legal guide09.indd - Islamic Finance News

Convertible Sukuk in Kuwait: A Legal Framework (continued..)
convertible securities. Stimulus Decree Law passed
recently by the Amiri Decree No 2 of 2009 and
its executive regulation issued by the Council of
Ministers’ Resolution No 285 of 2009 (the “Stimulus
Laws”) only allows issuance of convertibles bonds
and Sukuk by banks and investment companies that
are in financial distress if they fail to secure equity
finance through rights offerings.
As such, other than Kuwaiti banks and investment
companies that are regulated by the Central Bank
of Kuwait, there is still a lack of regulatory coverage
for the vast majority of Kuwaiti companies that
would like to issue convertibles. In addition, Kuwaiti
law does not allow for classes of shares other than
under the Stimulus Laws which are only applicable
to Kuwaiti banks and investment companies.
The Kuwaiti Commercial Companies Law No 15
of 1960, as amended, does not provide for the
availability of authorized capital which entail that
every time a Kuwaiti company would like to issue
shares it must seek the approval of its extraordinary
shareholders assembly.
Ministerial Order 388 of 2007 amended Executive
Regulation No 113 of 1992, (executive bylaw of
the Decree Law 31 of 1990 for the Regulation of
Securities and Foundation of Investment Funds as
amended) are the first rules promulgated in Kuwait
with respect to the issuance of Sukuk but did not set
the legal platform for the conversion of Sukuk into
equity or the possibility of having SPV issuers.
In addition, under the current Kuwaiti legal
framework, a Kuwaiti issuer cannot issue Sukuk
in excess of its paid-up capital which will relegate
the local market to small and medium-sized Sukuk
issuances. This may explain the reason for the lack of
Sukuk issued directly by Kuwaiti issuers as opposed
to Sukuk issued by orphan SPVs that are established
outside Kuwait and guaranteed by Kuwaiti obligors
— the only one convertible Sukuk issued by a Kuwaiti
obligor was the IIG Sukuk in 2007 using offshore
structure.
As such, Kuwaiti companies have the option to issue
Sukuk through an SPV to be incorporated in a foreign
tax heaven jurisdiction, or to be issued directly by
the Kuwaiti company. In both cases, the conversion
of the Sukuk will be made into shares of the Kuwaiti
company, but through an option to the Sukuk holders
to convert the Sukuk for a certain number of shares
in the Kuwaiti company (“physical settlement”) or to
pay to the Sukuk holders in cash the market price
of the shares which were supposed to be delivered
(“cash settlement”).
“A Kuwaiti issuer cannot issue
Sukuk in excess of its paidup
capital which will relegate
the local market to small
and medium-sized Sukuk
issuances”
In the case of physical settlement, the Sukuk will be
redeemed against delivery of either treasury shares
or issuance of new shares by the Kuwaiti company.
The Kuwaiti legal system so far does not recognize or
allow companies to have authorized capital where
the board of directors receive upfront shareholders
approval and then issue new shares in the future.
As such, if the company would need to issue
new shares, the approval of the extraordinary
shareholders assembly is required to increase the
capital and waive the pre-emption rights offering
of the shareholders in favor of the Sukuk holders.
The pre and post regulatory approvals to issue new
shares should not take more than a couple of months
to complete. If the Kuwaiti company was established
through a public offering process, the issuance of
new shares would require the approval of H H the
Amir which can take a relatively longer time.
The time impact makes it difficult for major
companies in Kuwait that were established through
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