* UAE’s Dana Gas, creditors committee agree on settlement

* Islamic finance industry worried it could create precedent

* Sukuk standards to be more detailed, tighter language

* Case underlined risks of competing legal jurisdictions

* Investor preferences shifting to English law-only deals

By Andrew Torchia and Bernardo Vizcaino

DUBAI, May 15 (Reuters) – Islamic finance operators are
scrambling to tighten the industry’s rules in order to make sure
other companies cannot take the same path as Dana Gas, which
this week forced a $700 million debt restructuring.

Global standards are likely to become more detailed and
explicit and a shift to centralised regulation may accelerate
after the United Arab Emirates firm reached a conditional deal
with creditors on Sunday over a contested sukuk issue.

Dana shook the $2.5 trillion global industry last
June, saying it would not redeem its sukuk on maturity. It
proposed swapping them for new sukuk with lower profit rates.

The original sukuk used a mudaraba structure, an investment
management partnership, which Dana said had fallen into disuse,
making the instruments invalid under UAE law.

Its creditors won some rounds in the legal battle that
followed, but Dana got much of what it wanted in the settlement,
which lets investors exchange their sukuk for new three-year
instruments with a 4 percent profit rate.

Investors have been worried by the prospect of other issuers
avoiding redeeming their sukuk by saying conditions have
changed. Market players may be more wary of Islamic bonds issued
in the UAE after one of its courts declined to enforce English
court rulings favouring creditors in the Dana case.

“It will definitely alter international risk perception
around UAE local law enforcement and sukuk in general, driving
up pricing or reducing liquidity,” said Khalid Howladar,
managing director of Islamic finance advisory firm Acreditus.

Sukuk deals have already begun changing partly in response
to Dana’s case, said Mohamad Akram Laldin, executive director of
the Malaysia-based International Sharia Research Academy for
Islamic Finance.

Whereas sukuk previously relied on implied agreements that
all parties were satisfied with endorsements by Islamic
scholars, this is now being made explicit in contracts, and
documents sometimes include clauses saying structures should not
be disputed, he added.

Some regulators are now asking issuers to acknowledge
annually that the structure of their sukuk remains
sharia-compliant, said a Dubai-based partner at an international
law firm.

Laldin, deputy chairman of the Malaysian central bank’s
Sharia Advisory Council, said the Dana saga had strengthened the
case for setting up centralised bodies that could approve
Islamic contracts and rule on disputes, rather than leaving
vetting of sukuk to scholars engaged by issuers and investors.

Meanwhile the Bahrain-based Accounting and Auditing
Organisation for Islamic Financial Institutions, one of the
industry’s top standard-setting bodies, is working on new
guidance for sukuk.


Bashar Al Natoor, global head of Islamic Finance at Fitch
Ratings, said Dana had not done visible damage to sukuk trade,
with first-quarter issuance slightly higher than a year ago.

But the case underlined the dangers of competing legal
jurisdictions. In February, a London High Court judge confirmed
the Dana sukuk’s purchase undertaking was valid, and ordered the
company to withdraw its lawsuits in the UAE.

But a court in the emirate of Sharjah then prohibited Dana
from withdrawing its UAE suits, and directed enforcement of
British court orders be suspended pending decisions by UAE
courts on whether they were eligible for enforcement.

Patrick Drum, portfolio manager at U.S.-based Saturna
Capital, said investor preferences had shifted to sukuk governed
solely by English law and away from dual-jurisdiction deals like

The case appears to mean the end of the old mudaraba sukuk
structure, criticised as un-Islamic by some scholars due to
features such as guarantees on principal and fixed returns.

But a revised mudaraba structure with equity-like features,
mainly used by Islamic banks to raise regulatory capital, has
emerged in recent years and may persist, analysts said.

Although mudaraba comprised less than 3 percent of sukuk
issued internationally last year, it accounted for around a
quarter of sukuk issued by Islamic banks, Bahrain-based
International Islamic Financial Market data shows.
(Additional reporting by Davide Barbuscia
Editing by Alexander Smith)