Contractors beware! The recently enacted Civil Code has an impact on the contractor’s obligations under Engineering, Procurement and Construction (EPC) contracts. The Civil Code, which took effect on August 6th 2013, imposes a statutory warranty period that applies to all Muqawala Contracts (Contracts to build).
Monday, December 23, 2013
Contractors beware! The recently enacted Civil Code has an impact on the contractor’s obligations under Engineering, Procurement and Construction (EPC) contracts. The Civil Code, which took effect on August 6th 2013, imposes a statutory warranty period that applies to all Muqawala Contracts (Contracts to build).
Thursday, December 19, 2013
Over the past few decades, Oman has seen significant developments in its infrastructure. As part of its modernisation initiative, the country has been transformed with the development of an extensive road network, the construction of sea ports and airports, utilities, the reconstruction of governmental buildings, various landmarks and tourist destinations.
Thursday, December 12, 2013
Successful resolution of disputes can require significant investment of money, time and energy. Navigating disputes in Oman can be greatly simplified if a company implements a comprehensive, in-house programme to manage any dispute as it arises.
Tuesday, December 10, 2013
The Omani courts have distinct principles and doctrines which are applied when deciding on whether to award damages in cases for breach of contract.
Wednesday, December 4, 2013
The first and most important consideration of a seller of a business should be how to protect the secrets of the business during the sale process. It is very important that sellers seek legal advice before disclosing information about a business to interested parties.
Wednesday, November 20, 2013
In an attempt to develop the laws relating to part time jobs in the Sultanate, the Ministry of Manpower recently issued a Ministerial Decision which permits employers in the private sector to recruit Omani employees on a part time basis. The decision shall be published in the Official Gazette, and come into effect the day following the date of publication.
Friday, November 15, 2013
Standard corporate insurance policies do not provide cover for criminal acts common in the corporate world such as forgery, computer fraud, fund transfer fraud, robbery and other forms of theft. As crime-related losses are not typically covered by most insurance policies, crime protection insurance is necessary for any business but the majority of businesses do not have enough crime protection.
Wednesday, November 13, 2013
Wednesday, November 6, 2013
Tuesday, October 29, 2013
Thursday, October 17, 2013
According to Ministerial Decision 570 of 2012 promulgating the formation, functioning and registration of trade syndicates, trade unions and general federation of Oman trade unions (the “2012 MD”) a trade union can be formed by any private sector organization with the employee strength of 25 or more and, once registered, has an independent legal identity. In addition to having at least 25 members, a trade union is eligible for registration upon having a draft statute and such other documents specified in Article 5 of the 2012 MD.
Monday, October 14, 2013
The Omani Government has in place a number of legislations targeting bribery and corruption, specifically in the public sector.
Wednesday, October 9, 2013
The Oman Arbitration Law is contained in Royal Decree No. 47 of 1997, as amended (the “Arbitration Law”). For arbitration to be an effective and predictable alternative to Court adjudication of disputes, it is important that properly rendered arbitral awards are enforceable and certain and, in most cases, final. This means that the parties’ ability to challenge and overturn an award should be limited. Chapter 6 of the Arbitration Law sets out the limited instances in which a party may apply to nullify an arbitral award.
Monday, October 7, 2013
Oman’s Consumer Protection Law promulgated by Royal Decree No. 81/2002 (with executive regulations issued by Ministerial Decision 49/07) (the “Law”) is intended to protect the principles of “freedom of choice, fair treatment, honesty and trustworthiness” which every supplier or advertiser should observe in their dealings with consumers.
Thursday, October 3, 2013
The holy month of Ramadan is the ninth month of the Islamic calendar, during which all Muslims must observe fast by abstaining from eating and drinking between dawn and dusk. The Sultanate of Oman has formulated regulations to be followed during the holy month of Ramadan.
Wednesday, September 18, 2013
Charles Cruden brings to Curtis more than a decade of experience in mergers and acquisitions, corporate and commercial law, compliance, domestic and cross-border investments, joint ventures, infrastructure, projects and real estate transactions.
Curtis Bolsters Litigation and Arbitration Practices with Addition of James Kellick as Counsel in Oman
James Kellick brings more than 15 years of litigation and other alternative dispute resolution (ADR) experience to Curtis, including LCIA, ICC and UNCITRAL arbitration. He has advised clients in relation to a wide range of commercial matters covering a number of industry sectors. He was most recently with Trowers & Hamlins in Muscat.
Monday, September 16, 2013
As mentioned in our post of April 2013, the Ministry of Manpower issued a MD No. 222 of 2013, pursuant to which, effective from 1 July 2013, the minimum salary of Omanis working in the private sector is increased to RO 325 from the existing minimum salary level of RO 200. The salary of RO 325 shall be comprised of RO 225 towards basic salary and RO 100 as allowance.
Thursday, September 12, 2013
Tuesday, September 10, 2013
Tuesday, September 3, 2013
Tuesday, August 20, 2013
Establishing Public Authority for Development of SME
A new Royal Decree No. 36/2013 has been issued to establish the Public Authority for the development of Small and Meduim Sized Enterprises and issuing its regulations. Please refer to our article for further information on this Royal Decree.
Executive Regulations to the Law of State Flag, Emblem and Anthem
The Diwan of Royal Court pursant to its Decision No. 29 of 2013 has issued the Executive Regulations to the Law of State Flag, Emblem and Anthem. The Executive Regulations have been issued pursuant to the Law of State Flag, Emblem, and Anthem (promulgated by Royal Decree No. 53/2004). The Executive Regulations specify the rules relating to raising the Flag and the occassions and manner in which the Flag will be raised; adherence to the Law on usage of Emblem; and playing of the national Anthem.
Thursday, August 15, 2013
The process of dissolution and liquidation of a company is an important aspect that should be analysed at the time of setting up a company in a new jurisdiction. It is particularly important in a situation where the new entity will not be completely controlled by one shareholder. In Oman, a limited liability company needs to have at least two shareholders and, except in certain circumstances, one of these shareholders needs to be an Omani individual or entity with at least 30% shareholding in the company.
Monday, August 5, 2013
Corporate governance is increasingly becoming the cornerstone of corporate management for companies in Oman and the principles of good corporate governance are being considered in the formulation of internal policies of companies.
Wednesday, July 31, 2013
The Public Authority for Small and Medium Enterprises: The Future Engines for the Growth of Oman's Economy
The Omani Government has recently showcased an increasing interest in the development and support of Small and Medium Enterprises (“SME”). The initiative is in compliance with His Majesty’s directive to support and develop SME as “the future engines for the growth of Oman’s economy”. A new Royal Decree was issued on the 31st of May 2013 setting up a separate entity in charge of SME - the Public Authority for Small and Medium Enterprises.
Tuesday, July 23, 2013
Previous posts have dealt with the relevant regulations relating to the conduct of insurance business in the Sultanate of Oman.
The terms of the actual contracts of insurance entered into require specific consideration, particularly with regard to liability in circumstances of non-performance of those terms and subsequent termination.
Wednesday, July 17, 2013
On the 6th of May 2013, RD 29/2013 promulgated the Civil Transactions Law (the ”Civil Code”), which now governs almost every aspect of Omani day-to-day transactions. The Civil Code is the base plate of Omani Civil Law and its provisions will apply both where there is no specific law to the contrary, and where specific legislation is silent on the matter in question. However, where the Civil Code does not cover certain matters, the Omani courts are directed to apply the rules and principles of Islamic Jurisprudence (Fiqh) in their judgments.
Friday, July 12, 2013
The Courts of the Dubai International Financial Centre (The DIFC Courts) - Jurisdiction and Relevance of the Dispute Resolution in the Wider Middle East Region
Article 5 of Law No. 12 of 2004 on the Judicial Authority of the DIFC Courts was amended in October 2011 by Dubai Law No. 16 of 2011, which means that parties from anywhere in the world now have the choice to ‘opt in’ to the DIFC Court’s jurisdiction for resolution of disputes in commercial and civil matters.
Wednesday, July 10, 2013
Monday, July 8, 2013
The Commercial Companies Law makes it mandatory for various forms of companies to have auditors. While the appointment of an external auditor is mandated in respect of a limited liability company if the company has ten or more partners or a capital of over OMR 50,000 or if the partners representing at least one-fifth of the capital require it, joint stock companies are generally required to have both external and internal auditors.
Thursday, June 27, 2013
The State Financial and Administrative Audit Institution (the “Institution”) in the Sultanate of Oman is an independent entity reporting directly to His Majesty the Sultan. It is a governmental institution and has the very critical job of supervising financial and administrative funds belonging to or managed by the State. It is also responsible for protecting public funds, properties and interests by virtue of the State’s Financial and Administrative Audit Institution Law promulgated by RD 111/2011 (the “State Audit Law”) and RD 112/2011 issuing the law on Safeguarding of Public Property and Preventing of Conflict of Interest (the “Law on Public Funds”).
In keeping with the State Audit Law and the Law on Public Funds, the Institution has now issued a Ministerial Decision on 3 April 2013 introducing the new State Audit Executive Regulations (the “Regulations”).
Monday, June 24, 2013
Over the past decade, our Muscat-based Construction Dispute Resolution Team has advised on numerous disputes between parties to construction contracts. On review of the reasons for why construction contracts ended in dispute, we have identified a number of common themes, and how to avoid these problems.
It is often simple in retrospect (and outside of the pressure to meet project milestones/manage workforce) to identify where problems in a construction project arose. The challenge to running an efficient and financially successful project is to identify the risks at the outset, and put robust procedures in place to avoid potential problems arising. Although some of the recommendations set out below may seem obvious and straightforward, it is telling that, in many of the construction disputes that have crossed our desks, these issues were routinely neglected or poorly executed.
Thursday, June 13, 2013
Omanisation in Insurance Private Sector
Ministerial Decision No. 192/2013 issued by the Ministry of Manpower specifies that the Omanisation percentage in the insurance private sector shall be 65% of the total manpower of the establishment. The Decision is effective from the date following its publication in the Official Gazette.
Amendment to Provisions regulating Collective Negotiation, Peaceful Strike and Shutdown
Ministerial Decision No. 189/2013 issued by the Ministry of Manpower amends some of the provisions regulating collective negotiation, peaceful strike and shutdown. The Decision stipulates setting up of a Committee to facilitate the negotiation procedures. It also provides timelines for settlement of collective labor disputes by the Committee.
Executive Regulations of State Audit Law
Executive Regulations to the State Audit Law (promulgated by Royal Decree No. 111/2011) are issued under Decision No. 13/2013 by the State Audit Institution (“SAI”). The Executive Regulations detail the functions of the SAI, its powers, responsibilities and the rules of enforcement.
Tuesday, June 11, 2013
CMA Circular 14 of 2012 made changes to the definition of an “independent director” and also led to amendments to the definition of a “related party”.
Monday, June 3, 2013
To help ensure the effectiveness of the internal regulations of management of public joint stock companies in Oman, the Capital Market Authority (“CMA”) issued Administrative Decision 4/2002 which requires the board of directors of public joint stock companies to produce a directors’ report for each financial year.
The directors’ report provides an opportunity for the shareholders to review inter alia the company’s performance as well as fiscal information for the past year and to better understand the direction the business will take in the future.
Thursday, May 30, 2013
The Central Bank of Oman (“CBO”) recently issued Circular no. BM 1105 dated 31 March 2013 (“2013 Circular”) which grants further clarity and impetus to Omanisation in the banking sector.
With the overall Omanisation requirement of 90%, the banking sector is one of the highest localized sectors in Oman. According to recent statistics issued by the CBO, most banks in the Sultanate have achieved an overall Omanisation ratio of over 92.5%.
Tuesday, May 28, 2013
Most projects/transactions thankfully do not end in dispute but, when they do, the first thing a legal adviser will look and hope for in the subject contract is a bespoke and carefully drafted dispute resolution clause. If, at the time of drafting a contract, parties carefully consider the likely type and value of dispute that may arise under the contract, and put thought into how they would like to exit the contractual relationship in the event of a dispute, then the chance of resolving any future dispute economically and successfully is greatly increased.
Internationally, arbitration is becoming a preferred method of dispute resolution. Even in jurisdictions with trusted and efficient (but often overly prescriptive and increasingly costly) court systems, contract parties are increasingly choosing arbitration for the flexibility it can bring to resolving disputes.
Tuesday, May 21, 2013
Tuesday, May 14, 2013
In recent times, the Western corporate world has witnessed ‘shareholder spring’ spurred by growing investor concern that many companies’ executive and director pay and perquisites are excessively high and are not sufficiently justified by the performance of the companies. While investor reactions have ranged from non-existent to high-intensity depending on the company, the overall growing trend of examining executive pay more closely has brought the issue of executives’ and directors’ remuneration to centre stage. In that spirit, this article examines the rules around such remuneration in Oman.
Friday, May 10, 2013
Wednesday, May 8, 2013
Oman’s growing demand for housing, continued focus on building tourism facilities, and strong overall economic conditions have driven the development of many new residential and commercial real estate projects in the Sultanate over the past few years. In today’s buoyant real estate market, it is as important as ever for buyers and sellers to understand the key terms of the sale and purchase agreements (“SPA”) through which real estate transactions are frequently carried out.
Tuesday, April 16, 2013
The Government of the Sultanate of Oman's emphasis on diversification and increased role of the non- Oil and Gas sectors in the national economy has recently led to a focus on the mining industry in the country.
Thursday, April 11, 2013
In a piece of important news relevant to companies doing business in the Sultanate, it was recently announced in the local press that Oman’s Council of Ministers has decided to raise the minimum wage for Omani citizens employed in the private sector.
Monday, April 8, 2013
To help ensure that Omani companies maintain a solid financial position and are able to withstand shocks to their businesses, the Commercial Companies Law contemplates varies types of legal reserve funds for companies.
Tuesday, April 2, 2013
Distribution agreements and commercial agency relationships are a common legal structure for doing business in Oman. Distribution agreements are particularly useful for selling locally within Oman goods or commodities that are produced abroad by a foreign company.
Thursday, March 21, 2013
It is always important, when considering filing a court case in Oman, to attend to administrative pre-requisites so that there are no time delays in the process.
Wednesday, March 13, 2013
Investment banking activities and licensing requirements
The Islamic Banking Regulatory Framework (the “Framework”) for the Sultanate of Oman was adopted on 18 December 2012 pursuant to Circular 1B 1 of the CBO. In addition to establishing requirements and parameters for Islamic banks, Section 5 of the Framework addresses investment banking activities. These investment banking requirements and parameters are the subject of this article.
Thursday, March 7, 2013
Bancassurance is the arrangement between a bank and an insurance company for the sale of insurance products by the bank. This arrangement is widely used around the world and helps insurance companies maintain smaller sales teams by benefitting from the branch and sales network of their partner banks.
Thursday, February 28, 2013
Licenses have now been issued by the Central Bank of Oman (the “CBO”) for some Islamic banks and windows in the Sultanate of Oman. Islamic banking, finance and investment activities have commenced. Banks, each to their shared and separate visions, are avidly pursuing realization of market opportunities and provision of Islamic financing services. There is considerable discussion, in the private sector and among regulators, regarding investing in and issuing sukuk and developing the “finance side” of the Islamic capital markets. The early focus on the sukuk markets is to be expected, given that the sukuk markets are the largest and most rapidly growing area of Islamic finance.
Friday, February 8, 2013
The term ‘insider trading’ typically evokes images of nefarious plots and shady dealings. And indeed, illicit insider trading often fits that description. However, it is important to recognize that legal forms of insider trading also exist, whereby the insiders of a company are allowed to trade in the securities of the company entirely within the parameters of the law.
Friday, February 1, 2013
Although the U.S.-Oman Free Trade Agreement has been a major success story, as with any lengthy and complex treaty, its implementation has not happened overnight.
One implementation issue that has generated much discussion lately is the accordance of Omani national treatment to U.S. companies that have some percentage of non-U.S. ownership.
The position historically taken by the Omani Ministry of Commerce & Industry (MOCI) is that, as matter of principle, the national treatment benefits under the U.S.-Oman FTA (such as the right to hold 100% ownership of an Omani limited liability company) should apply only to companies that are both (i) incorporated in the U.S. and (ii) wholly owned by U.S. natural persons.
Tuesday, January 29, 2013
It is a fact of life in Oman that sometimes commercial pressure is brought to bear on a party by the filing of a criminal complaint.
Arabic jurisprudence states that crimes are personal to the perpetrator, so a corporate entity cannot itself be the accused. Instead, the complaint is filed against individuals working for the entity in question. The approach taken by the police and Public Prosecutor is to identify the person or persons closest to the events which have occurred. For instance, when a child was injured in Oman at a playground due to a faulty slide, the criminal investigation was against the maintenance manager of the playground apparatus.
Wednesday, January 23, 2013
There has been renewed interest recently in relation to the interpretation and application of the U.S. Foreign Corrupt Practices Act (“FCPA”) due to the issuance on 14 November, 2012, by the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC”), of a guide entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guide”). The Guide clarifies the U.S. government’s current position on various FCPA-related issues, thereby increasing one’s ability to determine whether FCPA enforcement action is likely in a given situation.
Monday, January 14, 2013
Critical elements in the process of institutional change, even profound change, frequently occur without warning or preparatory fanfare. That has been true with regard to the implementation of Islamic banking in the Sultanate of Oman, as illustrated by the issuance by His Majesty Sultan Qaboos bin Said, on 22nd Muharram 1434 A.H. (6 December 2012 A.D.), of Royal Decree 69/2012, Amending Some Provisions of the Banking Law promulgated by Royal Decree 114/2000 (the “Islamic Banking Decree”). In addition, the Central Bank of Oman (the “CBO”) issued Circular IB 1 on 18 December 2012, which adopted the relevant Islamic banking regulations (the “Islamic Banking Framework”) with only minor amendments to the previously circulated draft. The long-anticipated Royal Decree consists of only three sentences. The amendments to the Banking Law (the “Islamic Banking Law”) are comprised of only 12 sentences set forth in six Articles in one new chapter of the Banking Law (Chapter Six, entitled, quite simply, “Islamic Banking”). The Islamic Banking Framework runs to 589 pages, plus some amendments in Circular IB 1. It is anticipated, however, that the changes effected by the Royal Decree will be significant as the Sultanate embarks upon the age of Islamic banking, finance and investment.
The Islamic Banking Law leaves much to the Islamic Banking Framework and future regulations, circulars and guidelines. But, laying the foundation for the development of the Islamic banking industry in Oman, the Islamic Banking Law does specifically address four critical substantive structural elements, as well as a few procedural elements of the transactional structure of Islamic banking in Oman. This article focuses on those four areas, leaving discussion of the Islamic Banking Framework to future articles.
The four substantive structural elements are: (i) the transactional base of Islamic banking in the Sultanate, and some fundamental requirements pertaining to that transactional base; (ii) the status of Islamic banking and Islamic banking transactions in terms of taxation, land law constraints and the provisions of other areas of substantive law; and (iii) two matters pertaining to Shari’ah supervisory boards, one at the level of the individual banks and one at some higher level.
The procedural matters pertain to: (a) the obligation of the Board of Governors of the CBO (the “Board of Governors”) to issue the Islamic Banking Framework; (b) the obligation of the CBO to license Islamic banks and Islamic windows at conventional banks; and (c) interpretation of the Islamic Banking Law, particularly as its provisions may conflict with other laws, rules, regulations and Royal Decrees. As is so often the case, a great deal of substantive law impact is embedded within the procedural provisions.
Transactional base of Islamic banking
The Islamic Banking Law (specifically Article (124)) is expansive in authorizing Islamic banks to make use of essentially all Shari’ah-complaint contracts and structures in Islamic banking transactions. It mandates that Islamic banks perform those transactions in a manner that does not contradict the Shari’ah (leaving aside for the moment the critical analysis of how the substantive principles of Shari’ah are to be determined and interpreted). By way of example, and not by way of exclusive itemization, Article (124) affords special attention to four types of Shari’a-compliant transactions. Each authorization is gratifyingly broad, and it is likely, in each case, that applicable restrictions will be set forth in the Islamic Banking Framework and future circulars and guidelines. And it is apparent, in each case, that further clarification of the scope of each authorization is necessary. First, Islamic banks are authorized to accept deposits and manage restricted and unrestricted investment accounts, whether those accounts are operating on the basis of charges or profits or otherwise.
Second, Islamic banks are authorized to finance and invest through mudaraba, musharaka, murabaha, ijara, salam, istisna, qard hasan and other Shari’ah-compliant contracts and structures.
Third, Islamic banks are authorized to issue asset-supported or project-supported sukuk and invest in asset-supported and project-supported sukuk. There is no indication of how an Islamic bank might go about issuing an asset-based or project-based sukuk. Presumably, issuance by the bank for its own account and based upon its own assets is permitted.
It would seem that this provision also allows for a broader sukuk issuance authority in order to allow Islamic banks to fulfill the functions of building capital markets and facilitating financing of bank clients. That would likely entail issuances by bank subsidiaries where the subsidiaries are capitalized by assets provided by third-party entities (i.e., customers of the Islamic bank). The use of bank subsidiaries is prudent as a matter of bank regulatory policy and practice; among other reasons: it is undesirable to allow an Islamic bank (or any other bank) to have liability on sukuk structured on the assets or projects of third parties – those liabilities should be isolated into subsidiaries holding those assets or projects. If this bank-subsidiary issuance structure is permissible, the sukuk markets in Oman have been given a major structural boost. And, depending upon the interpretation of the Article (125) tax exemption (discussed in the next section of this article), it seems likely that tax impediments to the use of such structures also have been removed. Thus, for example, it is arguable that the 12% tax that would be levied on a special purpose vehicle (“spv”) established as a sukuk issuer is not applicable if that issuer spv is a subsidiary of an Islamic bank effecting a Shari’ah-compliant banking transaction. Obviously, clarification is needed on these matters, and some clarification may be forthcoming as the Capital Markets Authority considers sukuk regulations for Oman.
Fourth, Islamic banks are authorized to deal in real estate and movables, including by way of selling, purchasing, investing in, renting and leasing real estate and movables, and this authorization is expressly stated to be an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. This is a monumental modification of the laws that goes to the heart of Islamic banking and the use of Shari’ah-compliant structures because essentially all Shari’ah-compliant structures make use of land and movables: the essence of Islamic banking and Islamic finance is the involvement of tangible assets. This provision is discussed in the next section of this article.
Status of Islamic banking transactions: Tax, Land Law, and others
The Islamic Banking Law seems to override a number of Oman’s existing laws, rules and regulations, including, in particular, the Land Law promulgated by Royal Decree 5/80 and tax laws pertaining to land transactions. Clause (D) of Article (124) of the Islamic Banking Law provides that Islamic banks are entitled to deal in real estate and movables, including (without limitation) by way of selling, purchasing, investing in, renting and leasing real estate and movables and that this authorization is an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. The Article (124) authorization is supplemented by Article (125), which provides that licensed Islamic banks are exempted from charges imposed by transactions related to the ownership, leasing and renting of real estate and movables where the transactions are performed for the purpose of providing Islamic banking services.
The lists of illustrative activities in Articles (124) and (125) do not match. Article (125) does not include references to ‘selling, investing and other dealings’, while Article (124) does refer to those activities. It is unknown whether this mismatch is intentional. Logic would dictate that ‘selling, investing and other dealings’ in real estate and movables in the course of practicing Islamic banking also should be exempted from charges, particularly in light of the nature of Islamic banking transactions, including with regard to the matters discussed in the next paragraph.
The scope of the exemption from land-related charges is undefined. Certainly it must encompass transfer taxes applicable to interests in land. Hopefully, the provision will be applied in such a manner that Islamic banks will not suffer charges or impositions that would not be incurred by a conventional bank on a similar banking transaction. Some of the more problematic areas of application of the exemption provision will arise in Islamic banking transactions that give rise to accretions or profits that are not incurred in conventional banking transactions. Consider, for example, mudaraba and musharaka arrangements involving interests in land where the transaction results in capital gain on the land interest. It will be necessary to consider, on a charge-by-charge basis, every charge of every type to determine whether it is appropriate to exempt Islamic banking transactions from each of those charges.
The second clause of Article (126) of the Islamic Banking Law provides the customary, but quite important, catch-all statement to the effect that ‘all that contradicts or contravenes the amendments set forth in the Islamic Banking Decree shall be revoked’. This provides comfort that other laws, rules and regulations that interfere with the implementation of Islamic banking in Oman will be removed. Resolution of these conflicts is left to the future. Potential conflicts are many and varied. This article mentions a few, such as taxation on land-related capital gains incurred because of the use of a Shari’ah-compliant structure and, as discussed in the next section, enforcement of determinations of the supreme authority for Shari’ah oversight. But many more can be easily imagined. These include not only charges in the nature of taxes, but also liabilities and impositions that arise because of the use by an Islamic bank of Shari’ah-compliant contracts or structures. Consider, for example, environmental liability or third-party liability arising as a result of the ownership or control of a land interest by a mudaraba or musharaka used by an Islamic bank to provide transactional financing. Will the Islamic bank be exempted from liabilities such as these? Will these types of liabilities be assessed only against the assets involved in the transaction? Or will the Islamic bank itself have liability? Much remains to be determined in the future.
Shari’ah supervisory matters
The Islamic Banking Law requires each institution doing Islamic banking to establish a Shari’ah supervisory board. The form, prerogatives and functioning of these Shari’ah supervisory boards are to be governed by the Islamic Banking Framework, as are the qualifications and conditions applicable to members of the Shari’ah supervisory boards. One of the more interesting features of the Islamic Banking Law as it pertains to Shari’ah supervisory boards is the requirement that the appointment of the board members and the determination of the compensation of board members are to be established by the general meeting of the Islamic bank. No separate provision is made in respect of these matters in the case of Islamic windows of conventional banks, but, presumably, the same concept would apply. Some of these matters were addressed, in part, in one of our previous articles on Islamic finance, which is available on our blog at http://omanlawblog.curtis.com/2012/12/one-of-first-matters-to-be-addressed-as.html.
Article (126) B of the Islamic Banking Law sets forth a requirement that has been described by various market participants as “unexpected”. It requires the Board of Governors to establish a supreme authority for Shari’ah oversight (the “Oman SOA”) and to specify the form, prerogatives and functioning of the Oman SOA as well as the qualifications and conditions applicable to members of the Oman SOA. The Oman SOA has not yet been established, and no guidance has been provided as to the nature of its role, function, power, authority or institutional status. Will the Oman SOA set standards for different contracts and structures (such as mudaraba, musharaka, ijara, murabaha, wakala, and the like) and require that the Shari’ah supervisory boards of the Islamic banks implement transactions in accordance with those standards? Will courts and arbitrators be required to submit Shari’ah matters to the Oman SOA? If any such submission is required, will the determinations of the Oman SOA be advisory in nature or will they constitute binding determinations? No indication has been provided with respect to any of the foregoing questions, or any other similar matter. One may surmise that the pronouncement establishing the Oman SOA will specify its role, function and power and authority, although that pronouncement will likely leave much to future determinations.
The Islamic Banking Law does not make reference to any paradigm or source that might provide guidance in respect of the role, function, power, authority, and institutional status of the Oman SOA. However, one might consider, as a possible paradigm, the central Shari’ah Advisory Council (the “Malaysia SAC”) of Bank Negara Malaysia, the Central Bank of Malaysia (“Bank Negara”). Bank Negara comprised the Malaysia SAC, under the auspices of Bank Negara, in 1997 as the highest Shari’ah authority for Islamic finance in Malaysia. The Malaysia SAC’s authority in its ‘regulatory’ function allows it to ascertain Islamic law for the purposes of Islamic banking, takaful, Islamic finance, Islamic development finance, and other business which is based on Shari’ah principles. The Malaysia SAC also has an advisory function, pursuant to which it is responsible for validating all Islamic banking and takaful products to ensure their compatibility with Shari’ah principles.
The Malaysia SAC was further institutionalized, defined and empowered pursuant to the Central Bank of Malaysia Act 2009, Act 701, Laws of Malaysia (the “CBMA”; available at http://www.bnm.gov.my/documents/act/en_cba.pdf), particularly in respect of its ‘regulatory’ function. Pursuant to the CBMA, Bank Negara is required to consult the Malaysia SAC on any matter relating to Islamic financial business and any matter pertaining to the performance by Bank Negara of its business or affairs or under any law in accordance with the Shari’ah (CBMA, Article 55(1)). Any financial institution may seek a ruling or the advice of the Malaysia SAC in respect of the operations of its business; no provision mandates that the SAC take such a request and render a ruling or advice (CBMA, Article 55(2)). Further, a court or arbitrator in any proceeding in any court or before any arbitrator is required to consider the published rulings of the Malaysia SAC and is required to refer any question concerning a Shari’ah matter to the Malaysia SAC for a ruling or advice (CBMA, Article 56). Articles 57 and 58 of the CBMA provide that the Malaysia SAC determinations in respect of each of the foregoing matters prevails, including over determinations of courts and arbitrators and contrary rulings of other financial institutions and in respect of rulings provided in response to requests made by financial institutions.
The definition of the nature, role, functions, power, authority, and institutional status, among other elements, of the Oman SOA is likely to be one of the most difficult challenges facing the Board of Governors in connection with the design of the Islamic banking model and practical implementation of Islamic banking in Oman. It entails delicate balancing among the CBO, the Oman SOA, the Islamic banks, and the Shari’ah supervisory boards of those Islamic banks. It further entails a careful reconsideration of the relative power, authority and institutional status, with respect to dispute resolution, among the courts and arbitrators, on the one hand, and the Oman SOA, on the other hand. The policy issues are many, and the effect on the existing legal and regulatory system is likely to be profound.
Regulations and licensing
Two Articles of the Islamic Banking Law, constituting a total of two sentences, address obligations in respect of issuance of Islamic banking regulations and the licensing of Islamic banks and Islamic windows of conventional banks. Each of these matters will be discussed in greater detail in future Client Alert articles, particularly those dealing with the Islamic Banking Framework.
Very simply, the Board of Governors is obligated to issue the Islamic banking regulations, as well as circulars and guidelines, in respect of certain enumerated matters and, in open-end format, other non-enumerated matters. As noted above, the CBO issued the Islamic Banking Framework on 18 December 2012 pursuant to Circular IB 1. The enumerated matters are licensing, governance, Shari’ah control, capital, credit, limits of investment and exposure, accountability, reports, disclosure and risk management. This sentence lays the foundation for the Islamic Banking Framework and for a dynamic, ongoing regulatory process that includes regulations, circulars and guidelines in a system that will be familiar to all parties that have banking experience.
With respect to licensing, the CBO is mandated to issue licenses to Islamic banks and Islamic windows of conventional banks. Those matters are addressed in the Islamic Banking Framework with respect to both banking and investment banking activities.
Interpretations of Islamic banking
As noted in other sections of this article, there are significant unresolved questions regarding the interpretation of different provisions of the Islamic Banking Law. These include the scope of taxation exemptions, the scope the revocation of laws, rules and regulations that contradict or contravene the Islamic Banking Law, and the status of the determinations of the Oman SOA vis-à-vis court and arbitrator determinations.
Two provisions of the Islamic Banking Law (Articles (121) and (124)) seem to indicate that whoever interprets the Islamic Banking Law must do so in a manner that does not contradict the essential substantive principles and nature of Islamic banking. A likely interpretation of that mandate is that application and interpretation of the Islamic Banking Law must be in accordance with the substance of the applicable Shari’ah principles. This interpretation gives rise to some delicate policy issues relating to the relative powers, authorities, institutional status, rights, and responsibilities of different branches and organs of government. One will have to consider the Oman SOA as an organ of government for purposes of these policy determinations. For example, the Board of Governors, in the exercise of its Article (126)(B) establishment obligation, may vest the Oman SOA with the ultimate authority to determine the substance of those Shari’ah principles, at least as a primary matter. That would seem to vest exceptional ‘judicial’ or ‘quasi-judicial’ authority in the Oman SOA, and will certainly raise the issue of the balance of power and authority as between the courts and arbitrators and the Oman SOA. In considering the policy arguments, and the inter-branch balancing, it is worth noting that Article (124) seems to indicate that Islamic banks must practice Islamic banking in accordance with the restrictions set by the Board of Governors, even where those restrictions might conflict with interpretations of the regular nature of the applicable Shari’ah principles.
The long-awaited Islamic Banking Decree giving effect to the Islamic Banking Law is now effective. It will result in profound changes in the law of Oman. Over time, it will result in profound changes in the financial markets in Oman. And, over time, it will influence the essence of the Omani culture. The Islamic Banking Law sets forth some elemental principles and the outline of the basic structure of Islamic banking. Much remains to be clarified as the Islamic Banking Law is implemented in the coming months and years. The Islamic Banking Framework, and related circulars and guidelines, will be a first step in resolving some of the many issues. But numerous other matters, some being of a fundamental policy nature, will remain and be resolved incrementally as the Islamic banking system evolves and becomes a part of the fabric of Omani existence. It is our hope that transparent and comprehensive discussions of these issues and these policy matters will accelerate and that the public will be better informed and served as a result.
Wednesday, January 2, 2013
The Code of Corporate Governance issued by the Capital Market Authority was recently amended to redefine the terms ‘independent director’ and ‘related party’ in public listed companies.
While this amendment largely preserves the definition of ‘related party’ with minor changes, the definition of the ‘independence’ of an independent director has been changed significantly.
The earlier definition of independent director construed the term quite liberally; only persons who had held a senior position in the company during the preceding two years and persons who had entered into financial transactions with the company or its affiliates were excluded from holding the position of ‘independent’ director. Moreover, a 2002 clarification issued by the CMA had also made it possible for shareholders and shareholders’ representatives to become independent directors. This latter step naturally resulted in some tension with the principle of having an independent director on the board to impart an objective and unbiased standpoint without being clouded by real or perceived conflict of interest.
The recent amendment to the Code of Corporate Governance has significantly tightened up the definition of ‘independent director’ with the aim of improving corporate governance and better protecting shareholders’ rights and interests. The new definition requires that an independent director must enjoy complete independence from the company and contains an array of exclusions to prohibit persons with potential vested interests from holding the position of independent director. The new definition of ‘independent director’ excludes, inter alia, (i) shareholders holding more than 10% of the shares of the company or its affiliates and (ii) representatives of a shareholder holding more than 10% of the shares of the company or its affiliates, from holding the position of independent director.
Companies impacted by this amendment would be well advised to seek legal assistance to better understand the implications of the amendment for the composition of their Board of Directors and Audit Committees.