legal guide09.indd - Islamic Finance News

Convertible Sukuk in Kuwait: A Legal Framework (continued..)
public offerings to issue convertibles and would entail
using exchangeable Sukuk structure as opposed to a
convertible Sukuk structure. With the support of the
government, it is expected that the capital increase
process would be reduced in the near future.
In addition to the timing issue, in case the company
would like to satisfy its obligation to convert the
Sukuk into capital through physical settlement by
delivering treasury shares, all physical delivery of
Kuwaiti shares need to be traded through the Kuwait
Stock Exchange (KSE) and each Sukuk holder would
need to have a trading account with the KSE to
receive the shares.
This creates a difficulty for convertibles as the shares
to be delivered upon conversion would need to be
traded at a discount to the market price, such as the
conversion price and the rules of the KSE only allow
certain margin deviation from the market price.
SPV issuer of the Sukuk against the cash proceeds
arising from the offering of the Sukuk to investors
or transferring the shares to an omnibus portfolio
account for the benefit of the Sukuk holders.
However, tax issues may arise if selections are not
made carefully as to the jurisdiction of the SPV or the
type of investors to participate in the offering. Again,
delivery of the shares should be made through the
second listing outlined above.
In the case of a cash settlement, the Sukuk will be
redeemed against payment of the market price of the
promised shares in cash. This could be burdensome
on the company. In order to protect directors making
such a decision, the shareholders should approve
the issuance of convertible notes in advance.
Solutions
To overcome this difficulty, there are three potential
choices for the company. The first choice is for
the company to offer the shares at market price
and pay the Sukuk holders sufficient cash to cover
the difference between the market price and the
conversion price.
This is a cumbersome process and creates the risk
that the company is obligated to deliver a large
amount of cash to cover the amount of the convertible
Sukuk and does not entirely eliminate the possibility
of an interloper acquiring the shares.
The second choice is to arrange for a secondary
listing of the shares on a second stock exchange
that allows the delivery of the shares to the Sukuk
holders to be made through OTC (over the counter)
procedures. This is potentially a lengthy and timeconsuming
process.
The third choice would be to change the structure of
the Sukuk to exchangeable and not convertible. This
would entail transferring the title of the shares to the
Hossam Abdullah is a corporate, banking and
finance partner of ASAR (Al-Sarraf & Al-Ruwayeh),
a leading legal services firm in Kuwait. Refer to
his profile on page 26.
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