The AAOIFI pronouncement on Sukuk issued in February 2008 reiterated its strong view against the application of purchase undertaking (PU) at par in equity-based Sukuk, namely musharakah, mudarabah and wakalah. The main research question that this study attempts to answer is whether the purchase undertaking (at par) guarantees principal in the equity-based Sukuk. This paper aims to provide empirical evidence on actual application of wa'd in equity-based Sukuk in the market to answer the research question. We utilized two main methodologies to answer the research question: a detailed term-sheet analysis, and interviews with market players. We studied 11 pre-AAOIFI deals and 4 post-AAOIFI deals. We examined two main features of wa'd: the trigger event and the price. With regards to the main trigger events for PU, both the pre- and post-AAOIFI Sukuk that used PU had maturity and default as the main trigger events. With regards to price, the PUs in pre-AAOIFI equity-based Sukuk are priced not only at principal but also include expected profit (not realized profit) that has not yet been paid. The price for post-AAOIFI deals differed from pre-AAOIFI deals, as Sorouh used a conditional PU priced at par while PLSA used a PU priced at market value or value to be agreed in future. Besides the case studies, we also conducted interviews with different market players (bankers, lawyers, rating bodies, regulators and Shari'ah scholars). We interviewed 42 respondents in all. The final usable respondents were 34 persons. The main question covered in the analysis section is about the function of PU. The top two functions of PU identified from the interviews is guarantee and recourse to the obligor. The scholars and the regulators had the highest percentage of respondents who viewed PU as a guarantee. Also, in IDB 2005 Sukuk, the scholars clearly stated that the PU functions as a guarantee of capital and return. Nonetheless, this was allowed in the deal, which was considered a mudharabah Sukuk, because the obligor (IDB) and the issuer (SPV) were viewed as independent parties.
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