The UAE’s onshore federal regulator for securities issues new regulation relevant to Sukuk

Following the recent litigation relating to the Dana Gas Sukuk where Shariah-compliance was an issue, on 23 May 2018, the UAE Securities and Commodities Authority (SCA), issued Chairman Decision No. 20/R.M. of 2018 on the Offering or Issuance of Islamic Securities (the ISRs), intended to add an additional layer of disclosure and transparency to the UAE’s Sukuk market in the interests of investor protection.

The ISRs are relevant both to:

  • domestic issuers of Shariah-compliant securities (ie securities issued pursuant to the UAE companies law - Federal Law No. 2 of 2015 concerning Commercial Companies, as amended - either by a public joint stock company or a mutual fund established in the UAE) who intend to issue such securities either in the UAE or outside the UAE, and
  • foreign issuers of Shariah-compliant securities (ie securities issued by a corporate entity established outside of the UAE that is supervised and regulated by a regulatory body equivalent to SCA) that are looking to offer those Shariah-compliant securities in the UAE.

The ISRs outline a number of key disclosure requirements that must be included in the offering document/prospectus for such securities, including, but not limited to:

  • the names, qualifications and experience of the Shariah Supervisory Committee that reviewed and issued the Fatwa related to the securities in question, as well as details of the committee’s remuneration and governance arrangements
  • a description of the Shariah-governance controls for trading the Shariah-compliant security and an outline of the procedure for remedial actions should such controls be found to be defective
  • details of the methodology for resolving disputes related to the "Issuer"/"Foreign Issuer" or the securities in question, and
  • the mechanism for the reallocation of assets and the method of disposing such assets (including their proceeds), where a Shariah-compliant security or "Issuer" is found to be no longer Shariah-compliant.

The ISRs also contain a number of specific requirements for the Fatwa. Not only must the Fatwa be disclosed to SCA, the market and investors, but the ISRs provide fairly specific documentary requirements for the Fatwa, which must contain, amongst other things, details of all contracts and documents that have been approved, the method of reaching the decision, the Shariah basis of such opinion and whether the Fatwa was unanimously agreed or issued by a majority (provided that, in the latter case, the opinion of the dissenting member and reasons of such dissent must be stated).

In addition, a foreign issuer who wishes to offer Shariah-compliant securities in the UAE is required to provide the SCA with a statement outlining:

  • any conflict of laws between UAE law and the laws of the jurisdiction where the Shariah-compliant securities have been issued
  • any differences in tax treatment in the issuance of the securities, and
  • any inconsistencies between the International Financial Reporting Standards (IFRS) and the Accounting Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) if the "Foreign Issuer"  complies with these standards in accordance with the laws of the country where the Shariah-compliant security is issued (which is the case in the Kingdom of Bahrain and the Sultanate of Oman, amongst other jurisdictions).

The ISRs also outline a number of continuing obligations that apply to such securities, including the provision of an annual Shariah report (prepared by the Shariah Supervisory Committee showing that the committee, its functions and activities, as well as the calculation and distribution of revenues related to the Shariah-compliant securities, continues to be compliant with the Shariah) and disclosure of any material date, information or events that would affect the security or the Shariah controls for its trading or any act that would create a conflict of interest between the functions and duties of the members of the Shariah Supervisory Committee. Such continuing obligations are relevant not only for domestic issuers and foreign issuers who issue such securities following the publication of the ISRs, but also those that have previously offered or issued Shariah-compliant securities in the UAE prior to the date that the ISRs came into force (although we assume these obligations arise only in relation to securities which remain outstanding).

The ISRs are expected to be published in the Official Federal UAE Gazette shortly and will come into force 30 days following their publication. For further specific guidance on the impact of the ISRs, please contact Lee Irvine, Muneer Khan and Samir Safar-Aly, or your usual contact.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.