Sukuk Structure That Fails Its Own Prospectus
A Bangladeshi infrastructure company, Delta Power, issues a BDT 5 billion sukuk to fund a transmission line. The prospectus describes the structure as an Ijarah (lease) sukuk: investors hold ownership in the underlying asset and receive rental income. However, the actual contractual documents show that Delta Power retains full ownership of the asset, that investors receive a fixed 11.5% return regardless of the asset's performance, and that Delta Power guarantees repayment of the principal in full at maturity. The Shariah adviser signed off on the structure in a two-page opinion that does not address the ownership or guarantee provisions. A rating agency assigned the sukuk an investment-grade rating based on the guarantee. Six months after issuance, a Shariah scholar publicly argues the structure is economically indistinguishable from a conventional interest-bearing bond and therefore non-compliant. Investors who bought on the promise of a Shariah-compliant instrument are demanding redemption.
1. Assess whether the sukuk meets the requirements of an asset-backed Ijarah structure and identify the disclosure failures.
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Structural assessment - the sukuk does not meet Ijarah requirements:
- Ownership - in a valid Ijarah sukuk, investors (through the SPV) must hold genuine beneficial ownership of the leased asset. Here Delta Power retains full ownership, so investors own nothing to lease back. The structure is not asset-backed.
- Return linked to rental - Ijarah returns must be rental for use of the asset. A fixed 11.5% return independent of asset performance is a predetermined return on money, which is the defining feature of interest, not lease rental.
- Guaranteed principal - a full principal guarantee by the originator converts the instrument into a debt obligation. Shariah-compliant structures permit only limited, conditional undertakings; an unconditional guarantee defeats risk-sharing.
Disclosure failures:
- The prospectus describes an Ijarah structure that the contracts do not deliver - a material misdescription.
- The Shariah adviser's two-page opinion is inadequate: it does not address ownership, guarantee, or return mechanics, and cannot support a compliance representation.
- The rating relied on the guarantee, which is itself the feature that undermines the structure - investors were given a rating premised on non-compliance.
Conclusion: the instrument is, in substance, a conventional bond labelled as sukuk. That is a misrepresentation to investors who specifically sought Shariah-compliant exposure.
2. What should BSEC do about the issuer, the Shariah adviser, and investor demands for redemption?
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Issuer (Delta Power):
- Primary responsibility for the misdescription. The prospectus must accurately describe the structure actually documented.
- Remediation options: (a) restructure the contracts to create genuine asset ownership, genuine rental, and remove the unconditional guarantee; or (b) reclassify and disclose the instrument honestly.
- Sanctions proportionate to the size of the issue and the number of affected investors; consider requiring a corrected disclosure and an independent Shariah audit.
Shariah adviser:
- The two-page opinion that ignores the core contractual terms is a failure of professional diligence. Advisers must review the actual documents and opine on ownership, return mechanics, and guarantees.
- Refer for professional discipline and require that future opinions address the specific structural tests.
Investor redemption demands:
- Investors who bought on a Shariah-compliance representation have a strong restitutionary claim. BSEC should require the issuer to offer an orderly exit or buy-back at the issue price plus accrued return for investors who elect to exit, funded by the issuer, not by penalising investors.
- Pending resolution, suspend further distribution of the instrument and require prominent disclosure of the dispute.
Systemic step: issue guidance requiring that sukuk prospectuses attach the full structural documents and a Shariah opinion that expressly addresses asset ownership, return linkage, and guarantee provisions.