Dana Gas - the famous Sukuk case, camouflage or correction?
With all the commotion on Dana, I thought to give my two pennies worth.
Dana Gas is practically defaulting on the final two Sukuk “profit distributions” (coupons) although they’re citing sharia illegality. This is default risk triggered by sharia incompliance; this means companies with a similar fate can now follow suit, which can kick off a big wave of similar cases.
I note two issues here:
1) Dana Gas has been struggling recently to meet its obligations with the fall in prices of Gas & Oil. This must have enticed them to look into why a Sukuk structure (issued under English law) bound them to pay fixed profit payments even though this Sukuk was stamped as a sharia compliant mudarabah. Surely the issuance of a mudarabah Sukuk means that issuers such as Dana can opt not to pay profits if it did not make profit? Isn’t that the whole point of Risk Reward? What happened to "Al Ghunm bil Ghurm”? Failure to meet payments in a true Sukuk structure should not be deemed "default" in theory but unfortunately in practice the markets would see failure to make a "coupon" payment as a default. This is part of the problem.
2) Other questionable features in the Sukuk structure, A) the "profit" distributions were based on a interest index rather than the firm's underlying profit, B) the bond holders purchase price was fixed.
Are the above Sukuk features structured with the spirit (maqasid) of the Sharia?
From an outsiders' view point who has made limited research, It appears that Dana Gas, whilst kicking off a massive moral hazard, have some justifiable reasons for refusing to pay up even though this causes short term / medium term self harm.There is a combination of contradicting issues between Dana's actions and the Sukuk they had restructured just a few years ago.
In addition, a gap was left wide open by the Sharia board "Dar Al Sharia" who approved the structure, amidst clear Sharia irregularities none of which were new regulatories mind you as the Dana Sukuk is similar to many Mudaraba structures out there. Dar Al Sharia should have incorporated the well documented struggle that Dana have been experienced and should have foreseen that Dana would be scratching the bottom of barrel should their conditions worsen. (Pun not intended)
It is important to note that the Dana Sukuk was a medium term Sukuk. The real question is, what will happen to perpetual Sukuks issued by other well-known Islamic Banks? How much of an impact would that cause to the investor confidence? Consider one of the major Islamic Banks running into a similar fate? Ultimately the Central Banks would act as a lender of the last resort even though that would not be in the spirit of the maqasid al sharia. However, before that happens, Islamic Banks can either obtain a dispensation from the courts to recall, amend the terms of perpetual Sukuks and reissue and amended one to existing Sukuk holders or they can default. Both measures would cause a serious harm. Especially if such perpetual Sukuks are being touted to be used a Tier 1 capital. This issue undoubtedly opens up a difficult Pandora box, which requires local regulators’ reaction.
No matter the result, retrospective actions must now be taken into account by the sharia advisors and local regulators. A portion of the liability, when a Sukuk issuer files for Sharia incompliance, must be borne by the Sharia Advisors upon rubber-stamping Islamic Finance structures. It would be good to get a statement from Dar Al Sharia on this, as they are a reputable scholarly board. Surely, the industry is strong enough to withstand such scrutiny …..or is it?
You may be interested to read. https://www.bloomberg.com/news/articles/2017-06-15/dana-gas-s-move-to-void-sukuk-stuns-analysts-who-question-motive
Until the next time.... have a great summer.