Part 2: The Documentation for Sukuk

In Part 2, Hani Abbas Helmy, Head of Sharia Review, for Dubai Islamic Bank, breaks down the documentation involved in a Sukuk.

The documentation of the Sukuk issuance can grow to around 1,000 pages sometimes. To make life a lot easier for the Sharia Reviewer reviewing this bulk, it is segregated into four categories. As the Sharia Reviewer acquaints himself with these categories, he is more efficient and more productive.

The four categories are:

1. The Prospectus: the most comprehensive document (although it is part of the Sukuk issuance documents, I have devised a separate category for it considering its importance, complexity and diverse content) is usually divided into the sections mentioned in the below table, which highlights the scrutiny required for Sharia Review and what to look for:

#SectionSharia ReviewWhat to Look for
1The Offering (Overview)Thorough.Transaction Compliance*.
2Parties involved and their capacitiesThorough.Assess relationships and its impact on Transaction Compliance.
3Sharia Structure (Fatwa) and Cash flowsThorough.Transaction Compliance.
4Use of proceedsThorough.Transaction Compliance. Underlying Sukuk Transaction related and should not contravene Transaction Compliance.
5The Sukuk Underlying AssetsThorough.Transaction Compliance. Sharia viability of the Sukuk Assets for the Underlying Sukuk Transaction and Structure.
6Summary of the Transaction documentsThorough.Transaction Compliance.
7Terms of the CertificateThorough.Transaction Compliance and General Sharia Compliance**.
8Feasibility studySkim through.Transaction Compliance and General Sharia Compliance.
9Form of Certificate (Registered or bearer)Skim through.General Sharia Compliance and equal rights of Sukukholders.
10RatingsSkim through.General Sharia Compliance.
11Credit worthiness of the ObligorSkim through.General Sharia Compliance.
12Financials (of Obligor)Skim through.Non-Halal activities.
13Risk factorsSkim through.General Sharia Compliance.
14TaxationSkim through.General Sharia Compliance.
15Subscription and SaleSkim through.General Sharia Compliance.
16Legal MattersSkim through.General Sharia Compliance.
17SettlementSkim through.General Sharia Compliance, particularly, interest charges and/or FX Sharia violations.
18General InformationSkim through.General Sharia Compliance.
19Other SectionsSkim through.General Sharia Compliance.

* Transaction Compliance refers to compliance of the structure of the Underlying Sukuk Transaction with the Sharia principles governing such structure and the guarantees relating thereto. Therefore, if the underlying Sukuk structure is an Ijara transaction, then the Sharia Reviewer refers to the AAOIFI Ijara Sharia Standard # 9 and the applicable provisions to Ijara Sukuk under the AAOIFI Sukuk Sharia Standard # 17, as well as the DFM Sukuk Standard, in addition to his IFI’s Sharia Board’s Fatawa and decisions on Sukuk issuances of the same type/variant.

** General Sharia Compliance refers to general/generic Sharia issues to look out for such as: (1) calculation and/or payment of interest, (2) incorrect application of exchange rates for payments and profit determination, (3) conventional terminology, etc.

These sections are distributed throughout the Methodology amongst the other documents based on the relevant priority, potential Sharia concerns and expected completeness of information.

2. Basic Underlying Transaction(s) documents: These are the set of documents that represent the Underlying Sukuk Transaction. This corresponds to the set of documents of a bilateral transaction at any IFI with the same structure. Hence, if the Sharia Reviewer assesses an Ijara Sukuk, the Basic Underlying Transaction’s documents are predominantly the standard Ijara documents, namely:

2.1. Promise to Lease

2.2. Purchase Agreement

2.3. Title Nominee Declaration, if needed.

2.4. Ijara Muntahiya Bittamleek Agreement

2.5. Service Agency agreement

2.6. Purchase Undertaking (PU)

2.7. Sale Undertaking (SU)

2.8. Sale Agreement Specimen (to be executed pursuant to the PU/SU)

2.9. Guarantee Document(s)/Agreement(s) 

This set of documents is predominantly reviewed by the Sharia Reviewer on similar terms as he reviews the set of documents of a bilateral Ijara transaction, but they are usually more comprehensive. It is known that when a lawyer drafts an agreement for a USD 10,000 transaction, documents are around 10 pages; however, for the same transaction for a USD 100,000,000 transaction, the documents can reach 200 pages. This is usually the case to cover the higher level of details provided for, considering the transaction size and the applicable risks that can also grow in size. Further in a Sukuk context the lawyers also consider the Sukuk Features that usually vary between Sukuk issuance. Hence it’s the same process for a bilateral transaction, except for (i) a larger number of pages and clauses to go through and (ii) different terminologies to map with the Sukuk Features.

3. Sukuk Specific Underlying Transaction(s) documents: These are additional documents that relate to the Underlying Sukuk Transaction. If this was a bilateral transaction these documents would not be part of the documentation set. Continuing with the Ijara Sukuk example, an additional document could be Substitution Undertaking, allowing the obligor to replace assets it needs to dispose of or for any other stipulated commercial needs.

This type of document is reviewed by the Sharia Reviewer thoroughly and cautiously assessing Sharia compliance on the basis of (i) a stand-alone document as to what it is, i.e. a promise, and (ii) its impact on the overall structure based on its terms.

4. The remaining Issuance documents: These are the documents that make the Underlying Sukuk Transaction a Sukuk instead of just another bilateral transaction, excluding the Underlying Sukuk Transaction’s documents and excluding the Prospectus as it was considered as a category on its own. These documents would predominantly be:

4.1. Subscription Agreement/Application (including KYC, AML and Tax related forms)

4.2. Trust Deed/Declaration of Trust

4.3. Custodian Agreement

4.4. Sharia Advisory Agreement, to be executed with each Sharia Advisor

4.5. Agency Agreement

4.6. Corporate Services Agreement

4.7. Paying Agency Agreement

4.8. Listing Agency Agreement

4.9. Calculation Agency Agreement

4.10. Cost Undertaking, if related to issuance service providers/agents.

The Sharia Reviewer should thoroughly review these documents looking out for the General Sharia Compliance related issues, while ensuring the following based on the type of the document:

#DocumentWhat to ensure
1Subscription Agreement/ ApplicationEnsure the adequacy of the Offer and Acceptance language, auto-effectiveness and process.
2Trust DeedEnsure complying with trust/custody requirements (Amana). This may be executed unilaterally or incorporated as part of an agency agreement.
3Custodian AgreementEnsure complying with custody requirements (Amana).
4Agency/Service type Agreements (4.3 to 4.8)Ensure that the agency relationship is properly established, following the AAOIFI Agency Sharia Standard # 23.
5Cost UndertakingThis is a promise to predominantly cover excess costs incurred by the service agent(s) while rendering the agreed services with due care. Costs covered beyond that are reported.

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