanisms that meet market needs and help boost its ability to deal with economic challenges and changes”.
Recent concerns were triggered by AAOIFI Shariah Standard No 62, currently in exposure draft form till the end of July 2024, which requires Sukuk to be asset-backed, rather than asset-based. This could be problematic as the vast majority of all Sukuk issued currently are the latter type.
While parking assets into SPVs, ring-fencing these assets and getting the SPVs to issue the Sukuk would be a simple way to comply with AAOIFI Shariah Standard No 62, they bring up issues of extra costs and also have balance sheet implications. Plus, SPVs are still corporate entities bound by strict rules.
But financial free zones withinthe UAE, like the Abu Dhabi Global Market (ADGM), have greatly simplified SPV struictures – by liberalizing shareholding requirements and providing a swift, practical way to implement a securitisation transaction.
As noted by law firm Al Tamimi, ADGM entities are not subject to any requirement of minimum shareholding by UAE nationals. Therefore, 100% of the SPV may be owned by a foreign national or group of foreign nationals.
Further to no restriction of profit repatriation, an ADGM SPV is not required to take office space – unlike an ordinary company limited by shares. Critically, ADGM allows SPVs to function as ultimate holding companies for assets, which, in theory, can continue in perpetuity.
Beyond affirming current regulations and practice for SPVs within the UAE financial free zones, SCA CEO Dr Maryam Buti Al Suwaidi described the decision as a positive step to encourage securitization and Sukuk issuance and promote the investment funds industry.
The decision will “enable public joint stock companies to transfer assets to SPVs, thus boosting their ability to issue Sukuk and debt instruments backed by these assets, which help attract more investments to domestic capital markets”.
The latest decision introduces minor tweaks of capping SPV shareholders at three, disallowing listing or trading in SPV shares and minimum AED1,000 (US$272.3) capital plus annual license renewal. A manager may not be a director of more than five unqualified special purpose entities.
The SPV decision should also be read in conjunction with an earlier SCA decision announced on the 28th June 2024 – regulating the private offering of debt securities, Sukuk and securitized instruments. The June decision is for “incentivizing private placement issuers to list locally instead of overseas, thereby enhancing the attractiveness of the national economy”. The lure with renewed emphasis on SPVs is clear for Sukuk issuers in UAE and some 20 jurisdictions which adopt AAOIFI Shariah standards either fully or partially. But it is unlikely to have any impact in the world’s largest Sukuk issuers — Malaysia, Saudi Arabia and Indonesia — which have not adopted AAOIFI standards as mandatory regulatory requirements.
