Madhu Kannan, managing director and CEO of the BSE, confirmed in an interview that he was “very pleased by what has been a very warm response to this product by market participants.”
“Our main priority will be to launch domestic and international ETFs (exchange-traded funds)/mutual funds off of this index within the next 12 months. We also are in the process of working with firms to offer structured products to clients based off of this index. In order to protect client confidentiality, we are currently not able to comment on specific products currently in development,” he said.
The BSE TASIS Shariah 50 Index is a joint effort between the BSE, one of India’s largest stock exchanges, and the local Taqwaa Advisory and Shariah Investment Solutions (TASIS) which the promoters hope would unlock the potential for Islamic ethical investments in India. The launch of the above index is potentially a major development for the Islamic capital market and asset management industry.
India with the world’s largest Muslim minority of between 150 million to 200 million is an untapped market for Islamic investment funds, especially equities, exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and index-linked equity funds. These funds of course are not only aimed at Muslim investors but also at those interested in alternative ethical and socially responsible investment products. Indeed, in India other faith groups including Hindus, Buddhists, Sikhs and Christians also share with Islam some of the views relating to usury, wanton speculation and market greed.
According to Kannan, both BSE and TASIS believe that increasing financial inclusion in India is an important national priority. Islamic investors in India and abroad have been hesitant to invest in the Indian markets given the limited options that were previously available to ensure that their investments were compliant with their religious beliefs. “The BSE TASIS Shariah 50 provides Indian and international investors, regardless of faith, with a new index which they can use to track investments that are compliant with Shariah law. In a broader sense, the Shariah 50 is a socially responsible investment index. Its constituents are filtered to remove companies that engage in practices that some individuals, regardless of faith, may deem to be less beneficial to society, including cigarette distribution, alcohol consumption and weapons development,” he added.
The BSE TASIS Shariah 50 index indeed consists of the 50 largest and most liquid Shariah-compliant stocks within the BSE 500. These include Indian corporate giants such as Reliance, Bajjaj Auto, Ashok Leyland, Siemens, Tata Global, Bharti Airtel and Hindalco etc.
Kannan is optimistic about the future of Islamic finance in India. Several positive developments have been taking place over the previous few years within the Shariah investment space within India, he maintains. “But yes, this Shariah index has definitely attracted considerable attention within the country as well as from abroad. Going by the response generated, the launch of the index could well prove to be an inflexion point in the growth of Shariah investments in the country. Developments in the tax arena (such as tax neutrality for equivalent Islamic financial products) are a different issue and we are not in a position to predict or comment on the pace of change in that respect,” he added.
He defended the transparency and independence of India’s legal system, which foreign businessmen have stressed can be very bureaucratic but which he maintained is in fact one of the strong positives that has been responsible for the country’s strong exchange inflows. This index, according to BSE, is likely to further help accentuate those inflows, particularly into the stock market from the Gulf region as well as Southeast Asia and it would provide strong comfort to Shariah-compliant investors. It should also encourage the launch of ETFs based on the index and provide a measure to compare the performance of Shariah-compliant investments.
According to the promoters, the Index has its own in-house Shariah screening process done by TASIS, which has adopted financial screens that are more conservative than its peers. TASIS, stressed Kannan, has three scholars on its Shariah board. They include Mufti Khalid Saifullah Rahmani, secretary general of India’s Islamic Fiqh Academy, a chief qadi (judge) and author of more than 50 books on contemporary Shariah matters; Mufti Barkatulla from the UK who advises several Islamic banks; and Iqbal Masood Nadvi from Canada and a former lecturer in Shariah Studies at Umm Al-Qura University in Saudi Arabia.
TASIS claims that its Shariah norms are much more stringent than those followed by Shariah boards located in most other countries. “Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which is a central organization engaged in creating Shariah standards, allows borrowing up to one third of the company’s market value but TASIS allows only up to one quarter of the asset of the company. Similarly the relaxation for impure (Haram) income is normally 5 percent of the total income (AAOIFI follows this rule) but TASIS is more stringent in this too and does not allow more than 3 percent impure income from all sources (including interest income as well as dividends from interest-based investments),” stressed Kannan.
TASIS’ impure profit purification methodology, according to BSE, “is unique and copyrighted”. Unlike other Shariah boards, TASIS requires computation of per-share impure income for the purpose of purification. This is not linked to companies earning profit or distributing dividend. Most other institutions including AAOIFI, advise purification based on the dividends received. If there is no dividend there is no purging irrespective of the fact that the company has earned impure income.
“It is our hope that conservative Shariah investors will be particularly attracted to the Shariah 50, given the fact that that TASIS utilizes a more strictly conservative methodology that is more correct from Shariah point of view,” explained Kannan.
As for the future potential of Islamic financial products in the Indian market, Kannan is confident that as of now the main growth area for Islamic products lies in stock market related products, including mutual funds, portfolio investments, structured products, and portfolio management services. Investment-type products offered by insurance companies, such as pension plans, also have potential (subject to the specific regulations relevant to them at a particular juncture).
There is also significant potential for Islamic funds to come in via venture funds in a variety of industry sectors, notably in real estate development (for Middle Eastern investors) and in infrastructure (for South-east Asian companies and funds). Already there are a number of Islamic investors in these sectors, including some sovereign funds. The Murabaha type of Islamic financing has been accessed from time to time by various Indian corporate entities since the early nineties.
The BSE TASIS Shariah 50 employs index constituent weight capping. Index constituent weights are capped at 8 percent at rebalancing in an effort to increase the diversification within the index and ensure greater compliance with international regulatory and statutory investment guidelines.
The Index follows a spate of Islamic equity funds aimed at the nascent Indian market either as standalone country funds or as part of a BRIC offering. In October 2010, for instance, India’s Tata Group launched its debut Tata Indian Shariah Equity Fund (TISEF) through its Tata Asset Management (Mauritius) Private Limited (TAMM), which is also the fund manager. This follows the establishment by the rival Reliance Anil Dhirubahi Ambani Group of a dedicated Islamic asset management company in Malaysia, Reliance Asset Management Malaysia Sdn Bhd, a subsidiary of Reliance Capital Asset Management (RCAM), in late 2009 to spearhead its global Islamic asset management activities. RCAM has embarked on a global Islamic asset management and fixed income strategy which will see the launch over the next few months of five Shariah-compliant funds — a global equity fund, an India country fund, a BRIC fund, a money market fund and a global sukuk fund.
