By Kandaswami Subramanian
On 27 December Mumbai Stock Exchange launched a new platform called “The BSE TASIS Shariah 50.” In the normal course of our politicized conditions, it would have attracted much attention. A leading Muslim leader in toe with a number of industrialists from many communities would have inaugurated it. And leaders from both the Hindu and Communal sections would try to make political capital out of it. In the current climate surcharged with rumours of corruption, terrorism, etc. including those over 2G scams and stock market gyrations, this development has goneunnoticed. However, there has been good coverage in the international press.
The Wall Street Journal had a report titled “BSE hopes to score with Shariah Index.” The Guardian, U.K., had also a brief coverage the next day. It provided details of the Shariah share index. Comparing it with the U.K. experience, it hoped that it could do better in India. The BBC had a better coverage and raised some interesting issues.
There has been a growing feeling, at least among the Muslim members, that they are being excluded from participation in the stock market. Both the Guardian and BBC reports draw attention to this. Unfortunately, this is not true.
There is no law or rule whether under the Company Law Administration or Stock Market regulation which restricts the freedom of Muslim investors to invest in the stock markets in India. They share the same fate as ordinary citizens in India, i.e. they don’t have the cash surplus to risk in stock markets. Firstly, there is a general apathy bordering on fear over investments in stock markets by individual, small holders though stock market regulator is expected to safeguard the interests of the small holders.
Smallholders had their field day in the late seventies and the number of public holders increased. But, after a series of scams such as those engaged in by Ketan Parekh, etc. smallholders are shying away from the market. Not all the tax incentives given on dividends issued by publicly quoted companies would bring them back into the market. In later years, the torrential inflows though portfolio flows, the price fixing formulae adopted by new issuers, the manner of allocation, preferential treatment for qualified investors and a whole lot of related developments have kept the smallholder at a long distanced. Even mutual funds have not been up to the game in matching the wits of the market.
The legal exclusion referred to by these analysts is self-imposed. It is a self-denying measure for which others, in particular, the stock exchanges cannot be blamed. In short, they are Muslims and, as devout Muslims, they have to follow the tenets of sharia in making investments. They need shares which are sharia cleared. It is the absence of sharia cleared market that has in some ways led to their exclusion. The current move of the BSE seeks to remove this handicap and create a new avenue for Muslim investors. The idea is also to promote sharia finance which is seen to grow globally.
Sharia finance is said to have become a trillion dollar industry worldwide. Some studies referred to their performance in other areas, especially the Gulf, and drew attention to the scope for promoting it. India is one of the largest Islamic markets in the world with a Muslim population of 175 million. Of these, one third lives in cities. What was required was infrastructure to attract investment from this class of investors. According to WSJ, KPMG Consultants strongly made their plea for opening a shariat window.
Thus was launched the BSE TASIS SHARIA 50. It is not a BSE creation. It is a private venture which has the approval of the BSE. Sharia 50 consists of the largest and most liquid sharia-compliant stocks within the BSE 500 Index.
Shariat does not permit Muslims to invest in companies that derive significant benefits from interest since usury is considered sinful under Islamic faith. Companies should not derive benefits from sale of products deemed harmful like alcohol, tobacco and weapons. To ensure compliance with this faith, the companies included in the index have been screened by Taqwaa Advisory and Sharat Investment Solutions (Tasis). TASIS is an Indian Islamic finance company based in Mumbai and whose board members include scholars and legal experts.
TASIS is upbeat over the venture. It takes the view, “Bombay Stock Exchange has the largest number of listed shariat-compliant stocks in the world.” “All Muslim countries of the Middle East and Pakistan put together do not have as many listed sharia-compliant stock as are available on the BSE.” No wonder, TASIS hopes that the new Index would “unlock the potential for sharia investments in India.”
Mr. Madhu Kannan, chief executive, Bombay Stock Exchange, seems to have given encouragement to promote this platform. While welcoming it, he hopes it would give an enhanced role to Muslims in India’s rapidly expanding economy. He also hopes that such socially responsible funds would attract pools of funds from the Gulf, etc.
The hope that a new window for investment in sharia-cleared companies by Muslims would create a huger market is based more on faith and wishes than on ground realities. If the Tasis 50 is hoping to tap domestic investors, it is attaching its cart to the wrong horse. We have already referred to the current situation where small investors have withdrawn from the market. It is now monopolisied by FIIs and preferred allotters. Muslims have not played any role in our stock markets for the simple reason that they underlings and occupy the lower strata of society. Sachar Committee made a special mention of very low Muslim participation in BSE.
If the intention is to seek funds from foreign based sharia finance companies, they have to come through the portfolio route. The scope is very limited as investments allowed will be subject to sectoral caps and limits on individual holdings. As BSE Tasis has to operate within BSE norms the scope is rather limited. There could also be disputes over arbitraging between the two sections.
Sharia finance is a special phenomenon endemic to Gulf investors who acquire their funds through oil deals. This area is yet to work out a frame work of rules which can be transparent and applied globally by non-Gulf companies. This is very vital if cross border flows across term institutions are necessary. Slate Street, in its study, drew attention to the complexities and contradictions and added, “these (sharia) solutions need to combine market requirements with Shariah compliance, as the forces of innovation will expose the divergence of shariah views that underlie Islamic transactions.”
In the early years, some of the Gulf finance companies used to outsource their money management to foreign banks/consultants and feel happy over their safety and rates of returned, In recent years they seem to think about other alternatives. Given the high volumes of funds these companies own or hold, it is not surprising that foreign banks, especially big US banks looking for business, come forward with sharia solutions. After all, they get their commissions and consultancy payments on deals.
Sharia finance is a new avatar. But it is more fashionably talked about than practiced. In a brilliant report, the BBC described “How Islamic finance missed heavenly chance.” While claiming to work to new principles governed by sharia such as avoidance usury etc. and also to avoid risk, the newly rising Islamic bankers were e competing with conventional bankers in –its fees, its bonuses and greed and “much of the modern Islamic industry has aped the practice of conventional bankers.” Furthermore, “the modern Islamic finance and its cohorts of scholars, who have the official religious seal of appeal to the products of finance firms, have been set up to circumvent the principles of Sharia law.” There are indeed insuperable operational and classification issues in trying to combine modern financial instruments which are value neutral with quaint older religious tenets.
Oil sheiks continue to make investments in high value investments regardless of religious tenets. Of late, they are adept at using Sovereign Wealth Funds. Even so, perhaps they feel that that their handling of huge funds created by oil, an exhaustible source, should carry some legitimacy with the citizens back home. This is also to ensure political stability. Therefore they have their public show of sharia finance moving in tandem with global banks.
In the years before the financial crisis, there was a wave of sharia finance and the crisis established that the sharia funds were not protected and shared the same fate as conventional banks. This was observed in the companies involved Dubai projects. Thus the wave observed earlier has abated; and it is odd that a new initiative should have been take up in India. It is unlikely to attract large value investments. It will remain a side show or, at best, a footnote to the Bombay Stock Exchange.
The writer is a Former Joint Secretary, Ministry of Finance, Government of India