Dana Gas Sukuk - Why Sharia compliance is NOT the point

Gassner's picture

Dear Reader,

Dana Gas Sukuk is still making headlines and continues to damage the Sukuk market.
A key question to be understood: Could a lack of Sharia compliance make the issuance unlawful?

Well this is the claim of the prospectus regarding the Sharia compliance:

No assurance can be given as to Sharia rules

The Sharia advisory board of Dar Al-Sharia have confirmed that the Transaction Documents are, in their view, Sharia compliant. However, there can be no assurance that the Transaction Documents or the issue and trading of the Certificates will be deemed to be Sharia compliant by any other Sharia board or Sharia scholars. None of the Trustee, Dana Gas or the Delegate makes any representation as to the Sharia compliance of the Certificates and/or any trading thereof, and potential investors are reminded that, as with any Sharia views, differences in opinion are possible. Potential investors should obtain their own independent Sharia advice as to the compliance of the Transaction Documents and the issue and trading of the Certificates with Sharia principles.

In addition, prospective investors are reminded that Dana Gas has agreed under the English Law Documents to submit to the jurisdiction of the courts of England. In such circumstances, the judge will first apply English law rather than Sharia principles in determining the obligations of the parties.

Basically, there is no assurance ever made that the offering is Sharia compliant and the duty remains with the investor, while the Sharia Board of Dar Al Sharia has approved and issued a positive opinion - quite the same as plenty of other issuances.
Hence, there is no reliance on Sharia compliance being given by Dana Gas in the first place and consequently the argument of a potential deficiency thereto should have no merits in court.

The question is what the Court in Sharjah will rule about it in its first hearing on 25th December 2017? So far no court has looked into the argument and only upholding formal legal procedures.

Despite having utilised a frequently used Sharia structure Dana Gas is the only issuer coming up with the argument of a deficient Sharia compliance and potential unlawfulness. This supports the impression it is nothing more than a tactic to delay payments. Dana Gas is awaiting itself a payment from its Northern Iraq's business partner until then it would not be able to honour its obligations – due to the delay in court hearing the payments may come in before the court convenes.

What disturbs me: UAE courts allow ordinary people to be imprisoned, if they are not paying their credit cards. Why their lawyers never came up with the argument they could not pay as it would be unlawful for Sharia reasons? They have the same or even stronger merits for Islamic credit cards.

Some commentators argued a central Sharia Board would be the solution. I tend to disagree. If a court is only gathering documents and upholding procedures you could still easily delay for six months or more a payment, saying a missing transaction document must be reviewed and until then no payment should be done.

What, however, is needed?

a) That UAE courts take fast decisions on issuances predominantly under English law and dismiss cases without merits immediately. One cannot arrest individuals for non-payment of debts on the one hand, and leave corporates with debt advisors getting away. Doing so, damages the reputation of the UAE as a financial marketplace and not per se the Islamic market segment alone.
b) Improve the insolvency and debt restructuring regime in the GCC
c) Closing delay tactics and enforcing obligations for the sake of market discipline.

Unfortunately it shows that structured bonds, like Sukuk, allowing for more excuses and delay tactics than conventional bonds. Every investor should read the prospectus and make sure he understands it and check the reputation of the issuer.

The rating approach as communicated by Fitch may change depending on the outcome of this controversy, including that some Sukuk may not receive a rating any longer. That way Dana Gas managed to cause a potentially lasting damage to the Sukuk market and specifically to the UAE.

Best regards,

Michael Gassner