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Country Report - UAE: New Standards for Sukuk

The Dubai Financial Market (DFM) officially published the final version of its ‘Standard for Issuing, Acquiring, and Trading Sukuk’ on the 2nd April 2014. The first of its kind, it is a comprehensive standard aimed at enhancing the regulatory environment of Islamic finance. This complements the ‘Standard for Issuing, Acquiring, and Trading of Shares’ published by DFM in 2007. Issuers and investors are generally familiar with Sukuk structures but some details lack clarity. The standard has introduced some improvements to the initial draft in order to resolve these issues.

The allowable percentage of cash and debt has been increased from 70% to 90% of the total underlying Sukuk assets. The final version also includes additions on how Sukukholders’ rights should be protected, and the financial liability att ached to special purpose vehicles that are treated as separate entities. Sukukholders should bear losses unless there is negligence, misconduct or a breach of rules by the guarantor. Also, contracts should indicate factors that could trigger early maturity of Sukuk, and describe the treatment of cases of default and the settlement of Sukukholders’ rights.

However, the new standards do not indicate the governing law for Sukuk contracts. At present, UK law is often used for international Sukuk deals.

Given that Dubai has more debt maturities in 2014, this is boosting issuance in the market by evidence of growth this year. The standards will be a central reference for Islamic finance institutions as well as Sukuk issuers and investors globally, and encourage the issuance of Sukuk instead of conventional bonds and the introduction of new Shariah compliant financial products.

In the same context, the board of directors of the Securities and Commodities Authority in Abu Dhabi (SCA) has approved two new regulations on the 26th April 2014: the Regulation for Sukuk and the Regulation for Corporate Bonds. The new Sukuk regulation deals with Sukuk as an ownership tool and not a debt one. The regulation covers several areas of application: including compulsory listing of companies and approval; issuance and listing rules; procedures and documents required for approval of listing; a record for applications for listing and issuance of Sukuk; listing, trading, clearance and sett lement of Sukuk; suspension and cancellation of listing; and many other related issues.

The rules requirements are eased in some areas; the minimum size of a Sukuk listing is now AED10 million (US$2.72 million), down from AED50 million (US$13.61 million) previously. However, strict requirements are specified in other areas. Listed Sukuk may be traded outside the market; but the trading must follow market procedures and any Sukuk issues must be approved by a Shariah committ ee accredited by the regulator of the issue.

Companies carrying on Sukuk-related activities will be required to have been established outside free zones in order to get listing approval. Companies will not be allowed to restrict their capacity in matt ers related to issuance and listing of Sukuk.

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Published: August2014
Publication: Islamic Finance News
Title: Country report - UAE: New standards for Sukuk
Practice: Corporate and M&A,Banking & Finance
Authors: Rima Mrad
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