Islamic Investment Opportunities in India

To assess the extent of Islamic investment opportunities on the stock market, one only has to look at the availability of stocks that conform to the norms stipulated by the Islamic Shariah, writes DR. SHARIQ NISAR who provides for the details of recent studies on the Indian stock market to find stocks that comply with Shariah norms.


The Indian economy with a GDP of US $1.25 trillion is the 12th largest, while in terms of purchasing power parity (PPP), it is the third largest in the world. The last four years have seen real GDP rise a cumulative 33%, with impressive increases of 8.5% in 2003/04, 7.5% in 2004/02, 8.4% in 2005/06 and 9.4% during the fiscal year 2006-07.

Investment opportunities in India are today perhaps at their peak. Strong population growth, a large pool of highly skilled workers, greater integration with the world economy and increasing domestic and foreign investment are expected to drive India’s real GDP by 6% per annum over the next 10 to 15 years. Riding high on its natural strengths, the country is poised to offer investment opportunities in excess of US$500 billion in diverse sectors over the next five years.

India’s economy is predicated on export of highly-skilled workers in software and financial services, and software engineering. Other sectors like real estate, manufacturing, pharmaceuticals, biotechnology, telecommunication, shipbuilding, aviation and tourism are showing strong potentials with higher growth rates.

Putting strong faith in Indian economic increasing number of gulf investors have started turning to India for their investment needs. This is proven from the fact that during the last six months, more than US$10 billion worth of investments had been announced by major Islamic finance players in the Gulf. In 2006 India received another US$2 billion in Islamic financing. Table I (see below) lists recent Islamic finance deals India had done so far.


The figures in Table 1 are not inclusive of the funds that came through the foreign institutional investors (FII) channel for investment in the Indian stock market. It has been reported that as many as 40 registered FIIs have their origins in the Middle East, most of which registered recently.

With the rise of Islamic investments, domestic Islamic finance players have started playing aggressively. A few examples are worth mentioning here. Mumbai-based Shariah advisory firm TASIS is in the advanced stages of finalizing an agreement with a UAE-based Shariah advisory firm for bringing a suite of Islamic financing

solutions to Indian corporates. Mumbai-based brokerage firm IDAFA has started venturing outside its stronghold. Now, the company is spreading its wings to other Indian cities such as Hyderabad, Chennai and Bangalore. Bangalore-based Bearys Group, the proud of India’s first Shariah-complaint realty fund, has established an Islamic finance company focused on foreign investment in real estate.

Ahmedabad (Gujarat) based Parsoli Corporation is reported to be in talks with Delhi-based Taurus Mutual fund for launching an Islamic mutual fund. Similarly, a few institutions have come up with offers on Islamic finance education and training. With such opportunities increasing, more and more, students from reputed institutes like Aligarh Muslim University, Indian institute of planning and Management (IIPM), and institute of Chartered Financial Analyst of India (ICFA) are opting for Islamic finance courses.


Stock market opportunity

To assess the extent of Islamic investment opportunities on the stock market, one only has to look at the availability of stocks that conform to the norms stipulated by the Islamic Shariah. When we talk about Shariah-compatible stocks, criteria to bear in mind are: (i) business of the company, (ii) nature of contract under which the invested capital of the enterprise is mobilized, and (iii) Shariah-compatibility of the shares of the company for purposes of trading.

A study of Indian stock market was conducted to find the stocks that comply with Shariah norms. Over 60% market cap of both the stocks exchanges i.e. Bombay Stock Exchange (BSE) and national stock exchange (NSE) were found to be Shariah compliant. Main findings of the study are highlighted in the following tables.

First a few words about the screening criteria. Screening criteria used differ all over the world. This is mainly due to the fact that Shariah boards of different institutions follow different methodologies owing to their adherence to a particular school of thought. Nevertheless, fundamentals remain unchanged across the world.

The criteria used in the present study are as follows.


Business screening

All business activities that are noncompliant with Islamic precepts are excluded. For example, all businesses related to conventional financial services where profits come through Riba-based operations, are prohibited. Also excluded are hotels, where alcohol and pork are served, activities associated with film production and distribution, and the media, which is filled with vulgar entertainment; and sugar factories, where molasses generated in the processes are used for producing potable alcohol. Business related to tobacco, gambling and lottery are also excluded.



Financial screening

Borrowing: should be less than one-third of the Trailing Twelve month Average Market Cap (TTMAMC).

Receivables: should be less than one third of the total income of the company.

Coming to the highlights of the study we find that 405 stocks of NSE are Shariah compliant. This comes to 30% of the total stocks listed on the NSE. On the other hand, 51% of stocks were Shariah compliant out of BSE 500 index. Market capitalization of qualifying stocks is over 60% of the total market cap of the respective stocks.

Sector-wise, computer software tops the list of Shariah complaint stock at NSE, both in terms of the number of stocks and market cap. Drugs and pharmacy comes second in terms of numbers of qualifying stocks with 35 companies fulfilling the Shariah norms. In terms of market cap, they rank fourth. Infrastructure and real estate ranks third both in terms of the number of stocks qualifying (27) and in market cap. Only four companies engaged in telephony business qualified, but their aggregate market cap puts them in second place in terms of market cap. Other sectors that make significant contribution to the qualifying stocks are finished steel, cement and cosmetics.


BSE 500 follows the pattern of the NSE, except that with the former, the number of qualifying stocks from each sector is less than that on the NSE. Consequently, there is slight change in the market capitalization as well. Computer software here also leads with 36 companies finding a place with aggregate market cap of 442 thousand crore. Telephone service providers come second with no change either in their number or market cap. Real estate and infrastructural activates rank third with slightly lower market cap than the NSE. Trading companies which could not make their place among top sectors at NSE, however, come sixth, pushing cement industry to last position among the complaint sectors.

[Dr. Shariq Nisar is CEO of Bearys Amanah Investment. He holds a PhD in economics with a specialization in Islamic finance. He can be contacted via email at]

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