Moves by Dubai-based investment bank Shuaa Capital to convert Dh1.5 billion bonds into shares was blocked yesterday by the UAE regulatory authorities as the financial dispute with the Dubai Banking Group (DBG) intensified.
The Dh1.5bn of convertible notes were issued to DBG, a subsidiary of Dubai Holding, in October 2007 with an interest rate of six per cent and a one-year maturity period.
DFM-listed Shuaa wanted to repay DBG by converting the bonds into 250 million shares. The conversion was based on a price of Dh6 per Shuaa share – and if DBG accepted this it would lose more than Dh1.2bn based on yesterday's closing price of Dh1.69. But the Securities and Commodities Authority (SCA) and the Dubai Financial Market (DFM) said they would not approve the conversion until both the parties have reached an agreement.
People close to Shuaa and DBG talks told Emirates Business that the two sides could not agree on a wide range of options to solve their differences.
"It seems that both parties will go for arbitration or litigation to solve the issue," said one person who asked not to be named.
There were dramatic developments yesterday as Shuaa announced in a letter to the DFM that it had issued 250 million shares and asked the market to register them in the name of DBG.
Majid Saif Al Ghurair, Chairman of Shuaa Capital, asked SCA and the DFM in the letter to "arrange for official registration of an additional 250 million shares of the company in uncertified form through the DFM within seven business days as defined in the notes".
However, DBG rejected the conversion in a letter to the DFM signed by Ahmed bin Byat, CEO of Dubai Holding, and Soud Ba'alawy in his capacity as Authorised Signatory of DBG.
They said DBG "elected not to convert the note but rather to redeem the note at its principal amount in accordance with the note and applicable laws".
In a letter posted on the DFM's website, SCA said it agreed that the conversion of the convertible bonds into shares should not proceed until the DFM receives SCA's approval in accordance with legal procedures.
SCA's decision was based on Article 185 and amendments to Article 186 of Companies Law No8 for 1984, which says: "Debentures may not be converted to shares unless this was provided for in the loan conditions and should be implemented by adopting the conditions mentioned in the preceding article. If conversion was decided, the debenture holder may choose either to accept the conversion or receive the nominal value of the debenture."
The DFM said: "As for the legal ownership of the shares, we will not register them in the name of DBG until we have received a letter from Shuaa Capital and DBG jointly or an order from the concerned authorities requesting us to have the shares registered in the name of DBG."
Trading in Shuaa stock was yesterday suspended and resumed twice.
The DFM suspended trading as it waited for news about the bonds and trading resumed following Shuaa's announcement that it had issued the shares. The price rallied and hit the circuit breaker.
The DFM suspended trading for a second time after DBG said it was rejecting the shares. Trading resumed again after the DFM decided not to process the new shares, and the stock declined sharply to Dh1.55 before ending the session at Dh1.69.
The dispute is over concerns whether the conversion of the bonds is optional or mandatory. DBG says the agreement and the law stipulate that the conversion is optional and has elected not to convert the bonds. In addition it has demanded that Shuaa repay the value of the bonds along with interest.
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