​Islamic Finance – Islamic Capital Market - Sukuk that is tradable and interchangeable

​Islamic Finance – Islamic Capital Market - Sukuk that is tradable and interchangeable
More value-added elements are needed in the Sukuk structure as investors become more sophisticated. One feature is the exchangeability or convertibility of the Sukuk into shares of certain businesses. They now have the chance to change their Sukuk into shares as a result. A straight bond or security issuance that also grants the investor the option to convert or exchange the bond or security into a predetermined number of shares of a company at a predetermined exchange price is known as an exchangeable security. This choice is available for both convertible and exchangeable securities, but the shares that can be converted into or exchanged for them vary. 

While holders of exchangeable securities can convert their securities into ordinary shares of other businesses, holders of convertible securities have the right to convert their securities into ordinary shares of the issuer company. The conversion price, which is set at the time the securities are issued and is dependent on the par value of the bond, is crucial in this Sukuk structure. The conversion ratio, which determines whether the security will be converted or exchanged into common shares of the relevant businesses, is calculated by dividing the par value of the securities by the share price.

Let's say a convertible or exchangeable asset has a $1,000 par value. A share's exchange cost has been set at $250. It is possible to calculate the conversion ratio by using two fixed variables: 1,000/250 = (4:1). This formula shows how each security with a $1,000 par value can be changed or traded for four common shares. It should be emphasised that regardless of the market value of the securities at the moment of conversion or exchange, the conversion ratio must be based on the par value of the securities. The holders of securities will undoubtedly profit from this development.

If the Sukuk holder chooses to convert or exchange their Sukuk, they will become shareholders of a company with all the corresponding rights and liabilities. Additionally, they will be qualified to receive dividends and/or financial gains, as applicable. Since the market will ultimately decide on the dividend or capital gain, there is no cap on either because it will be determined by the market. Holders will continue to receive the fixed income or the anticipated periodic profit distribution if they do not convert or trade their Sukuk. Additionally, they have the right to the principal redemption during the maturity time. They also have precedence over regular shareholders of the issuing company in the event of liquidation because they are Sukuk investors.