Stock changes Shariah compliance? Source: blog.islamicly.com
What to do if a Stock changes Shariah compliance?
Invested in a Shariah compliant stock which has now turned non-compliant?
As we have explained in our previous article that Shariah compliance status of stocks is dynamic and is not permanent. This could be due to the following factors:
-Change in Market cap of the company:
If a company’s market cap is increasing, it will help bring the Shariah financial ratios of that company within the permissible threshold. The inverse will also be true. A Shariah compliant stock may turn non-compliant if its market cap is falling which leads to it failing one or more Shariah financial ratios.
Islamicly APP updates the applicable Mcap daily, giving the most updated compliance information on globally listed companies.
-Change in latest fundamental financial numbers of the company:
Every listed company discloses its latest financial numbers every quarter.
Using the latest quarterly numbers for the company’s Debt, Cash & liquid assets as well as accounts receivables; a company may fail the Shariah compliance test due to the latest ratios breaching the compliance threshold.
The inverse will also be true i.e. a non-compliant company which was failing its Shariah financial ratio may turn compliant due to the latest financial ratios being under the respective thresholds.
Islamicly APP incorporates the applicable latest quarterly numbers, giving the most updated compliance information on globally listed companies.
-Change in revenue composition numbers of the company:
Companies in their annual reports disclose their revenue composition. If the revenue from non-permissible areas changes, it will affect the business sector compliance of the stock by either going above or below the 5% threshold.
Islamicly APP conducts an annual revenue of stocks for changes in business composition and assigns fresh compliances. This process is done manually through an experienced research team.
Here we discuss the various scenarios of stocks turning non Shariah compliant and the ruling of the Islamicly Shariah Board in each case.
For compliant stock turning non-compliant:
If a stock you invested in was compliant at the time of investment, but subsequently turns non-compliant, you will have 90 days to exit that stock. After the end of the 90 day period, till the time you sell the stock, ALL gains - capital/trading/dividends need to be fully purified i.e. 100% of such gain from the end of the 90th day till the date of sale needs to be purified (donated to charity). Such a charity can be done to any charitable cause of your choice except to mosques etc.
All gains - capital/trading/dividends from the date the stocks turns non-compliant till the 90th day, or the earlier date of sale of that stock, can be retained as permissible income
Status at buy: Compliant
Status at Sell: Non - Compliant
Buy Price on 1st Jan: $10
Turned non-compliant date: 1st April
Price when non compliant turned: $ 30
Grace period ends: 1st July
Price when Grace period ends: $60
Scenario 1 – sell/exit BEFORE grace period ends
Sold date: 1st May
Sell Price (on 1st August): $50
Capital/trading gain: $40 ($50-$10)
Permissible income: $40 ($50-$10) - This amount ($40) can be retained as permissible income and there is no need to purify this amount. This is because the stock was sold before the expiry of the grace period i.e. 1st July.
Scenario 2 – sell/exit AFTER grace period ends
Sold date: 1st August
Sell Price (on 1st August): $70
Capital/trading gain: $60 ($70-$10)
Permissible income: $50 ($60-$10) - This amount ($50) can be retained as permissible income and there is no need to purify this amount. This is because the grace period was till 1st July when the price was $60. So all gains till this date will be considered permissible.
Income to be purified: $10 ($70-$60) This $10 has to be donated to charity (you may deduct the transaction charges from $10 such as brokerage paid and other statutory taxes and the net amount needs to be donated).
This is because the gains after the end of the grace period are considered non-permissible. Since price at the end of the grace period was $60 and the stock was sold after the grace period ended at $70, the gain of $10 will be considered non-permissible income.
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Do watch what one of the pioneering scholar of Islamic finance says about Islamicly here:
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TAG: SHARIAH COMPLIANCE STOCK RESEARCH