By S M Wasiullah, for Maeeshat
India is the seventh-largest economy with Gross Domestic Product (GDP) of more than USD 2 trillion. Growing at 6%-7% annually in the last few years, it has become one of the world’s fastest growing economies. Due to the swift pace of development, the Indian economy has started to also exploit the emerging Islamic finance market niche to meet its capital/funding requirements. This trend has led to a notable development in Islamic finance activities in India. Due to the flexible regulations advanced by the Security Exchange Board of India (SEBI) over the years, the capital market has becoming a preferred avenue, especially for Shariah compliant investments.
Taqwaa Advisory and Shariah Investment Solution (TASIS) Private Limited has been in the forefront in providing Shariah compliant capital market advisory services in India. For its contribution in this area, TASIS has been awarded Gold Awards for being Capital Markets Service Provider and Advisory Services Provider of the year 2016.
Keeping in view the flexibility and regulatory feasibility of investing in Indian Capital market in a Shariah compliant way, out of the various Shariah based consultancy services that TASIS provides such as Products structuring, Shariah auditing, purging and education, the Shariah Screening service is perhaps the most important. This service directly enables a Shariah conscious investor to utilize the benefits of Shariah compliant investments immediately.
The objective of the current write-up is to give a snapshot of the process and methodology adopted in Shariah screening, the composition of the Shariah compliant stocks on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and their one year performance studied on various capital market parameters.
The concept of Shariah compliant equities came into the limelight in India when India’s first widely followed Shariah index – ‘BSE TASIS Shariah 50’ was launched in 2010. Presently in the Indian capital market, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two largest as well as leading stock exchanges on which Shariah compliant equities are listed/traded. BSE with more than 7,000 listed companies and NSE with around 1,700 listed companies are successfully facilitating the growth of the Indian economy by providing an efficient fund (including Shariah compliant fund) raising platform.
The Islamic segment of the capital market comprises Shariah compliant equity shares, i.e. shares of companies which do not engage in activities that are considered ‘Haram’ (prohibited) in Islam such as conventional (interest based) banking, conventional insurance, brokerage of conventional (interest based) financial products and provision of fund based financial services, manufacture, distribution and sale of potable alcoholic beverages and narcotics, processing, distribution and sale of pork and pork-related and non-halal products, gambling and tobacco; and those sectors in which investment is prima facie not permissible under Shariah in the Indian context till specific reliable information is available to the effect that the activities undertaken by the industry as a whole or a specific company in that industry are in accordance with the Shariah.
In addition to the business compliance aspect, the companies should also comply with Shariah norms pertaining to their financials. TASIS Shariah Board has developed its own set of financial parameters in this regard. The financial parameters are: a) total interest-bearing debt (from all sources) and issued preference capital should not be greater than 25% of the total assets of the company; b) interest income from all sources and 8% of interest based investments should not exceed 3% of the total income of the company; and c) receivables plus cash & bank balances should not be greater than 90% of the total assets of the company.
The universe of companies listed on BSE and NSE is regularly screened on the basis of above mentioned Shariah screening norms. The equities which comply with Shariah norms related to their businesses and financials are declared as Shariah compliant for investors.
It is to be noted that Shariah compliance is a dynamic process depending on the specific business and financials of a company in a particular period. Hence the list of Shariah compliant equities varies from time to time. As a result, companies which are ruled Shariah non-compliant during a particular screening period may become Shariah compliant in the next screening and vice-versa.
In terms of composition and share in the capital market, as on January 31, 2017, out of 7,103 companies listed on BSE, 3,699 companies qualified as business compliant and 1,077 companies qualified as Shariah compliant. Hence, out of the total number of companies listed on BSE, 52.1% are business compliant and 15.2% are Shariah compliant.
Similarly, out of total 1,749 companies listed on NSE, 1,370 companies qualify as business compliant and 449 companies qualify as Shariah compliant. Thus, out of total number of companies listed on NSE, 78.3% of the companies are business compliant and 23.1% of the companies are Shariah compliant.
In terms of assets, out of aggregate assets of the total number of companies listed on BSE which is INR 211.5 trillion, the Shariah compliant companies own assets valued at INR 21.1 trillion. Out of aggregate assets of the total number of companies listed on NSE which is INR 202.9 trillion, Shariah compliant companies own assets of INR 20.4 trillion. On both BSE and NSE Shariah compliant companies account for around 10% of the aggregate assets of all listed companies.
In terms of number of companies from a particular industry sector in the total Shariah compliant companies listed on BSE, the trading industry shares the highest percentage with a share of 17.9% of the total Shariah compliant companies. It is followed by computers (7.24%), drugs and pharmaceutical (6.59%), other automobile ancillaries (3.34%) and other chemicals industry (2.32%). Similarly, in the total Shariah compliant companies listed on NSE, the computer software industry has a share of 8.85% followed by drugs and pharmaceutical (8.19%), other automobile ancillaries (5.75%) and trading industry (4.87%).
In terms of market cap, out of aggregate market cap of the total number of companies listed on BSE, which is INR 114.4 trillion, the market cap of Shariah compliant companies is INR 40.5 trillion. Out of aggregate market cap of the total number of companies listed on NSE, which is INR 110.9 trillion, the market cap of Shariah compliant companies is INR 39.1 trillion. Interestingly, on both BSE and NSE, the Shariah compliant companies share around 35% of the total market capitalization of the listed companies. It can be said that the market share of Shariah compliant companies on Indian stock exchanges is significant.
In terms of growth in numbers, in comparison with the previous year (January, 2016), in the current year (January, 2017), on BSE the number of business compliant companies has increased by 17 numbers, an annualized rate of 0.5% whereas the number of Shariah compliant companies increased by 46 numbers, at a rate of 4.5% p.a. Further, the share of Shariah compliant companies in market cap increased by INR 3.23 trillion at a rate of 8.7% p.a.
Similarly, on NSE the number of business compliant companies has increased by 35 numbers, at an annualized rate of 2.6% whereas Shariah compliant companies increased by 53 numbers, at a rate of 13.4% p.a. Further, the share of Shariah compliant companies in market cap increased by INR 3.30 trillion, at a rate of 9.2% p.a. Despite positive growth in terms of numbers and market cap there has been a decline in the share of assets of Shariah compliant companies in aggregate assets of the universe of BSE and NSE by more than 5%. As seen in the above paragraphs, in terms of growth too, Shariah compliant companies are increasing their share on the BSE and NSE exchanges.
It can be concluded from the above information that Shariah compliant equities comprise a significant proportion of the overall Indian capital markets. Though the growth of Shariah compliant equities in India is not in line with the rate at which the global Islamic finance market is growing (i.e. 15%-20%) but if assessed in view of the limited awareness of Shariah compliant investment products in the local market, its overall growth is satisfactory.
[Mr. S M Wasiullah is Manager at Taqwaa Advisory and Shariah Investment Solutions (TASIS) Private Limited and also pursuing Ph.D in Management in the area of Islamic Finance from BSA Crescent University. He can be reached on email@example.com ]