BSE India to unveil Shariah index, counts on Arab funds

MUMBAI: Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE), will launch its Shariah index next week. The index, structured in partnership with Taqwaa Advisory Shariah Investment Solutions, will have 50 stocks selected from the BSE-500 bracket, two officials said.

Infrastructure, capital goods, IT, telecom and pharmaceuticals shares will form a large chunk of the ‘BSE Tasis Shariah-50 Index’, as the new index will be known. But no stock will have more than an 8% weightage. The stock screening has been done by Taqwaa Advisory (Tasis) scholar board, and the index construction, by BSE.

“The BSE is more popular among overseas investors. The new index will attract investments from Arab and European countries, where Shariah funds are already popular,” said Zafar Sareshwala, CMD, Parsoli Corporation, a company having expertise in Islamic finance. He said that the index will have to be actively promoted to draw foreign investors.

Shariah, the religious law of the followers of Islam, has strictures regarding finance and commercial activities permitted for believers. Arab investors only invest in a portfolio of ‘clean’ stocks. They do not invest in stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons.

The index will be rebalanced every quarter though stocks that do not comply (at some point of time) with Shariah statutes will be excluded immediately. National Stock Exchange S&P CNX Shariah Index and Dow Jones Islamic India Index are other Shariah benchmarks that are tracked by investors. Shariah-based equity investments do not allow investors to invest in heavily indebted companies — no investments in companies that have a debt-tomarket cap exceeding than 33% — companies with high outstanding receivables — net receivables in excess of 45% of M-cap — and companies that do not have at least 25% of its capital in fixed assets.

The current share of Indian Shariah compliant M-cap (over 60%) is highest even when compared to Islamic countries like Malaysia (at 57%), Pakistan (51%) and Bahrain (6%). Financial institutions such as HSBC, Benchmark, Taurus, UTI, Kotak, Reliance, Bajaj Allianz and Reliance Mutual Fund have investment products that are Shariah-tolerant in nature. “The new index will help Shariah-based portfolio managers to invest in Indian stock market. Foreign asset management companies having Shariah-based investment products will allocate money to India if it has a well-managed Shariah index,” said an expert in Islamic indices.

According to an official, Tasis will declare minor impurities present in the index so that investors can weed them out by giving zakaat or charity. Devout Muslim investors weed out a portion of their gains in anticipation that these are due from investments in non-Shariah assets.