Pakistan Stock Exchange Limited (PSX) will conduct the Shariah screening of listed companies for the purpose of a Shariah index and shall ensure that all such companies comply with Shariah Governance Regulations, 2018. The SECP Friday issued draft of the Shariah Governance Regulations, 2018 to specify procedure for the PSX to conduct the Shariah screening for listed companies.
The minimum Shariah criteria shall be followed by all persons for Shariah screening of companies and notified entities included that the core business should not violate any principle of Shariah. The SECP has also laid down other minimum Shariah criteria shall be followed by all persons for Shariah screening of companies and notified entities: Interest Bearing Debt to Total Assets: The Interest Bearing Debt to Assets ratio should be less than 37 percent.
Non-Shariah Compliant Investments to Total Assets: The ratio of Non-Shariah Compliant investments to total Assets should be less than 33 percent.
Non-Shariah Compliant to Total Revenue: The ratio of Non-Shariah compliant income to total revenue should be less than 5 percent.
Illiquid Assets to Total Assets: The ratio of illiquid assets to total Assets should be at least 25 percent.
Net Liquid Assets per Share vs. Market Price per Share (for listed companies only): Market Price per share should be at least equal to or greater than net liquid assets per share. Calculated as: Net Liquid Assets = Liquid Assets - Current Liabilities.
The SECP said that the Exchange shall conduct the Shariah screening for listed companies for the purpose of a Shariah index and shall ensure that all such companies comply with these Regulations within three months of the date of notification of these Regulations. Under the regulations, "Exchange" means the Pakistan Stock Exchange Limited. The Exchange shall review the Shariah compliance of companies and securities on a bi-annual basis.
The Exchange shall exclude a company or security from the index as and when it becomes Shariah non-compliant. The Exchange shall not outsource the function of Shariah screening to any person.
The SECP said that the Shariah compliant companies/Islamic financial institutions shall divest the non-Shariah compliant securities within a period of four months or when the market value of the security equals the cost of investment, whichever is earlier.
In addition to the Shariah screening criteria the following technical criteria shall also be followed:
Firstly, the Company which is on the Defaulters' Counter and/or its trading is suspended, declared Non-Tradable (ie NT) in preceding 6 months from the date of re-composition shall not be considered for inclusion in Shariah compliant index.
Secondly, the company shall be eligible for inclusion in a Shariah compliant index if its securities are available in the Central Depository System.
Thirdly, the company should have a formal listing history of at least two months on PSX.
Fourthly, the company must have an operational track record of at least one financial year.
Fifthly, the company should have minimum free-float shares of 5 percent of total outstanding shares.
Sixthly, the company will be eligible if its securities are traded for 75 percent of the total trading days and Mutual Funds (both Open-Ended and Closed-Ended) are ineligible for inclusion in the index, the SECP added.