I will fast forward and come straight to the point of how a Sukuk transaction is executed and money flows. For this purpose, I have selected Sukuk Ijarah as a role model.

When the interested investors have reviewed the prospectus and have made the subscription offer, the originator has the option to make either of the following decisions:

1. If the aggregate of all subscriptions is in excess of the Sukuk amount, whether to keep the Sukuk amount unchanged and return the excess subscription.

2. If the aggregate of all subscriptions is in excess of the Sukuk amount, decide to keep the excess amount by enhancing the Sukuk value. However, such a decision shall be based on the following aspects:
a. The prospectus provides for the greenshoe option in order to absorb the oversubscription
b. the value of the Ijarah asset is equal to or higher than the overly subscribed amount, and
c. if the aggregate of all subscriptions is lower than the Sukuk amount, whether to reduce the Sukuk amount or roll back the Sukuk for the time being or permanently.

In order to avoid the last situation, the appointed banks carry out the bookbuilding exercise which means they talk to the targeted investor base and try to obtain prior agreement to buy the Sukuk upon launch.

I have been to situations where despite ticking all the boxes, the Sukuk could not be sold owing to sudden unfavorable market conditions or a couple of instruments were launched just before the Sukuk and the liquidity will take some time to return to market for the new paper.

Another reason for the failure of a Sukuk launch could be that the originator is not happy with the class of investors selected by the arranger banks or that there could be a change of heart by the originator upon getting a liquidity boost through the sale of an investment, etc, or may be that the investors gave the nod subject to the originator hiking up the return which the originator is not happy with. Also, the launch should not coincide with any festive season such as Eid, Christmas and the New Year holidays.

Once the transaction documentation has been perfected and the Fatwa has been signed by the Shariah board overseeing the transaction, the same is submitted to the selected bourse for review and clearance together with the application for listing.

Different bourses may have varying procedures which cover pre-listing, listing and post-listing requirements. Nevertheless, what I have experienced is that the bourse does not go into extensive commercial, legal or Shariah review of the prospectus and the transaction documents. The purpose of the listing agency review is to ensure that the capital market laws are respected and that the security shall not harm the investors’ interest and fits well within the overall investment climate of the jurisdiction. If everything goes well, the clearance is provided by the listing agency within a couple of business days.

It is an open capital market secret that although the Sukuk is listed for trading in an exchange, either no trading takes place at all during the entire Sukuk tenor or, even if it does, the security changes hands by skipping the bourse and through ‘over the counter’ trading.

I believe the lack of trading at the bourse is attributed to the fact that Sukuk is a fixed income instrument with low investment risks, a steady return and a semi-assured redemption through the originator’s purchase undertaking. So, therefore, the investors would prefer to hold on to it rather than exiting the investment. Also, the Islamic and conventional banks invest in Sukuk so that they can use them for the repo purpose with the central bank as and when the liquidity need arises.

Once the listing clearance is obtained, a date for the launch of the Sukuk is decided when the Ijarah documents are signed between the originator and the trustee representing the Sukuk investors. As explained by me earlier, this is normally a bankruptcy remote shell company formed in any of the tax havens where there are established trust laws for the sole and exclusive purpose of the single Sukuk transaction. Again, this is not a Shariah requirement but a capital market norm which is also respected for Sukuk issuance.

The Ijarah documents to be signed are the sale and purchase agreement pursuant to which the originator of the Sukuk sells an identified asset or set of assets at an agreed price to the trustee shell company, the affairs of which are managed by an appointed bank which is termed as a delegate, meaning that the shell company has delegated the bank with certain of its defined powers and duties to enter into the transaction documents besides taking any action against the originator or any other party in order to safeguard the Sukuk investors’ interest. Once the delegate has signed any document, it will be legally assumed as if the shell company has done so.

The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.

Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at [email protected]

Next Week: Discussion on the Sukuk procedures shall continue.