Two ‘Forbidden’ IPOs Pit Gulf Investors Against Islamic Clerics

(Bloomberg) -- This year's list of IPO debacles could grow longer if Kuwait's clerics have their way.

A religious ruling in Kuwait against two initial public offerings launched this month is stirring fears that the Gulf state is clamming up at a time its bigger neighbor Saudi Arabia is doing just the opposite, courting investors in anticipation of Saudi Aramco's IPO.

The offering of half of Kuwait's stock exchange to citizens and a long-awaited public subscription to Shamal Al-Zour, the company that owns and operates a major power station, began Oct. 1. Nearly three weeks later, Kuwait's highest religious authority said they breached Islamic law's prohibition on interest and branded them “haram,” or forbidden.

The non-binding fatwa issued by the Ministry of Awqaf and Islamic Affairs said Boursa Kuwait trades in stocks of companies including those that don't comply with Islamic principals, and makes “illegal revenues” from brokering transactions in these stocks. It also states Kuwait Stock Exchange company's earns returns on deposits at banks aren't Shariah compliant.

“Is Kuwait the old Saudi?” said Fawaz Mohammad, a 41-year-old Kuwaiti businessman. “The mere existence of this fatwa catapults Kuwait into the Middle Ages at a time when Saudi is fast tracking openness and diversity, two values that were and continue to be core to the Kuwaiti identity.”

While a conservative country, Kuwait allows women to drive and doesn't force them to wear veils, freedoms that are just starting to take root in Saudi Arabia. In Kuwait, all laws are drafted, openly debated and issued through the Gulf Cooperation Council's only freely elected legislature. Islam is the official state religion and Shariah a main source of legislation.

Both public offerings are mandated by laws issued by parliament, which doesn't require companies to be Shariah-compliant.

Kuwait's benchmark index declined 0.3% on Thursday, trimming this year's gain to 18%. That compares with an 8.2% increase for the MSCI Emerging Markets index.

Playing Politics

With elections looming next year, lawmakers are now more likely to put the spotlight on populist issues as they go into parliament's last session.

Opposition to the share sales is building in parliament. Mohammed Al-Hayef, a hardline Islamist lawmaker who is spearheading the campaign against the Kuwaiti IPOs, has requested to quiz Finance Minister Nayef Al-Hajraf over issues that include the offerings. He also alleges that transactions overseen by Al-Hajraf aren't Shariah compliant, even though Kuwait's constitution or current laws don't require them to be.

The issue of observance of Islamic finance principles for companies looking to sell shares has come up before, when Saudi Arabia's National Commercial Bank was preparing its 2014 IPO. It eventually won approval from scholars after committing to become fully Shariah-compliant.

Shariah Compliance

“Don't those who issued these fatwas know that their salaries and the salaries of their sons come from state investments inside and outside Kuwait and from interest on stocks, bonds and deposits in companies and banks?” columnist Ahmad Al-Sarraf wrote in Al-Qabas.

Both companies under subscription have foreign investors. A sale of shares in Shamal Al-Zour would be the first IPO resulting from a public-private partnership. It's 40% owned by an international consortium that includes Japan's Sumitomo Corp. and France's Engie SA.

The two companies referred all questions to the Kuwaiti ministries of finance and commerce. The Commerce Ministry declined to comment while Finance Ministry officials couldn't be reached for comment.

‘Strange Ruling'

Some Kuwaitis are bewildered, some consider it good news since fewer subscribers could mean bigger allocations. Others are willing to fall in line. A group of lawmakers have issued a statement calling on the government to halt the IPOs. This seems unlikely since the bourse subscription ends Dec. 1 and Al-Zour on Nov. 29.

“This is a very strange ruling,” said independent economist Ali Al-Nimesh. “Who is behind this? A group that doesn't want people to buy these shares, because they want to control the majority.”

To contact the reporter on this story: Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Dana El Baltaji

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