SECP Issues Guidelines for Shariah-Compliant Investments Through PSX

The Securities and Exchange Commission of Pakistan, (SECP) on Thursday specified that the objective of a Shariah-compliant index (also called an Islamic index) is to serve as a gauge for measuring the performance of the Shariah-compliant segment of the market.

The SECP has issued guidelines to facilitate the investors dealing in Shariah-compliant investments through Pakistan Stock Exchange (PSX).

The SECP has guided the investors that a Shariah-compliant index is, therefore, comprised only of those securities that meet the requirements for Shariah compliance as per pre-defined criteria. A Shariah-compliant index also acts as a research tool for the strategic asset allocation process, and its construction is intended to increase investors’ trust and enhance their participation in Islamic capital markets.

There are currently three Shariah-compliant indices on PSX which include PSX-KMI All Share Index, KMI 30 Index, and Meezan Pakistan Index. The PSX-KMI All Share Index is comprised of all securities that are deemed Shariah compliant based on their fulfilment of the Shariah screening criteria and the technical criteria. KMI 30 Index and Meezan Pakistan Index are comprised of the top 30 and top 12 ranked Shariah-compliant securities, respectively.

PSX lists Shariah-compliant shares, Sukuk, Islamic Exchange Traded Funds (Islamic ETFs), and Islamic Real Estate Investment Trusts (Islamic REITs). It is also deemed permissible as per Shariah for investors to subscribe to the Initial Public Offerings (IPOs) of Shariah-compliant securities. In addition, PSX offers Shariah-compliant indices comprised of shares of listed companies that meet certain pre-defined Shariah and technical screening criteria. A Shariah-compliant facility to finance the purchase of shares is also available, through the National Clearing Company of Pakistan Limited (NCCPL), called Murabahah Share Finance.

The investors must review the updated PSX-KMI All Share Index on each date of index reconstitution to determine the Shariah compliance status of the securities they own. If any owned security is reclassified from Shariah-compliant to Shariah non-compliant status, then the investor must immediately sell off the security if its price on the reconstitution date exceeds or is equal to the original investment cost. Any capital gain arising from the sale may be kept by the investor. If, however, the price on the reconstitution date is less than the original investment cost, the investor may hold the stock until the price becomes at least equal to the original investment cost.

One of the criteria for the inclusion of securities in the PSX-KMI All Share Index is that the ratio of Shariah non-compliant income to total revenue should be less than 5 percent. Hence, it is possible that a company, deemed Shariah-compliant, earns some amount of Shariah non-compliant income. This income contributes to the profit of the company which is, in turn, used to pay dividends to shareholders. Hence, the investors are liable to “purify” the dividend they receive by excluding the element of impermissible income from the dividend earned.

The SECP guidelines added that Shariah lays down certain principles with regard to financial contracts, the conduct of business, and trading in general. In particular, Shariah prohibits any transaction that involves an element of interest (riba). In order to ensure Shariah compliance with a product or service, it must be free from such prohibited elements and conform to other requirements of Shariah. Various stock exchanges, including PSX, have designed and launched products and services that cater to the specific requirements of Shariah.



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