Legal risks and legal risk management in wakalah sukuk in Malaysia

Abstract

The default of Dana Gas sukuk has raised concerns regarding some legal issues prevalent in sukuk, for example, the unenforceability of the purchase undertakings as a result of Shariah non-compliance declaration by the sukuk issuer and unenforceability of foreign court's decision. Even though the sukuk were eventually restructured, the investors' rights were compromised, and the legal issues remained untested. In Malaysia, wakalah sukuk has been the preferred structure. This structure embeds purchase undertakings and entails a unique relationship between the issuer and the investor, i.e., an agent-principal relationship. Given the perspectives of previous sukuk default, this structure may entail more legal issues and hence, legal risks. Besides, the literature on legal risk management in sukuk are very few in number. While there have been studies conducted on legal risk and legal risk management in sukuk, they did not offer empirical evidence, causing questions around these two focal points to remain unanswered. Therefore, this study was conducted to identify legal risks, determine the legal risk management in wakalah sukuk, and propose best practices for managing legal risks in the sukuk. This study is an exploratory form of research that employs doctrinal legal analysis and document analysis. The data were collected from 24 selected wakalah sukuk documents comprising the Information Memorandum, Trust Deed, Principal Terms and Conditions, as well as interviews. Content analysis and thematic analysis techniques have been employed for analysis of these documents. For the interview, seven participants representing various parties in sukuk were selected using a purposive sampling technique. Data obtained from the interviews were analyzed using thematic analysis. This study's findings have revealed five types of general legal risks in sukuk, four legal risks specific to wakalah sukuk, and 22 specific legal risks in wakalah sukuk documents. Regarding legal risk management, there are different approaches to legal risk management among the participants. However, review of sukuk documents was found to be the primary legal risk management strategy, besides seven other main strategies. Eight legal risk management general techniques and 18 risk-specific techniques were employed in the wakalah sukuk to manage the 22 legal risks. Among them are the use of Disclaimer, Assurance, Transfer of Risk to Investors (TOR), Shariah Waiver (SW), and Dissolution Event Clause (DEC). Other than these, the participants employed seven other techniques and seven legal risk management tools. The use of these strategies, techniques, and tools was found to be associated with several factors. While differences in the use of the strategies, techniques, and tools are plausible, differing views regarding the uses of several techniques are unexpected. Each view is also associated with solid justification. With these, several gaps in legal risk management of wakalah sukuk have been identified and several improvements have been recommended. In sum, this study has provided insightful information and empirical evidence on legal risks and legal risk management, particularly for wakalah sukuk in Malaysia, as well as some of the best practices of legal risk management. Moreover, future studies are recommended to further research on the legality of existing legal risk management techniques and possible regulatory changes to improve the existing legal risk management in sukuk. The aim is to position the Malaysian sukuk market as the preferred issuing jurisdiction and to ensure its sustainability.