A broader 'Shariah' index for compliant Indian stocks

The Bombay Stock Exchange (BSE) has become the first in the country to launch a unique index for equities that follow the tenets of Islam - the S&P BSE 500 Shariah Index - comprising 500 largest compliant stocks that trade on the bourse.

The first such broad-based index has come about thanks to a strategic pact between the BSE and S&P Dow Jones Indices in February. The Shariah Index will represent all compliant stocks of the broad-based S&P BSE 500 Index.

Shariah, an Islamic canonical law, provides for certain pre-requisites for observant Muslims pertaining to financial and commercial activities that are either permitted or banned. According to an exchange official the following are excluded from the index:

* Advertising and mediafirms, except those generating revenues in excess of 65 percent from the Gulf Cooperation Council Countries

* Newspapers, news and sports channels

* Alcohol tobacco, pornography, gambling and related entities

* Companies engaged in cloning

* Financial services companies, save those that are Islamic banks

* Foreign institutional investors

* Insurance companies

* Food firms that deal in pork

* Firms trading in gold and silver with cash as collateral.

"Such companies are not considered Islamic - they can even be even anti-Islamic. So we have found them unsuited for investments by observant Muslims. So they do not figure on the index," said the exchange offiial.

"During the selection process, each company's latest financial statement and activities were reviewed to ensure that it is not involved in any Shariah-violative activities. We will have constant checks as well," the official added.

Presently, follow-up action is underway to screen all the companies from the broad-based S&P BSE 500 Index, and a few may fall short of the stringent Shariah-compliance norms.

The exchange was promted to launch the index after studies showed Muslim participation in the country's financial system was minimal. The Sachar Committee Report of 2006 had said some 50 percent of India's Muslim population was excluded from the formal financial sector.

The exchange officials said the creation of the index will not only promote financial inclusion of Indian Muslims, but also attract investment flows from the international funds that only touch firms that adhere to Shariah norms.

S&P Down Jones Indices has entered into a tie-up with London- and Kuwait-based Ratings Intelligence Partners for Shariah consultancy.

The BSE had partnered with Taqwaa Advisory and Shariah Investment Solutions (TASIS) to develop a compliant index in India, using the strict norms and local expertise of a domestic, India-based advisory board.

The BSE TASIS Shariah 50 index has 50 largest and most liquid Shariah compliant stocks. Since January 2008, the index has outperformed the 30-share sensitive index (Sensex) by 25 percent and the BSE-500 Index by over 30 percent.

(Quaid Najmi can be reached at q.najmi@ians.in and biz@ians.in)