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Meaning:- A SHARIAH Index in an index of companies that are found to be compliant with the Islamic canonical law or the Shariah. Most Shariah indices which have been created so far have been based on an existing or an underlying index, whose constituents have been screened for compliance by a board that is well-versed in the principles of the Quran. Screening procedure:- The screening is done at two levels, depending on the sector that the company operates in as well as a few of the operating ratios that the company works with, as evident in their annual report. For instance, all companies in a particular index whose business areas are pork, alcohol, gambling, financials, tobacco, pornography, trading of gold and silver as cash on a deferred basis as well as advertising and media (excluding newspapers and a few other cases which are analysed on an individual basis), would be left out of the index. Similarly, the amount of debt, cash and the proportion of revenue that is accrued from non-compliant activities is also taken into consideration. For instance, a company could be compliant if the ratio of debt to the market value of equity is less than 33%. Also, if the revenues that come from non-permissible activities are less than 5% of total revenues, the company could be accepted as a member of the index. The index can be expanded and non-compliant stocks in the underlying index are also constantly monitored to check if they stand to become compliant due to changes in their financial ratios. 

Reasons for the creation :- In an essay on working with Islamic finance, Martin L Ross says Islamic law focuses on the need to avoid usury and risk. It does not view money as an asset and hence does not favour the practice of being able to make money from money, a predominant example of which would be lending money and also charging interest on the same. In fact, the practice is considered haram under Islamic law. In fact, it is also has a strict view against the sale of products whose existence is not certain, like insurance which one would purchase based on a future eventuality which may or may not happen. 

Shariah Index in India:-While Indian companies have been included in Shariah indices in the past, the first two Shariah indices based on Indian equity markets were launched in February 2008 by Standard and Poor’s. Titled the S&P CNX 500 Shariah and the S&P Nifty Shariah, they have been created after screening the constituents of the S&P CNX 500 and the S&P Nifty. They give the investor the opportunity to participate in the Indian equity markets while remaining compliant with the principles of Islamic law. In fact, this has been followed by the launch of many mutual funds as well as portfolio management services which are compliant with the Shariah law.


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April 2024