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Al-Mirsal

Insights and commentary on legal developments in the Middle East

Top 4 Innovations Driving Growth in the Global Sukuk Market

Posted in Capital Markets, Islamic Finance, Malaysia, Qatar, Saudi Arabia, United Arab Emirates

The Sukuk Opportunity

Total Sukuk issuances for 2013 stood at approximately US$120 billion and the Sukuk market is likely to sustain double-digit growth in the coming two to three years with assets in Islamic finance expected to reach US$2.8 trillion by 2015.

The growth of the Sukuk market has allowed investors to diversify their portfolio and invest in credit that they would not otherwise have access to, such as Islamic institutions, which only raise funds in a Shari’ah-compliant manner. The future of the Sukuk market is one of innovation, where new assets, structures and markets continue to create new opportunities for investors. Based on our experience and deal flow from 2013 and first half of 2014, we expect to see four main trends continue to develop in the Sukuk market, namely:

  • Longer Term Funding: The financial crisis generated greater awareness in the Middle East on the advantages of longer term funding options. Historically, market perception assumed that getting conventional investors in the US to invest in long-term Sukuk would be time-consuming and a largely unsuccessful endeavour. However, Saudi Electricity Company successfully issued the world’s first international 30-year Sukuk in April 2013, which was issued to investors in the US pursuant to Rule 144A of the Securities Act 1933, as amended, which has provided assurance to the market that US investors are becoming increasingly willing to invest in longer term Sukuk. The success and volume of interest shown by global investors in the inaugural 30-year international Sukuk of Saudi Electricity Company and the subsequent 144A Sukuk issuance by the company in April 2014, means that these issuances will no doubt be replicated by other companies in the Middle East and Asia seeking to obtain longer term financing.
  • Issuance of Innovative Sukuk Instruments: Abu Dhabi Islamic Bank kick-started this innovation when it issued US$1 billion worth of additional Tier 1 capital certificates in 2012, representing the world’s first Basel III compliant Tier 1 Sukuk issuance. This ground-breaking issuance has paved the way for other banks in the Middle East and Asia, both Islamic and conventional, to follow their lead and has shown that Sukuk issued for the purposes of capital raising can generate significant investor demand among both conventional and Islamic investors. Most recently, Latham advised Banque Saudi Fransi on its SAR2 billion Tier II Sukuk issuance through a private placement in the Kingdom of Saudi Arabia.
  • Increased Use of Intangible Assets: Ooredoo successfully issued US$1.25 billion Shari’ah-compliant Sukuk under its US$2 billion trust certificate issuance program, the first Sukuk issued in the Middle East that utilized an innovative “airtime” Sukuk structure. The transaction signifies the market’s increasing acceptance of intangible assets as the basis for Shari’ah-compliant Sukuk issuances and signifies a rapidly evolving market for Shari’ah-compliant products in the Middle East. The increased use of intangible assets in Sukuk structures should serve to widen both the base of issuers, and the frequency with which they can access the Sukuk market.
  • Growth in Cross-Border Sukuk: Gulf issuers are beginning to tap into Malaysia’s highly liquid Sukuk market, the world’s biggest Sukuk market which accounts for appropriately 65% of all Sukuk issuances. Al Bayan Group Holding Company was the first Saudi issuer to issue a Ringgit denominated Sukuk, with the issuance of RM200 million Sukuk Wakalah due 2016 under a RM1 billion Malaysian Ringgit Sukuk Programme. The ringgit is fast becoming a growing, credible alternative to the US dollar for non-Malaysian issuers. This trend is facilitating more interdependence between the Asian and GCC Sukuk markets as GCC issuers look to benefit from Malaysia’s large and diversified pool of investors and available liquidity.

Click here to read more about the future of the Sukuk market and the development and management of an Islamic debt portfolio.

How the GCC Can Boost Confidence in its Local Exchanges

Posted in Capital Markets, Qatar, Saudi Arabia, United Arab Emirates

GCC ExchangesThe Gulf Cooperation Council (GCC) countries accounted for IPO issuances valued at US$1.1 billion in 2013, according to Bloomberg. Notably, Qatar Exchange bounced back this year with the successful IPO and listing of Mesaieed Petrochemical Holding company Q.S.C. (a Qatar Petroleum Subsidiary), the first IPO in Qatar since 2010 and the first under the current listing rules of the Qatar Financial Markets Authority.

With momentum returning to local exchanges combined with increasingly favourable market conditions, the GCC IPO market is expected to post strong growth in 2014.

Top 3 Drivers of Middle East IPO Growth

  1. Increased investor confidence in GCC IPO markets.  Given the lull experienced in regional IPO activity, companies have adopted a cautious approach when considering listing shares. A demonstrable track-record of successful listings on the local exchanges will entice potential issuers who are seeking access to capital.
  2. MSCI upgrade. Both the UAE and Qatar were recently upgraded from “frontier” to “emerging” market status by MSCI, which is among the criteria used by a large number of institutional investors and private equity funds to identify markets in which they can invest. It has been reported that the upgrade may draw as much as US$500 million of new investment into Qatari and UAE securities with the entry of foreign institutional investors and passive or index-tracking investors. The anticipated impact of the MSCI upgrade on local exchanges is yet to materialize however it is expected to end the GCC’s reliance on retail investors by creating a more attractive investment environment for institutional investors. The upgrade, which took place in May 2014, may encourage regulators, companies and banks in the UAE and Qatar to revise their foreign ownership restrictions, which will in turn attract more institutional capital to IPO markets.
  3. Improved disclosure mechanisms. GCC local exchanges are seeking to match the disclosure standards of their European and US counterparts. Currently, the enforcement of disclosure mechanisms, transparency and corporate governance in the GCC is developing in line with the more mature bourses. Best practices are set to emerge in the region as the exchanges mature and MSCI inclusion imposes best practices onto the market.

Found this interesting? Related posts about capital markets trends in the UAE can be found here, here and here.

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Qatar Amends Regulations and Issues Rules as MSCI Upgrade Comes Into Effect

Posted in Capital Markets, Qatar, Regulatory

Qatar ExchangeQatar, along with the UAE, has been upgraded from “frontier” to “emerging” market status by MSCI (an upgrade that is now in effect), which is among the criteria used by a large number of institutional investors and private equity funds to identify markets in which they can invest.

It has been reported that the upgrade may draw as much as US$500 million of new investment into Qatari and UAE securities with the entry of foreign institutional investors and passive or index-tracking investors.

In response to its upgrade, Qatar announced that it proposes to amend foreign ownership restriction rules imposed on companies listed on the Qatar Exchange.

Amendments to the foreign ownership restriction rules imposed on companies listed on the Qatar Exchange

On 27 May 2014, an Emiri direction was announced approving the amendment to existing regulation in connection with restrictions on foreign ownership in companies listed on the Qatar Exchange. Pursuant to the direction, the ceiling for non-Qatari ownership in companies listed on the Qatar Exchange was increased from 25% to 49%, subject to each company amending its memorandum and articles of association approving any proposed increase up to 49%. This replaces the requirement to obtain an exemption from the Council of Minister in connection with any increase above the 25% ownership threshold as set out under applicable laws in Qatar. The percentage of non-Qatari ownership will be calculated based on the total share capital and not the free float. Furthermore, it was announced that citizens of the countries comprising the Gulf Cooperation Council will be treated equally to Qatari citizens in connection with ownership of shares in companies listed on the Qatar Exchange. The announcement of this increase comes before the much anticipated MSCI Inc. upgrade for Qatar to an emerging market.

The QFMA issues its own rules on Mergers & Acquisitions

The Qatar Financial Markets Authority (QFMA) has issued five new regulations including its own set of rules in relation to the merger and acquisitions of companies listed on the Qatar Exchange (“M&A Rules”). It appears that the new M&A Rules are intended to complement existing merger and acquisitions regulations set out in Law No. (5) of 2002 Promulgating the Commercial Companies Law.

To find out more about Qatar’s MSCI upgrade and the impact on regional capital markets, click here.

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An Introduction to Non-Profit Incorporated Organisations in the DIFC

Posted in United Arab Emirates

DIFCWhile the Dubai International Financial Centre (the DIFC) remains primarily focused on the financial services industry, its stable and sophisticated legal and regulatory regimes have increasingly attracted organisations in the culture and arts, retail, leisure and — more recently — the non-profit sectors.

To date, only a handful of non-profit entities have been established in the DIFC.  Yet, the more recently introduced regulations allowing the creation of the Non-Profit Incorporated Organisations (NPIOs) may lead to increased interest. Nonetheless it remains unclear how the NPIO will fare as an alternative to pre-existing entities in the DIFC such as the company limited by shares (Ltd.) and limited liability company (LLC).

Sector Diversification in the DIFC

While the majority of entities based in the DIFC are commercial companies, a number of non-profit organisations maintain a presence in the centre. These are non-profit industry bodies rather than charities in the conventional sense. The DIFC’s focus on financial services most appropriately caters to this class of organisation, but the recently introduced NPIO model is not limited in sector and could fit any non-profit purpose permitted under DIFC and UAE laws.

Ltd./LLC vs. the NPIO

The DIFC NPIO entity — introduced in 2012 pursuant to the NPIO Law and the NPIO Regulations — is specifically designed for entities operating in the non-profit sector.

  • As with an Ltd. or a DIFC LLC, an NPIO is a legal entity with a personality separate from that of its members. However, unlike an Ltd. or an LLC, an NPIO does not have a share capital or membership interest, and therefore no individual or entity is required to serve as its shareholder or owner, and the minimum share capital requirements do not apply.
  • A degree of uncertainty remains as to how NPIOs will be used and regulated. Whereas the Ltd. and LLC are similar to their equivalents in more established jurisdictions, the NPIO is a more sui generis entity without significant international precedent.
  • NPIOs are subject to a number of drawbacks and restrictions which potential new entrants or existing non-profit entities currently established in the DIFC under alternative structures may find unattractive, including various restrictions in relation to the functions that an NPIO may conduct, such as a prohibition from conducting “financial services” subject to DFSA regulation and ancillary requirements specific to NPIOs as opposed an Ltd/LLC. As such, it remains to be seen whether the vehicle will take off and become the entity of choice for the non-profit sector in the Middle East.

For a more in-depth analysis of setting up an NPIO in the DIFC, click here.

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Iran’s Nuclear Agreement Negotiations Ease Certain US and EU Sanctions

Posted in Export Controls

Earlier this year, the International Atomic Energy Agency confirmed that Iran had met its initial obligations under the Joint Plan of Action (Joint Plan) with the “P5+1” (the United States, the United Kingdom, France, Russia, China and Germany). Iran’s suspension of sensitive nuclear activities triggered temporary relaxation of certain sanctions, but most restrictions and an aggressive enforcement climate remain in place. The US government has cautioned that the sanctions relief is “limited, temporary, targeted, and reversible.”

Limited Impact on Direct US Sanctions Against Iran

Comprehensive US trade and economic sanctions have prohibited US persons and US companies from engaging in or supporting virtually all forms of business involving Iran. These sanctions generally remain in place.

Limited Exceptions to the Rule

Targeted Impact on Secondary US Sanctions Against Iran

The US Congress and the Obama Administration have added various extraterritorial sanctions measures that target trade and financial activities between non-US parties and Iran, even if the non-US parties have little or no connection to the US. While the Joint Plan eases certain of these “secondary” sanctions, the relief is subject to significant limitations, both in terms of timing and substance.

  • Time Limitations – Activities pre-dating January 20, 2014 and activities not completed between January 20, 2014 and July 20, 2014
  • Substantive Limitations – Exports of Iran’s petrochemical products and associated services, purchase from and sale to Iran of gold and other precious metals and associated services and the sale, supply or transfer to Iran of goods and services used in connection with the automotive sector and associated services

First Installment of US$4.2 billion in Oil Funds Received

The White House estimates that the limited easing of the secondary sanctions identified above may result in approximately US$1.5 billion in revenue for Iran.

Impact on EU Regulations

The temporary suspension of certain US secondary sanctions benefits parties located in the EU and elsewhere that are not US persons or US companies, or that are not owned or controlled by US persons or US companies. In addition and in accord with the Joint Plan, the EU, by enacting Council Regulation (EU) No 2014/42 (the Regulation) on January 20, 2014, has amended its main regulation prohibiting activities related to Iran, Council Regulation (EU) No 267/2012, to authorize for the Joint Plan Period the following activities:

  • Transport of crude oil and petroleum products originating in or exported from Iran
  • Import, purchase, and transport of Iranian petrochemical products, and the related provision of insurance, reinsurance and financial assistance
  • Sale, supply, transfer or export of gold, silver, and specified base metals to, or purchase, import or transport of gold, silver, and such metals from, the Government of Iran or any person acting on its behalf
  • Provision of vessels for the transport or storage of Iranian oil and petrochemical products
  • Relaxed restrictions on the transfer of funds to or from Iran

While the implementation of the Joint Plan reflects continued progress in negotiations between the P5+1 and Iran, the sanctions relief afforded to date is limited and temporary, and does not meaningfully affect most US persons, US companies and their foreign affiliates, or multinational corporations. Indeed, the core of US and EU sanctions on Iran remain in full force, and they continue to create significant legal, reputational, and practical risks for any persons or entities seeking to do any form of business with Iran.

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How LIBOR Administration Change will Impact Financial Contracts

Posted in Banking and Finance, Regulatory

This month, the UK Financial Conduct Authority formally authorised ICE Benchmark Administration Limited (IBA) to assume responsibility for the administration of the London Interbank Offered Rate (LIBOR).

IBA is a subsidiary of the Intercontinental Exchange Group, a leading global network of exchanges and clearing houses that administers other benchmarks such as the French CAC40 and the Dutch AEX.

Guided by the Wheatley Review

The authorisation of IBA to administer LIBOR reflects one of the key recommendations of the Wheatley Review.  The review was published in late 2012 following allegations that a number of major financial institutions had been involved in the manipulation of the benchmark.  Click here to find out more.

IBA, as the regulated entity, will have the ultimate responsibility for all aspects of governance and administration relating to LIBOR.  However, as recommended by the Wheatley Review, it will convene an oversight committee that will take responsibility for many decision-making and technical matters.  This committee is expected to comprise benchmark submitters and users, as well as other experts, to ensure that a wide pool of stakeholders takes responsibility for LIBOR’s transparency and credibility.

The Impact on Financial Contracts

This change in the administration of LIBOR may impact financial contracts that reference LIBOR as a benchmark.

Post-Wheatley Review Financial Contracts:

Many financial contracts entered into following the publication of the Wheatley Review already contemplate the replacement of the British Bankers’ Association as the administrator for LIBOR – in these cases, there should be minimal risk of confusion created by the change of administrator or label for LIBOR.

Pre-Wheatley Review Financial Contracts:

The definition of LIBOR in older financial contracts, however, will need to be construed on a case by case basis.

Helpfully, the Loan Market Association (LMA) has obtained an opinion confirming that, for LIBOR definitions that followed the definition in the LMA recommended form primary documentation, an English court would interpret a reference to “BBA LIBOR” as a reference to the renamed LIBOR administered by IBA. This will no doubt provide considerable comfort to banks and borrowers that continue to have outstanding debts based on such loan agreements.

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How Greater Regulation Will Lead to Islamic Finance Growth in Qatar

Posted in Islamic Finance, Qatar, Regulatory

Qatar is set to further enhance financial markets regulation by developing a consistent risk-based regulatory framework.  Governor H.E. Abdulla bin Saoud al Thani has announced a three-year strategic plan, which was jointly drafted by the Qatar Central Bank, the Qatar Financial Markets Authority and the Qatar Financial Centre Regulatory Authority.

The goals of this plan include:

• Strengthening the financial market infrastructure

• Enhancing consumer and investor protection

• Promoting regulatory cooperation

• Building human capital

The Islamic financial services industry in Qatar is expected to benefit from the development of an enhanced risk-based regulatory framework by:

Creating consistent regulations for Islamic finance. With the recent closing of Islamic windows of conventional banks operating in Qatar, a risk-based regulatory approach helps to develop a level playing field in the form of consistent regulations for Islamic finance. These regulations should be aligned with the regulation of conventional financing to the extent consistent with Shari’ah requirements.

Strengthening the financial market infrastructure. With international prudential standards aligned to the core principles and standards adopted by the Basel Committee, the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO), Qatar could minimise the opportunity for regulatory arbitrage arising from cross-sectoral and cross-border differences. The financial market infrastructure could further be strengthened by ensuring the regulatory requirements distinct for Islamic finance are effectively addressed.

Improving compliance systems and controls. Rather than focussing on regulating the religious features of Islamic products, a risk-based regulatory framework typically focus on the adequacy of the systems and controls that firms maintain for all their compliance obligations, be they conventional or Shari’ah compliant.

Developing greater public confidence in Islamic financial services. Enhancing governance requirements for Islamic finance institutions should assist in developing greater public confidence in the Islamic financial services industry and allow investors a clear and enforceable measure against which to assess performance. For example, enhancing governance would ensure that suitably qualified scholars are represented on Shari’ah Supervisory Boards. These boards would then operate under approved policies and procedures and have in place systems to disseminate their rulings.

Improving the efficiency of the supervisory processes. Information-sharing and effective coordination among regulators will enable a complete understanding of the entire risk spectrum of the risk taking activities undertaken by Islamic financial institutions operating both within and outside of Qatar. This should improve the efficiency of supervisory processes and allow for early detection and management of cross-border transmission of risks arising from group-wide activities. The resulting public confidence should facilitate growth in the Islamic financial services industry in Qatar.

Creating an Islamic economy of scale. Globally, Islamic finance standards lack enforcement and standardization which impacts market confidence. A strong, standardised and transparent regulatory framework would help create economies of scale in the Islamic financial services industry. Qatar would be well placed to drive this growth both within Qatar and in the wider GCC and MENA region.

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First Qatari IPO in Three Years and QFMA’s New Listing Rules

Posted in Capital Markets, Oil & Gas, Qatar

Qatar Petroleum (QP) recently announced the first initial public offering (IPO) in Qatar since 2010. Shares in Mesaieed Petrochecmical Holding company Q.S.C. (MPHC) are being offered to eligible Qatari investors in the first IPO in Qatar since 2010 and the introduction by the Qatar Financial Market Authority (QFMA) of its current listing rules. It is also the first public offering in Qatar since both Qatar and the UAE were upgraded from ”frontier” to ”emerging” market status by MSCI earlier in the year. The IPO is expected to raise QAR 3.2 billion (US$880 million).

Innovative Incentives

The IPO incorporates an innovative incentive share scheme designed to encourage the development of a personal savings culture in Qatar. IPO investors who retain at least 50% of their shares will receive two sets of additional shares – free of charge – in five and ten years’ time (provided they hold 50% of their original shares by that time). The Qatari government has also announced it will buy 750 shares in MPHC as a gift for each disadvantaged Qatari citizen and those with special needs.

The IPO is expected to be the first of a series of equity offerings in Qatar designed to enable Qatari nationals to participate in the country’s hydrocarbon wealth and boost liquidity on the Qatar Exchange. While the MPHC IPO is only open to Qatari nationals, foreigners can invest in the secondary market subject to foreign ownership restrictions imposed by law and MPHC’s Articles of Association. The IPO has received considerable press attention in Qatar and throughout the region.

Key Stakeholders

MPHC is a subsidiary of QP, holding large stakes in three key players in Qatar’s petrochemical sector – Qatar Chemical Company Ltd. (Q-Chem I), Qatar Chemical Company II Ltd. (Q-Chem II) and Qatar Vinyl Company (QVC). MPHC’s operations are based at Mesaieed Industrial City in the south-west of Qatar.

IPO Details

Issuer:

Mesaieed Petrochemical   Holding Company Q.S.C.

Offering:

323,187,677 shares   (25.725%)

Offer price:

QAR 10 per share (plus   offering and listing costs of QAR 0.20 per share)

Offer period:

31 December 2013 – 21   January 2014

Photo: Getty Images

Top 4 Trends that are Shaping UAE Capital Markets

Posted in Capital Markets, Real Estate, United Arab Emirates

The strengthening global recovery appears to have brought renewed confidence to the UAE’s capital markets. As such, a number of interesting themes have begun to emerge:

Resurgence in Dubai’s Real Estate Sector:  Following a four year gap, IPOs and other equity offerings have returned in the form of DAMAC, Al Noor Hospitals, Arabtec, NMC Healthcare and Bank of London and the Middle East.  This resurgence can be attributed to the optimism surrounding Dubai’s Expo 2020 bid, which seems to have fuelled a revival of Dubai’s real estate sector.

NASDAQ Attracting Niche Issuers:  As smaller and more niche types of issuers list on NASDAQ Dubai it bodes well for the maturation of the market.

London over Local: London remains a popular alternative listing venue for UAE issuers, with DAMAC, NMC Healthcare and Al Noor Hospitals all opting for the LSE over local exchanges. NMC and Al Noor Hospitals have gone further and registered as UK plcs, benefitting from the UK’s corporate tax exemption for holding companies.

GCC Cooperation: Abu Dhabi’s local exchange ADX has entered into an important arrangement with the Saudi Tadawul exchange to permit cross-listing of shares, allowing companies listed on the ADX to benefit from a secondary listing on the region’s most liquid exchange. This is a positive step towards a passporting regime similar to that which exists between EU jurisdictions and is a sign of increasing co-operation among GCC regulators.

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How to Effectively Manage Outsourcing Contracts

Posted in Outsourcing

Outsourcing contractsThe Middle East is emerging as one of the biggest growth markets for outsourcing.  Organizations seeking cost and efficiency savings combined with greater continuity and risk management are switching to outsourcing as a method of managing their back-office business operations.

MENA outsourcing revenues are predicted to hit US$2.69 billion by 2016 (Frost & Sullivan).  Across the region, commitment to outsourcing can be observed with the Kingdom of Saudi Arabia forecasting that more than 50% of its ICT needs will be fulfilled by outsourcing companies by 2016.  In the UAE, the dedicated Dubai Outsource Zone (DOZ) has announced a 15% growth rate throughout 2012.

Successfully managing an outsourcing contract requires customers to include the right governance tools and mechanisms in their contracts and then use those tools appropriately.  Click here to read more about the types of governance tools.

Contract tools provide the customer with leverage in managing the outsourcing contract.  Customers should use these tools knowingly with a view to the potential impact on the supplier relationship.

Download the “Using Contract Tools” whitepaper and learn how to effectively manage outsourcing contracts.

Understanding how to use contract tools can optimize the outcome of the relationship for the customer, who will be empowered to:

  • Manage the supplier relationship to ensure issues are resolved quickly and opportunities are maximized.
  • Maximize savings as profitability of the transaction is determined by performance.
  • Handle issues and escalations to avoid disputes.
  • Use customer leverage to ensure contractual commitments are met.
  • Manage unexpected contractual change with reasonable pricing impact.
  • Monitor service performance and audit status information provided by the supplier.
  • Maintain contractual and operational control to ensure supplier compliance.
  • Work constructively with third parties to resolve any issues that arise.

If you found this article interesting you may also enjoy our Middle East & Africa Technology, IP and Sourcing Focus Newsletter – a roundup of recent news and developments in technology, intellectual property and sourcing across the Middle East and Africa.

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