Thursday, July 13, 2017



The latest issue surrounding Dana Gas Sukuk clearly shows that the market is still struggling to understand the true nature of sukuk. In reports published of late, many still talk about creditors taking steps to protect their interest related to payment of the so called dividend or profit as mentioned or provided for in the sukuk documents.

If the word “creditors” is to be understood conventionally referring to someone who has lent a certain sum of money, who for sure is entitled for a repayment at a certain future agreed date, then obviously the use of such word in the context of sukuk is totally unacceptable. The reason being true Shariah compliant sukuk are basically not debt instruments like conventional bonds where sums of money are borrowed or lent.

Sukuk if it is to be understood correctly have nothing to do with money lending (by sukuk holders) as they are basically investment securities and not debt ones. In the case of Dana Gas Sukuk which was structured on the basis of Mudarabah contract the investors/sukuk holders must have known from the outset that profit/dividend is not guaranteed as it will depend basically on actual performance of the underlying assets/projects that backed up the sukuk.

Although sukuk holders have no right to guaranteed profit they however enjoy a certain degree of protection in a different sense. If wrongdoing or negligence or breach of terms and conditions of mudarabah contract can be proven, they have the right to be fully indemnified by the issuer or Mudarabah Management Company. Notwithstanding, profit shall always be paid out of actual profit generated by the activities carried out by the issuer as agent for the sukuk holders in running the business.

In the above context sukuk documents and prospectus must make sure that the true nature of mudarabah investment is clearly stated, and sukuk holders owe to themselves to appreciate this fact properly. In the same connection, the issuer should be properly advised not to state anything that may mislead the potential sukuk holders about to the true nature of the investment in sukuk where returns are actually based on actual performance and not as per guaranteed fixed rate of return.

UAE is fortunate because it had enacted legislation governing commercial transactions including Islamic/Shariah based ones. The Civil Transaction Code of 1985 which is of general application in all the emirates provides for rules that need to be followed by all relevant parties lest their transactions can be declared null and void as per the law.

In this context, legal arguments can be put forward by all the involved parties in accordance with such established provisions of the relevant laws. In a broader context, with the presence of such provisions a certain degree of uncertainty related to legal status of transaction can be properly addressed within the ambit of the law.

What however remains to be answered in the case of Dana Gas Sukuk is this: if truly the sukuk is against the law, how come the legal advisors involved in the issuance of the sukuk several years ago were not aware of the so-called point of law related to the nature of Mudarabah Sukuk. This issue is as important as the question of shariah compliance of the sukuk since legal compliance is of no less important than the Shariah one. Although the issuer’s latest action was premised on the legal opinion it obtained from their legal advisor, it seems that such opinion if actually given was actually a belated one. It is unthinkable that the basic nature of mudarabah contract was overlooked when they structured and documented the sukuk in the first place given the fact Mudarabah as a contract/structure is not something of novelty in nature.

What ever that may happen to the parties involved, if Islamic law is to be used in settling the dispute, surely there is enough guidance from Shariah perspective to solve the problem. However the big question is: to what extent the parties are willing to resort to Shariah dispute settlement mechanisms? The indications are, as it was obvious in several other previous cases involving Islamic finance, that not everyone is giving due importance to Islamic ways of settling disputes via Islamic competent courts or arbitrators. As with this Dana Gas Sukuk, English court was given non-exclusive jurisdiction as per the sukuk documents besides Emirate’s court in certain matters as also provided in the same documents.

So the big question here is; will the English court be willing to consider the specificity of Shariah rules in their forthcoming judgment given that the sukuk holders had taken action in the English court. To answer this, one has to read about what had been decided in Shamil bank, the Blom bank and Symphony Gems cases. In all of these cases, the English judges had issued their judgements based on English law.

With the development such as the above is it worthy to talk about Shariah compliance in its honest sense. By right what is started with the so-called Shariah compliant investment needs to be ended or resolved with similar pronouncement. It remains to be seen whether the parties are serious about the Shariah compliance aspect or they are just like any other players in the bond market.

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