Analysis of DG Restructured Sukuk Terms -- Lessons for Other Investors

"دخول الحمام ليس مثل خروجه"

In this post we’ll take a detailed look at DG’s restructured sukuk (the “Nile Delta Sukuk”).

Our primary text is the listing particulars for Nile Delta published on the Irish Stock Exchange last August.   For those who want comparatives, here’s equivalent information for “Dana Gas Sukuk” the previous incarnation.

The DG restructuring saga provided investors some important lessons.  Not only the hapless group that invested in Dubious Gas, but also those considering other “Islamic” investments or doing business in the UAE.

Analytical comments (appearing below in italicized bold face) will be both descriptive and prescriptive.

Descriptive for those who’ve already entered the hammam (investors in the sukuk).  Other than a secondary sale they are “in” for what appears to be a prolonged bath.  As an aside, AA sincerely hopes he is wrong.

Prescriptive for those lucky investors who haven’t yet entered but may be considering so-called “Islamic” investments or dealing with obligors in Sharjah.  AA undertakes this task knowing full well that while repetition is said to be effective in teaching donkeys, history shows that teaching investors is a more difficult task.

Shari’ah Compliance

The self-averred devoutly scrupulous members of DG’s Board and management were mightily troubled that the previous sukuk was no longer Shari’ah compliant due to a change in scholarly interpretation on al-mudarabah transactions.  So much that they felt compelled to reject their contractual obligations.  As part of the proposed restructuring, they offered sukuk holders an opportunity to right that wrong with a Shari’ah compliant instrument.

What was the outcome?

As the Listing Particulars succinctly state on p 48:  “No assurance can be given as to Shari’ah rules.”

While the Shari’ah Advisory Board of Dar Al-Shari'ah has opined that the sukuk is Shari’ah compliant, the LP notes that there are no assurances that it will be deemed so by other Shari’ah scholars and boards.

You may also recall, and if you don’t, AA will remind you that DAS opined that the previous sukuk was Shari’ah compliant.  That’s not to cast aspersions on DAS scholarship or diligence.

It’s a simple fact that there is no central body that gives a definitive pronouncement on Shari’ah compliance.

As well a subsequent change in interpretation decided such transactions were not Shari’ah compliant. Whether this was intended to be retroactive or not was not explicitly stated.

This by itself should give pause to investors contemplating Shari’ah transactions for two reasons.  For the faithful -- compliance with religion.  For those prudent in conducting financial transactions  -- enforcement of issuer obligations.

Simply put if you’re looking for Shari’ah compliant investment opportunities, your best bet is equity.

Legal Enforceability

But there is more here that should increase anxiety.  Prudent investors usually craft legal agreements to protect their rights to enforce the issuer’s obligations in this world.

The learned courts of Sharjah accepted the argument that while Dana Gas Sukuk was Shari’ah compliant at inception a subsequent changed interpretation about the compliance (or in this case non-compliance) of mudarabah transactions made it non-compliant.  No grandfathering was granted to transactions began prior to the change in interpretation.

As the LP wryly notes on page 45:  “Investors may have difficulties in enforcing any English court judgments or arbitral awards, which do not satisfy the requirements of UAE laws, against Dana Gas in the courts of Sharjah.”

The history of the Dana Gas sukuk restructuring suggests that “may have” above is more appropriately written as “almost certainly”.   While there is no doctrine of case precedent in the UAE, prudent investors probably would want to avoid these courts.

Investors should pay particular attention to the courts whose acquiescence is required for enforcement.  The LP disclose the various shortcomings in key GCC/MENA legal systems not only regarding enforcement of foreign court judgements but also creation and enforcement of security rights.

But there are more than legal warnings in offering memoranda.  By creating the DIFC, the Ruler of Dubai made an unequivocally unfavorable statement about Dubai and UAE courts.  The DIFC is a partial answer.  But as events in Asia suggest, one would be well advised not to “bank” on “one country two systems”.

Reliance on Complex Structuring

These transactions involve elaborate structuring.

First, to attempt to create the “Islamic” equivalent of a bond.  Much of this involves the use of Abu-Yusuf-y transactions.   Often poorly or incompletely executed in light of legal requirements.

Second, to attempt to mitigate the legal risks of local jurisdictions.  Key transaction documents are made subject to the laws of what are perceived to be more investor friendly jurisdictions.  But as several cases, including DG, have shown ultimately this does not work unless the key local jurisdiction where enforcement will take place plays along.

The result is many “moving parts” which affords desperate issuers opportunities to seek to undermine the structure.

Before we turn to Nile Delta, let’s look at the case of Golden Belt Sukuk discussed in an earlier post on this site.

Investors wanted a bond-like structure with a fixed interest rate.  So clever lawyers created a transaction in which the Trustee on behalf of the investors would lease Maan’s properties in KSA back to him at a fixed rental.  However, for probably imagined to be very good reasons, the transaction did not require that he actually sell and re-register the properties in Trustee’s name.

Investors ignored (but the Offering Circular did not!) that a local KSA court was likely to compare the rental charge due under the sukuk to market rentals for similar properties.  And, if the sukuk rentals were above market rental rates, adjust the sukuk rentals according.  And, for some reason the local law requirement for a “wet” signature to make a document legally binding was missed.  But why quibble? What could possibly go wrong? Quite a great deal.

Back to DG on page 51 (the Nile Delta) Listing Particulars makes the following points about the transfer of the Trust Assets.

1. While the Purchase Agreement for the Trust Assets is governed by English Law, substantially all of the initial Ijara Assets are located in the Emirate of Sharjah.  
2. To the extent that the laws of the Emirate of Sharjah and, to the extent applicable in Sharjah, the federal laws of the UAE are applied in relation to any dispute relating to the Purchase Agreement or the transfer of the Ijara Assets, there are doubts whether an ownership interest in certain Ijara Assets can be effectively transferred without registration of the transfer with appropriate authorities. 
3. Accordingly, no assurance is given that any ownership interest in the Ijara Assets will be effectively transferred to the Trustee.  
4. Oops – not really a sale and transfer.  
5. Also note the bit about applicability of UAE federal laws in Sharjah.  One might be advised not to “bank” on UAE federal laws saving one in this transaction, if indeed one imagined they might. And perhaps in other transactions in other Emirates.

But the LP goes on to note potential remedies. 

1. Dana Gas has agreed in the Purchase Undertaking to indemnify the Issuer for the purposes of redemption in full of the outstanding Certificates in the event that any transfer of the Ijara Assets is found to be ineffective. 
2. Given the issuer’s past behavior, no doubt a source of great comfort to some investors.
3. In the event that the Trust Assets are not purchased by Dana Gas for any reason, the Delegate will seek to enforce the above provisions of the Purchase Undertaking.   Seek? Indeed! Achieve? Well, that did not seem to work out so well with the previous incarnation.
4. It is likely that, in any action heard by them, the courts of Sharjah would review the transaction as a whole and seek to uphold the intention of the parties to treat the arrangements as a financing transaction on the terms agreed, provided that the transaction is not recharacterised as a sale and purchase of assets as described below.   As they did with the previous sukuk?
5. A Sharjah court may characterise the transactions contemplated by the Transaction Documents as a sale and purchase of assets that is void as a result of the failure to register the transfer of the Ijara Assets as described above and may therefore refuse to enforce the indemnity in the Purchase Undertaking. 
6. Accordingly, Dana Gas would be required to return the purchase price it received for those assets to investors less any amounts already paid to investors in respect of those assets (i.e. Periodic Distribution Amounts paid under the Certificates). As a result, in this particular situation, investors in the Certificates may not receive back the full amount of their investment. 
7. This is a familiar argument.  Where have I heard it before? (Purely rhetorical question.) Positioning for October 2020 and another convenient attack of conscience?
8. Prospective investors should note that, to Dana Gas’ knowledge, this matter has not been considered by the courts of Sharjah, therefore there can be no assurance as to the approach that would be taken by the courts of Sharjah in such circumstances.  Since the legal concept of case precedents does not exist in Sharjah, does it matter whether or not they have?

In summary a highly structured instrument composed of several transactions subject to the laws of more than one jurisdiction with enforcement dependent on the jurisdiction—which just happens to be the one with the least reliable legal system—about whose validity as Shari’ah compliant there is no assurance.

A transaction that is therefore highly fragile.

Providing a borrower in distress the opportunity to seek to undermine the entire structure.

If you’re already in the hammam, you don’t have many options.  Striking when the iron is cold isn’t going to get you much.

If you’re thinking about investing, (فكر في الخروج قبل الدخول ).

It’s very simple.

1. Do not deal with people you do not trust.
2. Make sure the contract between you and your counterparty is specific – amounts, dates, rights and responsibilities—and contains a realistic path to enforce your rights.
3. Never rely on your contract to correct deficiencies in (a) your counterparty’s character and (b) local law. 
4. No matter how much some clever lawyer tries to persuade you he has "fixed" problems with his brilliant structuring. Be suspicious of transactions that have complex structures.  They often fall apart in times of distress.
5. Make sure, as much as you can, that if you have to enforce your rights under a contract, you will get a fair shake in the legal system and in certain jurisdictions a fair shaykh. Or in other words, that the law is fair and reasonably predictable.
6. If any of these elements are missing, take your money and business somewhere else.

GFH 2017 Unexplained Pricing on USD 314.5 Million Share Issue - What Did We Learn About Transparency?

AA Promised a Rant and Here it Is

In an earlier post, I outlined what appears to be a discrepancy between the price at which GFH issued some 1,186,904,148 new shares in 2017 and the price that the Board requested shareholders approve and which they did approve at GFH’s 1 March 2017 EGM.

According to AA’s analysis, on average the shares were issued at USD 0.2505 per share (a 5% discount to par value) instead of the approved price of USD 0.953 per share.

AA could find no explanation from GFH for the discrepancy. So let us assume that the lower pricing is appropriate.  The fact that there is no disclosure suggest some serious shortcomings in disclosure.

This is not simply an exercise in quibbling.  The difference in price had an immediate impact on dilution of the existing shareholders.  Had shares been issued at USD 0.953 each, GFH’s “old” shareholders to use Abdul Muhsin AdDarwiish’s happy turn of phrase would own some 88% of GFH.  Instead they own 61%. 

That in turn, leads AA to ask did shareholders understand the potential impact of dilution.  Was that impact sufficiently disclosed to them at time of approval? Was the significant change in price disclosed to them prior to conclusion of the transaction?  Were they asked to reaffirm their approval? Or otherwise consulted?  

You can read more details here. 

Let’s turn to the lessons AA thinks regulators, stock markets, shareholders, and GFH management should have learned from the share issuance. 

Dilution

1. If we take the EGM minutes as an accurate and complete account, then there was no discussion about the effect of dilution on current shareholders resulting from the issuance of a potential 3.4 billion of new shares.
2. Shareholders didn’t ask.
3. GFH’s Board did not raise the topic.
4. Perhaps, the Board are forgetful. If only they remembered, they would have raised it.
5. Perhaps, they forget they have a fiduciary duty to their shareholders. So they don’t feel a need to raise it.  The shareholders should look after themselves.
6. Whatever the case, it’s clear that the authorities need to establish a rule. You must tell your shareholders in writing what the proposal means.  If all the shares being offered are taken up, your shareholding will go from x% to y%. You must provide this document to them as part of the EGM package prior to the meeting.  And it must be clearly mentioned and discussed at the meeting.
7. External auditors should also be counseled that they have a fiduciary duty to the shareholders on matters like this, not a fiduciary duty to the board.  And that duty means they must bring up the topic if no one else does. One way to solve this issue so external auditors won't be shy out of concern about re-appointment is to make it a requirement that when dilution may occur, the external auditors are required by law to give a report.  
8. Representatives of the Central Bank, the Ministry of Commerce should be trained to make sure dilution is discussed, raising the topic if they have to. 
9. When the promised issue price is changed in a way that would increase dilution, as is the case here, It seems that the board at a very minimum needs to advise shareholders.  AA's minimum though would be a bit stricter to give shareholders a second vote at a second EGM.  Why? Because the change in price dramatically changed the shareholders' ownership interests in the company.

Disclosure

1. When there is new share issuance, details of the transaction need to be provided in writing to shareholders via a discussion in the annual report and a special disclosure on the exchanges where the company is listed.  Both ways.
2. The ludicrous two line “disclosure” given by GFH is completely inadequate.
3. Because of this it is clear that the authorities need to establish a rule requiring such a report and mandate its format and contents as issuers appear unable to determine what material information should be included. 
4. Data should include:  number of shares issued, class of shares, issue price per share allocated between par value and share premium. Gross proceeds, expenses, net proceeds.
5. If there are unusual accounting entries, e.g., the unexplained USD 24.3 million debit to the Capital Adjustment Account, these need to be explained in understandable language in financial statements.
6. Note 16 page 41 in GFH's 2017 AR has the following “explanation”: “Shares were issued to the subscribers resulting in increase in share capital by US$ 314,530 thousand. Excess over the par value of US$ 0.265 per share has been considered as share premium and reflected accordingly under share premium account (including transfer from capital adjustment account).”
7. That is not an adequate explanation.
8. And, no, management cannot hide behind the bogus excuse “the auditor made me do it”.  If the auditor is adamant that its language is unalterable, which seems unlikely. AA has never had a problem with auditors refusing to provide additional information. Then the management can explain in the MD and A in the AR. Or by  other means.
9. Frankly, the opaque language used in this note looks like a deliberate attempt to keep information from readers of the financials, to obfuscate the transaction, though it could also be the result of other deficiencies in aptitude or attitude.
10. How can a share premium be negative?  
11. Why is there a need to use the capital adjustment account? What on earth is being adjusted? 
12. If shares were issued at a discount, then that needs to be clearly and simply stated.
13. (شفافية) is not simply a word, or an expression of intent.
14.  It is proven by action – providing detailed, understandable information. 
15. Failure to do so is (خداع) in the worst case.  Or deficiencies in attitude or aptitude.  In either of these two cases one probably would be well advised to entrust one's money to other stewards.

GFH 2017 USD 314.5 MM Share Offering Unexplained Lower than Promised Pricing More than Triples Dilution

Sometimes Promises of Transparency are, well, so Transparent

You Can See Right through Them

In preparing the translation of GFH’s 2019 Annual General Meeting for Fiscal Year 2018, the lament of Abdul Muhsin adDarwiish, the representative of AlRajhi, about the drop in book value per share (dilution) caused by this transaction caught AA’s eye.

Just the first examination raised enough questions for AA to take a deeper look. So here we are again.

Summary

In 2017 GFH's Board of Directors proposed that shareholders authorize the issuance of up to USD 450.5 million in new shares to be priced at USD 0.953 each to be used to acquire certain infrastructure projects and investment funds.

Later that year GFH issued some 1,186,904,148 shares.

As per AA's calculation, these shares on average were issued at a discount to par, that is below USD 0.265 per share. “  

AA can find no explanation for this discrepancy.  

So what's the big deal?  

Well, if shares were issued at the promised USD 0.953 per share, the old shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.

Interested?

AA has a typical long exposition for you right below.

Detailed Exposition   

According to GFH’s FY 2017 AR Note 18 page 44, GFH assessed the value of the assets acquired as USD 297.502 million.

According to the FY 2017 AR Consolidated Statement of Changes in Owners’ Equity, GFH issued USD 314.530 million in new shares (Share Capital), recognized USD 2.896 million in Share Premium and had an adjustment of negative USD 24.3 million in the Capital Adjustment Account for a net increase in Shareholders’ Equity of USD 293.106 million.

Doing the math, on average GFH issued the new shares at USD 0.2507 per share (using the USD 297.502 million asset valuation).  That’s roughly a 5% discount from par value of USD 0.265 per share.  Some 1,186,904,148 shares were issued.  Keep both amounts (average issue price and number of shares) in mind because we’re going to come back to them later.

AA is unable to definitively “account” (pun intended) for the USD 4.396 million (negative) difference between the increase in equity and the value of assets acquired.

But suspects that these are expenses associated with the exchange based on GFH’s 2017 AR Note 2 (u) page 26 which states that:  “Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.”

That’s about 1.5% of the value ascribed (USD 297.502 million).

AA thought that was the end of “intriguing” information in GFH’s AR, but then at the end of the note were two facts about the acquisition of a 56% stake in MGIC (Morocco Gateway Investment Company) and a much more modest 8% additional stake in KHCB.

1. The consideration for both of these was some USD 69.1 million and net assets (at book value) of USD 36.2 million acquired. No comment on the reason for the overpayment.  Nada.  Like GH it seems GFH was still carefully considering goodwill.  Presumably, the value of KHCB is known.  If not, that’s a serious matter.  So it’s the value of a “dream” by the Atlantic in Morocco.  As AA did with GH, he will do here. If one doesn’t know the value, how does one buy something?  Adding insult to injury the missing value here is some USD 32.9 million or some 48% of the amount paid.
2. GFH paid cash for KHCB and 203,291,786 GFH shares for an additional 56% in MGIC (roughly USD 53.8 million based on par value).

The immediate question is where did these shares come from?  

Treasury Shares?

That seems a good guess given the information we have in this Note and the CSOSE. In the sense that it doesn’t support these shares as having arisen from the share issuance/asset swap.

AA believes that there should be an adequate disclosure—the information in GFH’s 2017 AR falls quite short of that modest goal--somewhere about this transaction and more importantly about the issuance of USD 314.5 million in new shares. I didn’t find one so far. Nothing at the Bahrain Bourse or DFM, besides a very short woefully uninformative notice.

If you have seen more disclosure, let me know by leaving a comment.

So what do we do?

Dr. Abu Arqala Prepares to Go Back to the Past

Back to the Past.  To early 2017 when GFH’s Board first mooted this most excellent of ideas.

Here’s the agenda for the 2017 AGM and EGM announced 6 February 2017 on the Bahrain Bourse.

Items #2 and #3 in the EGM Agenda are pertinent to this study.

Item 2 -- “To increase the authorized capital of GFH from US$1,500,000,000 divided into 5,660,377,358 share to US$2,500,000,000 divided into 9,433,962,264 share at a nominal value of US$0.265 per share.

Item 3 -- “To discuss and approve GFH’s new strategy to acquire financial institutions, infrastructure investments, and investment assets by swapping the shares of the investors and shareholders of those companies with GFH shares through issuance of new shares by increasing the issued and paid up capital from US$ 597,994,604 to US$ 1,498,994,604 subject to obtaining all relevant authorities’ approvals, as follows:

1. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new share at a nominal value of US$ 0.265 in addition to a share premium of US$ 0.688 (total share value of US$ 0.953 – equivalent to 0.36 Bahraini Dinar / Emirati Dirham 3.5/ Kuwaiti Dinar 0.29) allocated for the acquisition of a number of infrastructure projects and investment funds.
2. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new shares at a nominal value of US$ 0.265 in addition to a share premium to be determined by the Board of Directors as per market conditions, to be allocated for the acquisition of a number of financial institutions and strategic assets.  If you look at the Arabic language EGM agenda, “strategic assets” are described as “and other investment assets (  واصول استثماریة اخرى).

So what GFH’s Board is proposing as of 6 February 2017, is to issue additional shares at USD 0.953 to acquire “a number of infrastructure projects and investment funds” as the first step. And then in second step issue an additional 1.7 billion in share at par plus a premium to be set by GFH’s Board as per market conditions.  

Why does AA say these are two steps?  

Well in the first case, GFH's Board has determined the premium so this step must proceed the second step where the premium is to be decided.  It would be "mighty strange" (to use a technical financial term) for the Board not to know what the premium is for an issuance today, but know what it will be in the future.  

Also if both steps were concurrent, it would seem "mighty strange" that the premium could be different.  What would the investors who paid USD 0.668 in premium think, if other investors were offered fine GFH shares at a premium of only USD 0,334 a month later?  Or offered shares at a discount?  Or either occurred concurrently with the USD 0.688 premium?

In neither of the proposals is there a mention of issuing at par or at a discount.  The use of the word premium implies to AA and AA would bet as well to the shareholders at the EGM that shares would NOT be issued a par or below par.

As noted above, according to information in GFH FY 2017 AR Note 16, during 2017 GFH issued some 1,186,904,148 shares and received according to AA’s analysis USD 297.502 million before assumed expenses (see above).  That is an average per share price of USD 0.2507, a 5% discount from par of USD 0.265.  After the expenses are deducted the average price per share is USD 0.244.

Now there is a share premium shown of USD 2.896 million.  If we assume that represents shares issued at USD 0.953 that would mean that roughly 4.2 million shares were issued at USD 0.953 per share resulting in an increase in share capital of USD 1.116 million with USD 2.896 million allocated to share premium for a total of USD 4.012 million. 

Pretty small beer. Roughly 0.35% (that is, 0.0035) of the total share issuance.  That is probably not what shareholders expected when they voted for this proposal. 

Based on GFH’s Board proposal they were expecting to issue up to USD 450.5 million. If they only needed one-one hundredth of that amount, surely they would have asked for a much smaller tranche.  Wouldn’t they?  That would be in the spirit of Chairman AlMutawa's statement about the new Board and management being "keen" on transparency. You'll see that just a bit further below. 

One more interim stop before we go to the minutes of the 2017 EGM. 

That is, press clarifications of an earlier clarification issued by GFH to both the DFM and Bahrain Bourse about the planned issue.

“The bank intends to increase the capital by way of issuance of new share in order to acquire infrastructure assets. The settlement (payment) to the shareholders of the infrastructure assets will be by way of issuance of new shares of GFH at rate of AED 3.5 per share. The entitlement for the new shares of GFH will only be for the shareholders of the infrastructure assets; hence the current shareholder of GFH will not be the ones subscribing to the new share issuance. It is to be noted that the new shares will be issued at fair value of the company at rate of AED 3.5 per share – as per the valuation of independent third party.”

There are two key points here:

1. Reaffirmation of the issuance of new shares at the USD 0.953 per share price.  Here expressed in AED. Now if GFH's intent was to issue only 4 million shares at this price and over 1 billion shares below par certainly they would have said something.  Wouldn't they? 
2. Even more importantly that the USD 0.953 per share price is “fair value” as determined by an independent third party.  The Board as stewards of shareholders’ interests would not issue shares at a price lower than fair market value.  Would it?

Of course, fair value could change.

While fair value and market value are not necessarily the same, let’s look at trading data from the Bahrain Bourse.   GFH’s price per share declined from USD 0.76 in early February to USD 0.50 on 14 August 2017.  A 34% decrease.

If we assume intrinsic value went from USD 0.953 in early February to USD 0.265 in August, that would be roughly a 72% decrease.  

AA’s experience with fair value theory and practice is that fair value is expected to be fairly accurate (accurate as any estimate can be) over a long period of time absent significant events.  It is an estimate of intrinsic value unaffected by market movements which are often if not always driven by sentiment as opposed to rational consideration, particularly in retail dominated markets such as those where GFH is listed.

AA would be surprised to see a drop of this nature because he is unaware of any dramatic non transitory event that might have caused this. It would have had to be quite an event to cause a drop in fair value by 72%.

Is anyone out there aware of such an event? Did AA miss something big, really big?

We’re still not finished because we know from GFH’s 2017 AR that they acquired TIBC and certain Indian assets as part of the share issuance/asset swap.  But do we know if these are the specific assets that GFH had in mind when it drafted point one to Agenda Item #3.  That is, which assets would be acquired by issuing shares at USD 0.953 per share.

Let’s take a look at the minutes for GFH’s 2017 EGM.  These are available on the Bahrain Bourse’s website, but in Arabic only.

Turn to page 5.  In the third paragraph, Mr. AlRayes, GFH’s CEO, says that the share issuance will be used to acquire infrastructure assets and investments funds similar to (a) the energy city fund in India, (b) Royal Ranches in Marrakesh, and (c) Tunis Financial Harbour Tunisia by issuing shares at USD 0.953 per share composed of par value of USD 0.265 and a premium of USD 0.688 and then goes on to give equivalents, e.g., KD 0.29, AED 3.5, and BD 0.360.  That seems crystal clear.

Looking back at GFH’s FY 2017 AR Note 18 page 44, the assets identified as having been acquired with the share issuance are:  TBIC (Tunis Bay Investment Company) and “India Projects”.

In Note 1 page 14 “India Projects” are defined as Energy City Navi Mumbai Investment Company and Mumbai IT & Telecom Technology Investment Company.PPThese seem to be just the assets Mr. AlRayes mentioned at the EGM.

No doubt some of you out there are saying. GFH got the fine assets they wanted. Stop quibbling over accounting entries.  Besides you told us that accounting and reality often don't coincide.

Quite.

But here there is a practical consequence in the real world. 

If the shares issued to purchase these assets were issued at USD 0.953 composed of USD 0.265 par value plus a premium of USD 0.688 then:

1. GFH would have issued only 312 million shares instead of 1,186.9 million. That is, it would have issued 26% of what it did issue.
2. “Old” shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.  
3. BVPS would be higher. 
4. The "Old" shareholders share of future profits would be higher.

So the question is what happened?

How did USD 0.953 per share become roughly par value (USD 0.2505)?

It seems to AA that in order to issue the shares for these acquisitions at a price lower than USD 0.953 per share, GFH would have needed to call a second EGM to obtain shareholder approval.  GFH’s Board in their role as stewards of the shareholders’ money would have had to request another approval and as part of their keen adherence to transparency (شفافية) explained the unique circumstance or circumstance which caused “fair value” to change and therefore justified the change in price. Wouldn’t they?

But AA can’t find record of another EGM held by GFH prior to the August 2017 closing of the deal.

Nor do the EGM minutes appear to give the Board discretion in changing the USD 0.953 price.

And two final bon mots from the 2017 EGM, Mr. Ibrahim Salaah adDiin—apparently a long suffering shareholder since 2009 at least—noted that the previous management had in his view misled shareholders regarding GFH upcoming net losses and shareholders had endured a capital reorganization which cost them 75% of their shares in 2010 or 2011.  He noted that in 2015 the Board had stated it had no intent to increase capital.

Dr. Ahmed Mutawa, GFH’s Chairman, noted that there was a new board and new management that was (حريصين على شفافية).  Quite! The truth of that statement is evidenced in GFH’s annual reports, press releases, etc.  And, perhaps, just perhaps, on this topic as well.

Following that Mr. AlRayes, GFH’s CEO, made an argument for shareholders to approve the new strategy (Agenda Item #3) by noting the many achievements over the past few years.  And ended his comments by stating that the board’s new plan included reaching USD 4 billion in market value by 2019.  Note that is not a promise or a guarantee but merely the contents of the plan.

Could it be that the USD 0.953 issue price was also included in the board’s plan in the same way?

Kidding aside I’m sure there must be a good explanation.

Clearly, the CBB, MOICT, and authorities at the Bahrain Bourse, DFM, and Kuwait Bourse are not asleep at the switch.  They wouldn’t have allowed GFH to fail to implement the EGM resolution.

The problem is AA can’t find the explanation.

Sadly, sometimes when you’re looking for (شفافية) it is hard to find.  Perhaps, the explanation is the difference between (حارس الشفافية) and (حريص على الشفافية) (ولكن اَللّٰهُ أَعْلَم).  

That leads as you might expect to a rant.  Uncharacteristically in a separate post.

America's Greatest Leader Ever Hosts Massive 4th of July Celebration - Overflow Crowds and Gratitude

Overflow Crowds Throng Highway Between Washington DC and Baltimore Maryland

Overflow Crowd in Baltimore

Today America’s Greatest Leader Ever (AGLE) presided over the definitive 4^th of July parade demonstrating that he has Made America Great Again. The outpouring of honor, respect, and gratitude from the crowd for the AGLE is unprecedented in American history.

So great was the number of participants in Washington DC that there wasn’t enough room for everyone who wanted to join in honoring the AGLE and the USA. 

Pictured above are the overflow crowds along the 65 kilometers of highway between Baltimore and the District of Colombia.  Plus additional participants in Baltimore.  

Clearly there were more people present today than at the AGLE’s Inauguration.  

A conservative estimate by Faux News put the crowd in DC and along the road to Baltimore and in Baltimore at more than 100 million people.  

According to questions asked by Faux anchors and militia volunteers all the participants were US citizens.