Participative Financial instruments: An Italian approach to Sukuk? (Part III)
As mentioned in the previous articles in this series, the terms and conditions of the issuance of participative financial instruments (PFIs), ie financial instruments which exclude a right of reimbursement of the holders, must be set out by the company’s bylaws along with the rights that are attributed to the latter, the penalties that are applicable in the event of a breach of the holders’ obligations and, if permitted, the rules of the instruments’ circulation. PFIs are therefore quite flexible instruments and a large part of their regulation is left to the bylaws of the issuer and, in the last instance, to the parties’ will. This should facilitate, in principle, the alignment of their features, with those of Sukuk.
As far as the nature of the contribution made in exchange of PFIs, Article 2346, Paragraph 6 of the Italian Civil Code provides that: “The company, in exchange for contributions from the shareholders or third parties, even under the form of works or services, may issue financial instruments.” If, on the one hand, such a provision does not rule out that services, goods and receivables also be contributed, on the other hand it allows for sure that PFIs are issued in exchange of money, as it happens for Sukuk. Contributions can be made both by the shareholders of the issuer and third unrelated parties, so that from this perspective there are no obstacles to assimilating PFIs into Sukuk.
The remuneration of PFIs, which could be shaped in different ways, such as a profit participation, as a capital reimbursement or as a distribution of reserve, both during the life of the issuer as well as at the time of liquidation, could be fixed or variable. So it would be possible to provide for a fixed or variable annual rate of return on equity calculated on the amount of the contribution similar to a Sukuk profit rate.
Since PFIs would exclude any reimbursement right of the holders, they would constitute direct, unconditional and quasi equity instruments of the issuer, accounted as a reserve in the balance sheet of the issuer and therefore will contribute to the ‘capitalization’ of the latter. These features appears not to be far from those of Sukuk as certificates which do not place an obligation on the issuer but give a proportional interest in the ownership of assets, projects or investment activities. Indeed, both Sukuk, in a different manner according to their structure, and PFIs involve participation in the business risk of the issuer and, in the end, trigger the risk arising from the solvency of the latter.
Lastly, if so provided in the issuer’s bylaws, PFIs may be transferable, and therefore be liquid instruments, tradable in the secondary market like most Sukuk.
Of course, considering the various structures of Sukuk, only an in-depth case-by-case analysis would allow the assessment of whether, at least in some of those cases, PFIs issued by an SPV could be considered the Italian law declination of Sukuk.