Financial Paper (Shares and Bonds) - Scope of Standard

Transcription

1. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) Statement of the Standard 1. Scope of the Standard This Standard covers shares with respect to their issuance and flotation including investment, trading, renting, loaning, pledging and Salam in them, along with the rule for concluding futures, options and swapping contracts on the basis of shares. The Standard also covers issuance of and trading in interest-bearing bonds. The Standard does not cover investment Sukuk for which there is a separate specific standard. 2. Rules for Issuance of Shares 2/1 The issuance of shares is permissible if the objectives for which the corporation was established are permissible according to the Shari’ah, thus, the objectives of its formation should not be transactions that are prohibited, like the manufacturing of liquor, trading in swine or transactions in Riba. If the objectives of the corporation are impermissible, the formation of the corporation is permissible too, and consequentially so is the issuance of shares that constitute such a corporation. 2/2 It is permissible to add a determined percentage to the value of the share at the time of subscription to cover the expenses of issuance as long as this percentage is fixed and determined to be a reasonable amount. [see item 4/1/2/2 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/3 It is permissible to issue new shares for increasing the capital of a corporation if such shares are issued at a price that is equivalent to the value of the old shares, which is worked out through expert valuation of the assets of the corporation or on the basis of the market-value whether this is at a premium or at a discount with respect to the price of the issue. [see item 4/1/2/3 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 560
2. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) 2/4 It is permissible to underwrite the issue when this is done without compensation in lieu of underwriting. This is an agreement, at the time of the formation of the corporation, with someone who undertakes to purchase the entire issue of shares, or a part thereof. It is an undertaking from the person bound to subscribe at the nominal value to all that remains and has not been subscribed to by another. It is permissible to acquire compensation for work, like the preparation of feasibility studies or the marketing of shares, irrespective of the work being undertaken by the underwriter or someone if such compensation is not in lieu of a guarantee. [see item 4/1/2/4 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/5 It is permissible to split the value of the share into instalments at the time of subscription so that one instalment is paid and the remaining instalments are deferred. The subscriber will be considered a participant to the extent of what he has paid up and will be bound to pay his additional capital in the company, and this on the condition that the instalments apply to all the shares and that the liability of corporation remains restricted to the value of the shares subscribed to. [see item 4/1/2/5 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/6 It is not permissible to issue preference shares that have special financial features leading to the granting of priority to these shares at the time of liquidation or the distribution of profits. It is permitted to grant certain shares features related to procedural or administration matters, in addition to the rights attached to ordinary shares, like voting rights. [see item 4/1/2/14 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/7 It is not permissible to issue Tamattu’ shares. These are shares that grant the participant compensation in lieu of his shares, whose value is redeemed during the existence of the company, and he is granted Tamattu’ shares that grant him rights that are available for shares based on capital, except the right to profits and the distribution of assets at the time of winding up, insofar as the Tamattu’ shares 561
3. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) are entitled to profit lesser than that given to the owner of shares based on capital, just as the owner of Tamattu’ shares does not have a share in the assets of the company at the time of winding up until the owners of shares based on capital have been granted the value of their shares. [see item 4/1/2/15 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 2/8 The share certificate – or what stands in its place – is a document that is deemed evidence of ownership of the shareholder for his undivided share in the assets of the company. It is permitted that this document be in the name of the owner, to his order, or for the bearer. 3. Rules for Dealing in Shares 3/1 A share represents an undivided share in the capital of a corporation, just as it represents an undivided share in its assets and the rights associated with it upon conversion of the capital into tangible things, benefits, debts and so on. The subject-matter of the contract at the time of trading of shares is this undivided share.(1) 3/2 It is permissible to buy and sell shares of corporations, on a spot or deferred basis in which delay is permissible, if the activity of the corporation is permissible irrespective of its being an investment (that is, the share is acquired with the aim of profiting from it) or dealing in it (that is, with the intention of benefiting from the difference in prices). 3/3 Participation or trading in shares for purposes of conversion Participation or trading is permitted for purposes of conversion for one who has the ability to effect conversion by adopting a resolution for (1) See the Shari’ah basis for the standard, item (18), for the permissibility of trading in shares of corporations whose assets represent tangible things and profits along with debts and cash that are in excess of the tangible assets and profits with the stipulation that such tangible and cash assets should not be less than one-third. The reason is that the debts and cash can be properly considered as secondary to them. (This explanatory note is intended to complete the text of the Standard for implementing subsequent amending procedures, God willing). 562
4. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) conversion in accordance with the Shari’ah at the first general meeting or by striving for conversion in line with item 3/4/6. [see Shari’ah Standard No. (6) on Conversion of a Conventional Bank into an Islamic Bank] 3/4 Participation or trading (for investment and trading) in the shares of corporations whose primary activity is permissible, but they make deposits or borrow on the basis of interest The fundamental rule is that of prohibition of acquiring shares of and transactions (investment and trading) in the shares of corporations that sometimes undertake transactions in Riba and other prohibited things even when their primary activity is permissible, but from this rule subscription and transactions (investment or trading) are exempted with the following conditions: 3/4/1 That the corporation does not state in its memorandum of association that one of its objectives is to deal in interest, or in prohibited goods or materials like pork (swine) and the like. 3/4/2 That the collective amount raised as loan on interest – whether long-term or short-term debt – does not exceed 30% of the market capitalization of the corporation, knowingly that raising loans on interest is prohibited whatsoever the amount is. 3/4/3 That the total amount of interest-taking deposits, whether short-, medium- or long-term, shall not exceed 30% of the market capitalization of total equity, knowingly that interesttaking deposits are prohibited whatsoever the collective amount is. 3/4/4 That the amount of income generated from prohibited component does not exceed 5% of the total income of the corporation irrespective of the income being generated by undertaking a prohibited activity, by ownership of a prohibited asset or in some other way. If a source of income is not properly disclosed then more effort is to be exerted for identification thereof giving due care and caution in this respect. 563
5. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) 3/4/5 For the determination of these percentages, recourse is to be had to the last budget or verified financial position. 3/4/6 It is obligatory to eliminate prohibited income specific to the share that is mixed up with the earnings of the corporations, and this in accordance with the following: 3/4/6/1 The elimination of prohibited income is obligatory on one who is the owner of the share, whether an investor or a trader, at the end of the financial period, even if the payment is due at the time of issuance of the final financial statements whether quarterly, annual or for other period. Accordingly, elimination is not obligatory for one who sells the shares before the end of the financial period. 3/4/6/2 The subject-matter of elimination is the prohibited income specific to the share whether or not the profits have been distributed and whether or not the corporation has declared a profit or suffered a loss. 3/4/6/3 Elimination is not obligatory for the intermediary, agent or manager out of part of their commission or wages, because this is their right in lieu of the work they have undertaken. 3/4/6/4 The figure, whose elimination is obligatory on the person dealing in shares, is arrived at by dividing the total prohibited income of the corporation whose shares are traded by the number of shares of the corporation, thus, the figure specific to each share is obtained. Thereafter the result is multiplied by the number of shares owned by the dealer – individual, institution, fund or another – and the result is what is to be eliminated as an obligation. 3/4/6/5 It is not permissible to utilise the prohibited component in any way whatsoever nor is any legal fiction to be 564
6. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) created to do so even if this is through the payment of taxes. 3/4/6/6 The responsibility for elimination of the prohibited component of the income, for the benefit of all, falls upon the institution in case it is trading for itself or in case it is managing the operations. In the case of intermediation, however, it is bound to inform the person dealing in them of the mechanism for the elimination of the prohibited component so that he can undertake it himself. The institution may offer these services, with or without a charge, for those dealers who desire them. 3/4/7 The institution will apply the above rules whether it does so directly or through another and whether it is trading for itself or for another by way of intermediation or management of wealth, like funds, or is doing so as the agent of another. 3/4/8 It is necessary to observe these rules throughout the period of participation or trading. If the rules cannot be applied, it is obligatory to give up such investment. 3/5 It is not permissible to purchase shares by raising interest-bearing loans through a broker or another (margin sales), just as it is not permitted to mortgage the shares for such a loan. [see item 4/1/2/6 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/6 It is not permissible to sell shares that the seller does not own (short sale), and the promise of a broker to lend these at the time of delivery is of no consequence. [see item 4/1/2/7 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/7 It is permissible to the buyer of a share to undertake transactions in it by way of sale to another and the like after the completion of the formalities of the sale and the transfer of liability to him even though the final settlement in his favour has not been made. 565
7. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) 3/8 To secure lawful interests, it is permissible to specialised official agencies to organize trading in some shares so that it cannot be undertaken except through specialised brokers or those licensed to undertake the activity. [see item 4/1/2/8 of Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern Corporations] 3/9 It is not permissible to lend shares of corporations. 3/10 It is permissible to mortgage shares that are lawful according to the Shari’ah, and in this respect there is no difference whether the assets of the corporation are cash, tangible assets or debts or they are a combination of cash, tangible assets and debts and irrespective of one type being predominant in them. This is to be done in conformity with the conditions for selling shares at the time of liquidation. 3/11 The contract of Salam is not permissible in shares. 3/12 It is not permissible to conclude futures contracts for shares. [see item 5/1 of Shari’ah Standard No. (20) on the Sale of Commodities in Organized Markets] 3/13 It is not permissible to conclude contracts of options for shares. [see item 5/2 of Shari’ah Standard No. (20) on the Sale of Commodities in Organized Markets] 3/14 It is not permitted to conclude swap contracts with respect to shares and their returns. 3/15 It is not permissible to rent shares, whether this is for pledging them or for the purpose of selling the rented shares, and returning shares similar to them, as is done in the stock-markets, or for acquiring their profits or for showing a stronger financial position of the hirer or for another reason. 3/16 It is permitted to lend shares by way of I’arah for the purpose of pledging them or for the purpose of granting their profit to the borrower as is done in stock markets. The borrower does not have the right to sell the shares except for the execution of the terms of the mortgage. 566
8. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) 3/17 It is not permissible to undertake trading in the shares of a corporation, when the assets of the corporation are cash exclusively, whether this is during the period of subscription or after that, prior to the commencement of the business of the company or at the time of liquidation, except at their nominal value and with the condition of delivery of possession. 3/18 It is not permissible to undertake trading in the shares of a corporation if the entire assets of the corporation are composed of debts, unless the rules for dealing in debts are observed. 3/19 If the assets of a corporation are composed of tangible assets, benefits, cash and debts, the rule for trading in the shares of such a corporation will differ according to the primary asset, which conforms to the objective of the corporation and its usual activity. If its purpose and activity pertain to trading in tangible assets, benefits and rights, trading in its shares is permissible without taking into account the rules of Sarf or transactions in debts, with the condition that the total market value of assets, benefits and rights should not be less than 30% of the total assets value of the corporation including all assets, benefits, rights and cash liquidity (the corporation’s debts, current accounts with others, and bonds it holds which constitute debts) irrespective of their size as in such a case these are secondary. If, however, the objective of the corporation and its usual activity is dealing in gold, silver or currencies (Sirafah Sirafah), ), it is obligatory to undertake trading in its shares in the light of the rules of Sarf Sarf. 3/20 It is stipulated for the implementation of what is laid down in paragraph 3/18 that it shall not be adopted as a means for bargains in debts and trading in them by merging parts of tangible assets and benefits with the debts as a legal device for transaction in debts. 4. Rules for Issuance of Bonds The issuance of all kinds of bonds is prohibited when these bonds include stipulations for the return of the amount of loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan, is paid in monthly or yearly instalments or in another 567
9. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) manner and whether this excess represents a percentage of the value of the bond, as in the case with most types of bonds, or a part of it, as is the case with zero-coupon bonds. Likewise, prize bonds are also prohibited. This applies irrespective of the bonds being private, public or governmental. 5. The Rule for Trading in Bonds Trading in bonds, both sale and purchase, is prohibited and so is their pledging and endorsement and so on. 6. Shari’ah Substitute for Bonds The Shari’ah substitute for bonds are investment Sukuk. [see Shari’ah Standard No. (17) on Investment Sukuk] 7. Date of Issuance of the Standard This Standard was issued on 30 Rabi’ I, 1425 A.H., corresponding to 20 May 2004 A.D. 568