Understanding Islamic Finance - Doha Academy of Tertiary Studies

336 Understanding Islamic FinanceBox 12.3:(Continued)a part of the cost of an expansion project of the company. The TFCs are based onthe mechanism of Shirkah and are tradable in the securities market. The payment ofprofit or sharing of loss is linked to the operating profit or loss of the company. Theinvestors assume the risk of sustaining losses proportionate to their principal amountin the case of any operating losses incurred by Sitara. Changes in any governmentregulations may also affect the profitability of the TFCs. By investing in the TFCs,an investor also assumes the risk of not being able to sell the TFC without adverselyaffecting the price.Profit is paid on a six-monthly basis. For the purposes of sharing profit with theTFC holders, the level of yearly operating profit is divided into two tiers, as describedbelow under the headings of Level I Profit and Level II Profit.Level I ProfitOn the first Rs. 100 million operating profit at 12 % p.a. of the outstanding principal.The rate of 12 % has been taken as a projected rate by reverse accounting on the basisof a sharing ratio. The rate of percentage profit entitlement shall be proportionatelyreduced if operating profit is less than Rs. 100 million, as follows: (Actual operatingprofit / Rs.100 million) × 12 % = Actual profit entitlement rate for Level I profit.Level II Profit2 % p.a. of the outstanding principal on each subsequent Rs. 100 million operatingprofit (over and above Rs.100 million). One quarter of this profit will be transferredinto the Takaful reserve and the balance will be distributed to the TFC holders. The rateof profit entitlement shall be proportionately reduced if the actual figure of subsequentoperating profit falls in between two successive slabs of Rs. 100 million of operatingprofit, as follows: (Actual operating profit / Rs.100 million) × 2% = Actual profitentitlement rate for Level II profit.If the final profit payment of a year is in excess of the on-account profit paymentsalready paid to the TFC holders, the excess amount will be paid along with the nextsix-monthly on-account profit payment. However, if the on-account payments thathave already been made for the year are in excess of the final profit share of theTFC holders, then the excess will be adjusted as per a predecided procedure. If theoperating profit is more than Level I profit, the profit-sharing arrangement applicableon Level II profit is followed.If, upon finalization of the annual audited accounts, a loss is incurred, the on-accountprofit payment has to be adjusted. The loss attributable to the TFC holders will beoffset against the Takaful reserve created for the purpose. If the amount available inthe Takaful reserve is insufficient to absorb the entire loss attributable to the TFCholders, the unabsorbed losses will be adjusted against the principal amount at thetime of redemption of the principal amount.The face value of each TFC issued to the general public is Rs. 5000. The principalamount has to be redeemed at the end of the third, fourth and fifth years fromJuly 1, 2002. The amount of principal redemption at the end of the third year may beRs. 1650/-, at the end of the fourth year Rs. 1650/- and at the end of the fifth year