THIRUVANANTHAPURAM: The high court in Kerala has ordered a stay of execution against a state government decision to have equity participation in a firm offering Shariah-compliant financial products. The southern Indian state incorporated the company hoping to raise huge funds for infrastructure development through these instruments from its two-million-strong expatriates based in the Gulf.
According to the 2006 estimates, 27.8 percent of Kerala’s 33 million population is Muslim. A large number of enterprises complying with the Shariah principles are already functioning in the state’s Muslim-dominated Malabar region.
Banks in Kerala are sitting on deposits worth Rs370 billion (about $8 billion) from its overseas population and the newly-floated company, Al-Barakah Financial Services, was expecting to attract a portion of it and make it available for the cash-strapped state.
The stay order came on a petition by maverick politician Subramanian Swamy, who challenged the move saying the move defies the secular principles of India’s constitution.
“The government shall not commence operation of the proposed institution pending disposal of the petition,” a division bench comprising Chief Justice S.R. Bannurmath and Justice Thottathil Radhakrishnan said after hearing preliminary arguments.
Swamy, a Harvard-educated economist, argued that the new firm was bound by the Shariah law and its chief executive was to report to a Shariah advisory body, not to any constitutional authority, and investing public money in such a company was unconstitutional.
“The state government is holding 11 percent equity in it (through Kerala State Industrial Development Corporation) and it is against the basic principles of secularism as defined by our constitution,” Swamy said. “Shariah is applicable to Muslims only.”
The KSIDC counsel countered this saying it was governed by the prevailing company laws in the country and guidelines laid down by Reserve Bank of India (RBI), the central bank.
The court then issued the order against the company going operational before the court hearing from the governor of the RBI and the federal Finance Ministry and reaching a final decision.
The Al-Barakah Financial Services was to sell the rupee-denominated bonds and create investment funds free of interest initially to finance its big infrastructure plans like a seaport, airport and an expressway linking the north and south of Kerala, a narrow strip of land along the Arabian Sea coast. Islamic finance is expected to pump Rs230 billion to spend on infrastructure in India by 2014 and Kerala was the first state to tap its potential. Al-Barakah was to start operations from this month with 30 branches across the state.
The company has an authorized capital of Rs10 billion and initial paid-up capital of Rs1 billion, mainly to be contributed by prominent Kerala expatriates like Yusuffali M.A. and Dr. Azad Moopen (UAE), P. Mohammed Ali (Oman) and C.K. Menon (Qatar) who are part of the core group that met in Trivandrum thrice.
They decided to incorporate Al-Barakah as a non-banking finance company as the RBI does not give sanction to full-fledged banks operating on Islamic principles in spite of recommendations by an expert committee.
The incorporation as NBFC under India’s Companies Act followed a feasibility study conducted by consultants Ernst & Young and a board of subject experts was to be formed to decide on what kind of investments the institution could attract.
The state’s Finance Minister T.M. Thomas Isaac recently told the state assembly that Al-Barakah would be developed into a full-fledged bank as soon as the RBI took a decision to that effect.
