It is no more than a cranky joke that on a hot day when someone faces a creditor demanding to pay back the due debt, he refuses to do so on the pretext that he borrowed money in winter and hence his obligation to return it has lapsed in summer. The issuers of Dana Gas Sukuk must be sentenced to 100 lashes each for uttering non-sense in the holy month of Ramadan1. The case is so baffling that it reminds one of a man who raised a child as his own son for several years before proclaiming him to be an illegitimate child conceived by his wife. Or, funnier enough, the Dana Gas guys are like a man who slept with a woman for four years apparently after marrying her and left her on the pretext that their nikah was faulty in the first instance anyway. Such a person should be tried for committing adultery. Shouldn’t the? Why am I getting so mad? The story goes like this.
On June 13, Dana Gas, a Sharjah-based regional independent natural gas producer, unilaterally announced that its US$700 million worth of outstanding sukuk had turned Shari’arepugnant, following the change in the UAE law. The said sukuk is based on a mudaraba structure. According to the Islamic law, a mudaraba contract does not allow for capital and rate guarantee. Dana Gas, however, highlighted three Shari’a-related problems with the transaction:
- The redemption price of the sukuk is pre-fixed;
- Profit payment is guaranteed regardless of the company’s performance; and
- Distributions are based on interest and not profit-based calculations.
Dana Gas’s claim that its sukuk is not Shari’a-compliant under the UAE law is ridiculous, as there is no sukuk law promulgated in the UAE, unlike in other countries, notably Malaysia. Dana Gas has apparently sought advice from a law firm that knows nothing, or little, about Shari’a. This is why they have come up with an absurd view as summarized above in the three point. According to the Offer Circular, the redemption price of the sukuk is not fixed, unqualified. Profit payment is not guaranteed as such. In fact, Dana Gas has a right to pay the investors more than a minimum prescribed in accordance with a profit distribution ratio. Similarly, distributions are not based on interest, rather they are benchmarked with LIBOR, which is not the same as the return being interest-based. Butapparently, their lawyers have no, or limited, experience of reading Islamic financial transaction documents.
The Dana Gas guys are like a man who slept with a woman for four years apparently after marrying her and left her on the pretext that their nikah was faulty in the first instance any way.
This is not for the first time that such a claim has been made by an institution involved in Islamic finance. The Investment Dar (TID) asserted in an English court that its wakala-based arrangement with Blom Development Bank was not Shari’a-compliant, and hence it should not be enforced. The English court obviously adjudged the case against TID. It is unfortunate that Dana Gas has preferred its own interest over the global Islamic financial services industry that faces a huge potential reputational risk in the wake of this case. There is nothing wrong to be self-interested, but it leaves many a people lift their eyebrows if it is in the spirit of pursuit of selfinterest with guile. There are numerous examples of what I call as comedy of errors and strategy of jokers. Once I was attending a session on Shari’a-compliant funds at a conference in Kuala Lumpur. Obviously, a guy from an asset management company my then employer was advising on Shari’a matters complained that all the delay in product development and issuance was caused by Shari’a advisors. This sufficed to infuriate me, as I knew that it was their own legal and compliance team and not us, the Shari’a advisors, who delayed the transaction. Of course, I didn’t care much that the guy was my client and that we stood a chance of losing recurring business from them. I just had to speak for the Shari’a advisors.
We should expect the same from Dar Al Sharia, the Shari’a advisors on the transaction, to come forward and make an unambiguous statement on the Shari’a compliancy of the transaction. Failing to do so will damage confidence of the investors in Islamic finance in general and sukuk in particular. I get mad when I saw someone switching from an Islamic banking career to a job with a conventional bank in a hard-core conventional banking role. I know that in some cases it has never been a choice of the individual but rather a compromised option but still it looks obscene to see someone selling pork bellies after spending a couple of years preaching the ill effects of pork consumption. It is just like seeing someone hitting a person for eating openly during the day in Ramadan, and the next day seeing the same person halfnaked on a beach with a 90% naked women. Sometimes mad people come up with sane views, and in my case it is a norm rather than an exception. After reading the Offee Circular and the accompanying transaction documents, one cannot but accept that the above-mentioned three problems with the sukuk are completely baseless. The redemption price of the sukuk is not necessarily pre-fixed. The announcement by Dana Gas of not paying the periodic return from the date of June 13 till the redemption date is technically a default, in which case the redemption price becomes fixed, as per the terms and conditions of the sukuk offering. So, Dana Gas hasactually fixed the price now after defaulting. This is my view despite the fact that Dana Gas has received protection from courts in Sharjah, British Virgin Island and England, barring its sukuk holders from taking actions against the company’s securities until Dana Gas receives a clear court judgement declaring its sukuk to be unlawful and unenforceable. Whatever be the quality of Shari’a advice given to Dana Gas,the fact remains that the sukuk issuer appears to have used uncertainty over Shari’a compliance to combat its financial pressure. So, it is high time for the government of the UAE to start taking Shari’a matters more seriously. The already approved Higher Shari’a Authority should now be constituted and made more effective for reducing uncertainty on the Shari’a matters related with Islamic banking and finance. Final point. Madness should be dealt with madness. Dana Gas’s announcement is no more than madness. If readers find the arguments presented here as incoherent, incomprehensible and less intelligent, they must know that this is deliberate. The intent here is to intimidate rather than reconcile. It is also to register protest against Dana Gas, which has certainly attempted to hurt the global Islamic capital markets. It has also adversely affected the claim of Dubai to become the global hub for Islamic economy, including Islamic finance.
