If you are investing in accordance with the Shari’ah principles and have invested in Shari’ah-approved securities, you may want to review your investment holdings from time to time. This is because the status of your shariah-approved securities may change.
What are Shari’ah-approved securities?
Generally, Shari’ah-approved securities are the securities of companies, whose activities conform with Shari’ah principles. These approved securities include ordinary shares, warrants and transferable subscription rights (TSRs). For warrants and TSRs, its underlying shares must be Shari’ah-approved. Loan stocks and bonds are non-approved securities – unless they are issued based on Shari’ah principles.
What happens when approved-securities become non-approved?
Due to certain reasons such as changes in a company’s operations, Shari’ah-approved securities may become non-approved. For instance, shares of a construction company that has taken over a gaming outfit as a subsidiary, and derives significant profit from the gaming business, will become Shari’ah non-approved. What should you do if your status of securities changes? Sell the securities immediately and incur losses if the market condition is unfavourable? Or keep the securities until you recover your investment costs? The Securities Commission Shariah Advisory Council offers some guidance.
Scenario 1
You hold Shari’ah-approved securities and constantly follow the latest updated list.
- On the date the updated list takes effect – usually on the announcement date – review your securities holding and check whether all your Shari’ah-approved securities are still on the updated list. If they are, then continue holding them.
- But if any of your securities become non-approved, you can do the following.
If the price of the securities on the announcement date is more than the original investment cost, liquidate or sell off the securities immediately. Any capital gain from the disposal can be kept by investors.
If the price of the securities is less than the original investment cost, you can hold the securities until its price is the same as your original investment costs. However, investors may use the dividends received from holding the non-approved securities to recover their original investment costs in order to expedite the disposal of the non-approved securities.
Example: The original investment cost of your non-approved securities is RM4.50 per share. On the announcement day, the price is RM4.40 per share. Subsequently, you received RM0.10 dividend per share but the share price remains at RM4.40. But due to the dividends you can now dispose your shares without incurring capital loss.
RM4.40 (current share price) + RM0.10= RM4.50
Scenario 2
You hold Shari’ah-approved securities but do not consistently follow the latest update. You only get to know about the latest list, one or two months after the announcement date.
If all your securities are still Shari’ah-approved, you can continue holding them.
However, if the status of some of your Shari’ah-approved securities has changed, you need to do the following:
If the price of the securities is more than the original investment cost – at the point when you realised its status – liquidate or sell off the securities immediately. You may keep the profit between the original investment cost and closing price on the announcement day. Profit between the closing price on the announcement day and the disposal price must be channelled to charitable bodies.
Illustration: Mazlan found out long after the announcement date that he had a few lots of Shari’ah non-approved shares in his portfolio and he quickly sold them. The following is the amount of capital gain (profit) he can keep.
If the price of securities is less than the original investment cost (at the point when you realise its status), you can hold on to the securities until its price is equal to its original investment cost. However, investors may also use the dividends received from holding the non-approved securities to recover their original investment costs in order to expedite the disposal of the non-approved securities.
Scenario 3
You mistakenly invest in non-approved securities. Once you get to know it, you must do the following:
- Dispose of the non-approved securities within a month of knowing the status of the securities. Any capital gain made or dividend received during or after the disposal of the securities must be channelled to charitable bodies.
- Investors may keep their original investment costs. Original investment costs includes brokerage cost of other related transaction cost.
*This article is published courtesy of Securities Industry Development Centre, Securities Commission and extracted from the MalaysianInvestor website. For details, visit www.min.com.my.
**This article was first published in The Halal Journal May/Jun 2005 edition.