By Zaheer M. Khan
Among all the avenues available for Shariah conscious investors in India, the Capital Market is the most easily accessible. Currently, the Indian Capital Market offers two major options for investors, namely, Equities and Mutual Funds.
As on 29th February 2020, out of the 5,053 companies listed on BSE and NSE combined, 1,415 companies qualified as Shariah compliant. These account for around 28% of the total number of listed companies.
In addition to equites, there are a few Shariah compliant Mutual Funds too, listed on the Exchange. Among those claiming to be Shariah compliant, Tata Ethical Fund is certified by TASIS, whereas another fund, namely Taurus Ethical Fund, claims to be Shariah compliant, but the information related to its certification and purging is not available. In view of the limited opportunities available for investing in a Shariah compliant manner, it is imperative to explore other potential options as well.
Among other options Gold ETFs appear to have the maximum potential to become an emerging Shariah compliant investment avenue, though they do not currently control a high AUM as an asset class. However, since traditionally gold has been a favoured medium of savings and has shown a reasonably satisfactory appreciation over extended periods, it could be an ideal avenue of non-interest savings for a large segment of non-savvy but Shariah conscious investors.
An exchange-traded fund (ETF), is a marketable security, the underlying assets of which are a basket of assets such as shares, bonds, gold etc., held in certain specific proportions to track and mimic the constitution of a specific index for the same class of assets.
Similarly, Gold ETFs are exchange traded funds that allow investors to invest in gold on the exchange through Gold ETFs. Their assets are essentially either Gold in specie or securities backed by physical gold. So, when a person wishes to invest in a Gold ETF, the investor buys units of the ETF at the prevailing NAV of the Gold ETF and the ETF concerned buys a corresponding quantity of physical gold, and vice-versa. As in case of shares, the units of a Gold ETF can be dematerialized and held in demat form. If the investor so desires, he can procure gold physically from the Gold ETF subject to certain minimum quantity constraints.
A Gold ETF which intends to follow a “fully-invested” approach has to have a minimum exposure of 95% of its assets to gold and gold bullion with a fineness (or purity) of 995 parts per 1,000 (99.5%) or higher and not more than 5% in current assets. The fund manager can buy and sell gold at different points of time at different market prices. The fund also has to maintain its cash liquidity in current accounts of banks or invest in interest-based money market instruments. If it invests in money market instruments, the Gold ETF ends up earning interest.
Apart from investing in gold bullion, the funds may also invest in SEBI permitted instruments having gold as the underlying asset. In some cases, the fund also invests in warehouse receipts and other permitted securities linked to gold prices and Units of International Gold ETF.
TASIS Empirical Study:
TASIS has done an empirical study of the 11 Gold ETFs currently registered with the Indian capital markets regulator, SEBI. The financial information of these ETFs over the period of April 2016 to January 2019 was collected and analyzed. The brief findings of the study are:
- The funds purchase and sell Gold on spot basis only.
- They do not exchange gold in specie of a particular quality against that of another quality.
- The gold is purchased and kept at warehouses i.e. “Designated Depository”.
- The policy of the Gold ETFs is to physically deliver the gold to large investors (as defined in Scheme Information Documents (SID) on demand.
- The funds are required to maintain liquidity of 0% to 5% of the total AUM.
- As far as liquidity management and investment in money market instruments are concerned, it is observed that in normal cases, the minimum and maximum percentages of investments in money market instruments to the total AUM, are 0% and 3% respectively, whereas the average percentage of funds held in cash is around 1.5%.
- Additionally, in normal cases, the ratio of interest income (earned on such interest-based avenues and money market instruments) to the total income of the fund ranges between 0% and 7% (generally upto 3.5%).
Shariah Compliance Norms for Gold ETFs:
On the basis of the above empirical study and considering the Indian Capital Market conditions, TASIS Shariah Board has set the following norms for Shariah Compliance of Gold ETFs.
|Operational Parameters||Financial Parameters|
|§ It should Purchase and Sell gold on spot basis only
§ It should not Exchange Gold in specie of different qualities.
§ It should Purchase the Gold in physical form and keep it at the warehouse.
§ It should have a policy of physically delivering the Gold to the Large Investors on Demand.
|§ Investments in Money Market Instruments should be less than or equal to 1.5% of Total AUM.
§ Interest Income should be less than or equal to 3% of Total Income
Hence, for a Gold ETF to be a Shariah compliant Investment option, its asset allocation should remain overwhelmingly (more than 95%) in physical gold; and the income from the portion of the fund, invested (deployed) in various money market (interest-based) instruments should not exceed 3% of the total income of the Fund.
It is to be noted that due to constraints in availability of data of Gold ETFs in the public domain, the Shariah status of a Gold ETF is determined on the basis of quantum of its investment in money market instruments as revealed in its latest monthly portfolio data, whereas its interest income is considered as that given in its latest available Income and Expenditure statement.
If we apply the above norms to the 11 Gold ETFs available on the excahnge as on 29th February 2020, 7 Gold ETFs qualify as Shariah compliant. It is to be noted that the Shariah compliance stautus of the Gold ETFs is dynamic and could change in any month based on their investment in money market instruments and Shariah non-compliant avenues.
Purging of Gold ETFs:
It is to be noted that Investors investing in Gold ETFs should also purge the impure income accrued on account of their investment. In case any of the Gold ETFs is desirous of being categorized as Shariah compliant, it should exhibit its purging ratio on its website at intervals of not more than six months so that Shariah conscious investors can discharge their obligation of purging the interest income.
In view of the limited options available for Shariah conscious investors in India, Shariah Compliant Gold ETFs could be an additional avenue. As stated above, the traditional bias in favour of investing in gold along with the facility of holding the investment securely, in demat format (permitting conversion into specie easily and at low cost), will be a big advantage to a large number of Shariah conscious investors.
[Mr. Zaheer M. Khan, Executive-Operations at Taqwaa Advisory and Shariah Investment Solutions (TASIS) Private Limited. He handles TASIS Shariah Finance internal research assignments. He can be reached on firstname.lastname@example.org ]