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:
|#||Section||Sharia Review||What to Look for|
|1||The Offering (Overview)||Thorough.||Transaction Compliance*.|
|2||Parties involved and their capacities||Thorough.||Assess relationships and its impact on Transaction Compliance.|
|3||Sharia Structure (Fatwa) and Cash flows||Thorough.||Transaction Compliance.|
|4||Use of proceeds||Thorough.||Transaction Compliance. Underlying Sukuk Transaction related and should not contravene Transaction Compliance.|
|5||The Sukuk Underlying Assets||Thorough.||Transaction Compliance. Sharia viability of the Sukuk Assets for the Underlying Sukuk Transaction and Structure.|
|6||Summary of the Transaction documents||Thorough.||Transaction Compliance.|
|7||Terms of the Certificate||Thorough.||Transaction Compliance and General Sharia Compliance**.|
|8||Feasibility study||Skim through.||Transaction Compliance and General Sharia Compliance.|
|9||Form of Certificate (Registered or bearer)||Skim through.||General Sharia Compliance and equal rights of Sukukholders.|
|10||Ratings||Skim through.||General Sharia Compliance.|
|11||Credit worthiness of the Obligor||Skim through.||General Sharia Compliance.|
|12||Financials (of Obligor)||Skim through.||Non-Halal activities.|
|13||Risk factors||Skim through.||General Sharia Compliance.|
|14||Taxation||Skim through.||General Sharia Compliance.|
|15||Subscription and Sale||Skim through.||General Sharia Compliance.|
|16||Legal Matters||Skim through.||General Sharia Compliance.|
|17||Settlement||Skim through.||General Sharia Compliance, particularly, interest charges and/or FX Sharia violations.|
|18||General Information||Skim through.||General Sharia Compliance.|
|19||Other Sections||Skim 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:
|#||Document||What to ensure|
|1||Subscription Agreement/ Application||Ensure the adequacy of the Offer and Acceptance language, auto-effectiveness and process.|
|2||Trust Deed||Ensure complying with trust/custody requirements (Amana). This may be executed unilaterally or incorporated as part of an agency agreement.|
|3||Custodian Agreement||Ensure complying with custody requirements (Amana).|
|4||Agency/Service type Agreements (4.3 to 4.8)||Ensure that the agency relationship is properly established, following the AAOIFI Agency Sharia Standard # 23.|
|5||Cost Undertaking||This 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.|