Shariah-compliant investment: SECP unveils list of 7 ‘prohibited’ products, practices

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has issued a list of seven products and practices that investors adhering to Shariah principles must not procure or utilise, including conventional derivative products.

The SECP Thursday issued guidelines under section 40B of the Securities and Exchange Commission of Pakistan Act, 1997 to facilitate the investors in undertaking Shariah-compliant investments through the Pakistan Stock Exchange.

The investors have raised the question that what are some of the products and practices that investors adhering to Shariah principles must not utilize.

The SECP guidelines revealed that Shariah lays down certain principles with regard to financial contracts, the conduct of business, and trading in general. In particular, Shariah prohibits any transaction that involves an element of interest (Riba). In order to ensure Shariah compliance of a product or service, it must be free from such prohibited elements and conform to other requirements of Shariah. Various stock exchanges, including PSX, have designed and launched products and services that cater to the specific requirements of Shariah.

According to the SECP, it is not permissible to invest in, or utilize, the following products and practices as per Shariah:- Conventional derivative products, including futures and options, margin financing, short selling, day trading, dealing in preferred stock, trading subscription rights of listed securities and units of Shariah non-compliant REIT scheme.

SECP reconstitutes Shariah Advisory Committee

Responding to a query about whether Zakat payable on the shares owned by an investor, the SECP responded that the ownership of shares in a company literally means to be the owner of the assets of that company to the extent of the proportion of shares owned. Further, the assets of a company include those on which Zakat is payable (such as tradable stocks and cash) as well as those on which Zakat is not payable (such as land and buildings). It, therefore, follows that if an investor buys shares in a company to earn dividends only, the investor is only required to pay Zakat on the percentage of the value of the shares owned that represents the company’s assets on which Zakat is due. In this instance, the investor is not required to pay Zakat on the full value of the shares owned.

The SECP stated that the objective of a Shariah-compliant index (also called an Islamic index) is to serve as a gauge for measuring the performance of Shariah-compliant segment of the market. A Shariah-compliant index is, therefore, comprised only of those securities that meet the requirements for Shariah compliance as per pre-defined criteria. A Shariah-compliant index also acts as a research tool for strategic asset allocation process, and its construction is intended to increase investors’ trust and enhance their participation in Islamic capital markets.

There are currently three Shariah-compliant indices on PSX: (1) PSX-KMI All Share Index; (2) KMI 30 Index; and (3) Meezan Pakistan Index. The PSX-KMI All Share Index is comprised of all securities that are deemed Shariah-compliant based on their fulfillment of the Shariah screening criteria and the technical criteria. KMI 30 Index and Meezan Pakistan Index are comprised of the top 30 and top 12 ranked Shariah-compliant securities, respectively, the SECP said.

The investors must review the updated PSX-KMI All Share Index on each date of index reconstitution in order to determine the Shariah compliance status of the securities they own. If any owned security is reclassified from Shariah-compliant to Shariah non-compliant status, then the investor must immediately sell off the security if its price on the reconstitution date exceeds or is equal to the original investment cost. Any capital gain arising from the sale may be kept by the investor. If, however, the price on the reconstitution date is less than the original investment cost, the investor may hold the stock until the price becomes at least equal to the original investment cost.

One of the criteria for inclusion of securities in the PSX-KMI All Share Index is that the ratio of Shariah non-compliant income to total revenue should be less than five per cent.

Hence, it is possible that a company, deemed Shariah-compliant, earns some amount of Shariah non-compliant income.

This income contributes to the profit of the company which is, in turn, used to pay dividends to shareholders. Hence, the investors are liable to “purify” the dividend they receive by excluding the element of impermissible income from the dividend earned, the SECP added.

Copyright Business Recorder, 2022