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Topic 2: Institutions and Market

• Securities Commission
– Islamic capital market
– Shariah Advisory Council
Securities Commission
The SC was established on 1 March 1993 under the Securities
Commission Act (SCA)1993

It is a self-funding statutory body with investigative and enforcement


powers within the following jurisdiction acts:

• Securities Commission Act 1993


• Capital Markets & Services Act 2007
• Securities Industry (Central Depositories Act 1991

It is also entrusted with the responsibility of regulating and


systematically developing the Malaysia's capital markets.

It has direct responsibility in supervising and monitoring the activities


of market institutions and regulating all persons licensed under the
Capital Markets and Services Act 2007.
Shariah Advisory Council of SC
The SAC is a committee established under section 18 of
the Securities Commission Act 1993 (SCA).

The SAC was given the mandate to ensure that the running of
the Islamic capital market (ICM) complies with Shariah
principles.

Its scope of jurisdiction is to advise the SC on all matters


related to the comprehensive development of the ICM, and
functions as a reference centre for ICM-related issues.

The members of the SAC consist of Islamic scholars/jurists and


Islamic finance experts.
SAC Approaches for ICM

In introducing the ICM instruments, the SAC


uses two approaches :

To study the validity of


To formulate and develop
conventional instruments
new financial instruments
used by the local capital
based on Syariah
market from the Syariah
principles.
perspectives.
Stock Screening Process

The objective of
screening is to ensure
A process of stock or security that
determining one purchase or invest
whether stock is does not contain any
Shariah compliant prohibited elements
or not. that make it Shariah
non compliant.
Evaluation Process by SAC

Announcement
Report
Presentation
Evaluation &
Report
Preparation
Data
Collection
1: Data Collection
The SAC receives inputs and
support mainly from the SC
• The SC gathers information on
companies’ activities from various
sources such as annual financial reports,
and published information in magazines,
newspapers and KLSE references.
• Apart from that, the SC also conducted
surveys and interview sessions with
respective companies’ managements.
2: Evaluation & Report Preparation

The evaluation is focused on core / primary


activities of the company with regard to the
goods and services offered.

This is because these primary activities bring


returns for the company and are
subsequently distributed to its shareholders
in the form of profit and dividends.
3: Report Presentation
4. Announcement
General Criteria for Shariah Compliant
Companies
The general criteria in evaluating the status of Shariah-approved
securities are that the companies are not involved in the
following core activities:

• Financial services based on riba (interest)


• Gambling
• Manufacture or sale of non-halal products or related products
• Conventional insurance
• Entertainment activities that are non-permissible according to Shariah
• Manufacture or sale of tobacco-based products or related products
• Stockbroking or share trading in non-Shariah approved securities
• Other activities deemed non-permissible according to Shariah.
Criteria for Mixed Companies to be considered as
Shariah Compliant
for Mixed Companies
• Qualitative method of evaluation
• The SAC will evaluate the society or public perception
towards the companies, (e.g. exemplary image) and
determining the importance and maslahah (benefit) of these
companies to the ummah (nation)
• i.e. The haram element only involve matters such as
‘uruf (custom), ‘umumbalwa (common plight & difficult to
avoid), and fasad al-zaman (the lack of good deeds and
practices at a particular time)

• Quantitative method of evaluation.


• The SAC will calculate the percentage of contribution or ratio
of haram activities to the turnover (TO) of group accounts or
to the revenue/ profit before tax (PBT) of group accounts
Summary of Quantitative Approach
Benchmark Activities

5% Conventional Banking; Conventional insurance,


Liquor and liquor related; pork and pork related,
Non halal food and beverages; Shariah non
Compliant entertainment and other activities
deemed non compliant according to Shariah.

10% Interest income from conventional accounts and


instruments; Tobacco and tobacco related
activities.
20% Rental received from Shariah non Compliant
activities.
25% Hotel and resort operations; Share trading,
stockbroking business and other activities
deemed non compliant according to Shariah
Revised Shariah Screening
Methodology
(SAC, SC)

http://www.sc.com.my/frequently-asked-questions-on-revised-shariah-screening-
methodology/
FAQs On Revised Shariah Screening Methodology

1. Why has the Securities Commission Malaysia’s (SC) Shariah


Advisory Council (SAC) revised the Shariah screening methodology
for companies listed and to be listed on Bursa Malaysia?
2. What are the changes in the Shariah screening
methodology?
RB: 5% Business Activity Benchmark
The 5% Conventional banking;
benchmark
Conventional insurance;
would be
applicable Gambling;
to the
following Liquor and liquor-related activities;
business
activities: Pork and pork-related activities;

Non-halal food and beverages;

Shariah non-compliant entertainment;

Interest income from conventional accounts and instruments;

Tobacco and tobacco-related activities; and other activities


deemed non-compliant according to Shariah.
The contribution of Shariah non-compliant activities to
the overall revenue and profit before tax (PBT) of the
company will be calculated and compared against the
relevant business activity benchmarks.
Financial Ratio Benchmarks
3. What is the primary implication of the revised
screening methodology?

The streamlining of the business activity benchmarks and


the inclusion of the financial ratio benchmarks will
enhance the robustness of the screening methodology for
listed securities and, in turn, is expected to bolster the
competitiveness of the Malaysian Islamic equity market
and Islamic fund management industry.
4. How does the revised methodology affect the
Shariah-compliant status of listed companies?
The Shariah-compliant status of the company may be affected in the
following manner:

(a) Companies with mixed activities which are currently assessed under
the 10% or 25% benchmarks may be affected because their activities are
now assessed under the 5% or 20% benchmarks.

Example:
(b) Companies with high level of conventional debt may be affected
as currently there is no screening based on the total conventional debt
of the company.

Example:
5. When is the effective date?

 The outcome of the revised methodology will be reflected in the List of


Shariah-compliant Securities by the SC’s SAC effective from November
2013
 To ensure a smooth transition under the revised methodology,
investors are given 6 months[1] from the effective date of the List of
Shariah-compliant Securities on 29 November 2013 to dispose of
securities that are excluded from the list, in the event that the
respective market price of such securities exceeds or is equal to the
investment cost
 During the 6 months period, dividends received and capital gain
realised from the disposal of such securities may be retained by
investors, without the need to channel any portion of the dividends and
capital gains to baitulmal and/or charitable bodies

Note: Original Investment Cost (OIC) may include brokerage cost


or other related transaction costs.
Item (RM
million)
Group turnover :
250.00
Group Profit Before Tax (PBT) :
25.00
Non permissible activities:-
i) Turnover (Non-halal food and beverages :
activities) 18.00
ii) Turnover (Hotel & Resort Operations) :
55.00
iii) PBT (Non-halal food and beverages activities) :
1.50
iv) PBT (Hotel & Resort Operations) :
6.00
Balance sheet items:-
i) Total cash placed in conventional accounts/ :
instruments 65.00

ii) Total cash placed in Mudharabah investment :


accounts 76.00

iii) Sukuk Mudharabah :


89.00

iv) Subordinated Bonds :


138.00

Total assets :
368.00
Benchmark Limit
(Imposed by
SAC, SC)
1) GROUP T/OVER (a) (b)

a) % of Non-Halal Food RM18,000,000 7.20% 5%

RM250,000,000
b) % of Hotel & Resort
Operations RM55,000,000 22% 20%
RM250,000,000
2) GROUP PBT

a) % of Non-Halal Food RM1,500,000 6% 5%


RM25,000,000

b) % of Hotel & Resort


Operations RM6,000,000.00 24% 20%
RM25,000,000
(a) Cash Over Total Assets
Total cash placed in conventional
accounts/instruments
Total assets
= RM65,000,000
RM368,000,000
= 17.66%

(b) Debt Over Total Assets


Subordinated
= Bonds
Total assets
= RM138,000,000
RM368,000,000
= 37.50%
Category Ratio Exceed/Not Exceed Status Overall

1) GROUP a) % of Non-Halal Shariah ABC Berhad


T/OVER Food 0.07 non- is a Shariah
(Exceed limit/ compliant non-compliant
benchmark) equity since
b) % of Hotel & Shariah most of the
Resort 0.22 non- calculated
(Exceed limit/ compliant ratios exceed
benchmark) the
2) GROUP a) % of Non-Halal Shariah benchmarks/
PBT Food 0.06 non- limits set by
(Exceed limit/ compliant SAC, SC.
benchmark)
b) % of Hotel & Shariah
Resort 0.24 non-
(Exceed limit/ compliant
benchmark)
3) Financial a) Cash Over 17.66% < 33% Shariah
Ratios Total Assets (Not exceed compliant
benchmark)
b) Debt Over 37.5% > 33% Shariah
Total Assets (Exceed limit/ non-
benchmark) compliant
How to dispose the
securities/stocks, when its status
have changed from Compliant to
Non-Compliant?

Compliant Non-Compliant
(Approved) (Disapproved)
Securities Securities
Timing for Disposal
Disposal DURING the announcement
is made

• Such non-compliant securities must be


liquidated or sold if at the time the
announcement is made, the value of the
securities held exceeds the original investment
cost
• Any capital gains arising from the disposal of
the non-compliant securities made at the time
of the announcement can be kept by the
investors.
Cont.

Disposal AFTER the announcement


is made
• Any excess capital gains made from the
disposal after the announcement day at
a market price that is higher than the
closing price on the announcement day
should be channeled to charities.
• Selling Price after announcement (–)
Closing Price during announcement =
Channeled to charities
What if closing
price during
announcement
LOWER/BELOW
than investment
cost?
Price < Cost
Investors are allowed to hold the non-compliant
securities/stocks within a month of knowing the status
of the securities

Investors also are permissible to keep dividends


received during the holding period until when the total
amount of dividends received and the market value of
the non-compliant securities held equal to the original
investment cost.

• At this stage, they are advised to dispose of their holding


• The investor has a right to retain only the original investment
cost (OIC)
• OIC inclusive brokerage cost and other transaction cost
Cont.

During the holding period, investors are


allowed to subscribe :

• Any issue of new securities by a company whose non-


approved securities are held; and
• Securities of other companies offered by the
company whose non-approved securities are held;
which must be Syariah-approved securities
• (on condition that the investors expedite/speed up
the disposal of the non-approved securities)
Cont.

In summary for non-


approved securities:
The investors have to dispose of any non-approved
securities which they presently hold, within a month of
knowing the status of the securities

Any gain made or dividend received during or


after the disposal of the securities has to be
channeled to charitable bodies.

The investor has a right to only obtain the


original investment cost.
Exercise Based on Old Benchmarks
i) Stock LineClear Bhd ( a shariah compliant share ) was purchased on March 17,
2008 at a price of RM 5.50 per unit ( inclusive of all related charges ).
ii) Later , SAC announced on June 1, 2008 that stock LineClear Bhd was declassified
as a Shariah non compliant share.
iii) The closing price of the stock is as follows:

Transaction Date Closing Price per unit share

June 01, 2008 RM 8.50


June 14,2008 RM 9.00
June 20, 2008 RM 8.30
July 7, 2008 RM 7.50
Question

• Based on the problem given, calculate the


amount of capital gain per unit of stock
LineClear Bhd that can be kept by the investor
based on each transaction date given.
Proposed Answer
If the transaction date And the Closing THEN, the capital gain/loss However , the capital gain
(2008) price is earned is allowed under the Ruling of
SAC

A B C D

March 17 RM 5.50 NA NA

June 01 RM 8.50 RM 3.00 RM 3.00


( RM 8.50- RM 5.50)

June 14 RM 9.00 RM 3.5 RM 3.00


(today’s CP exceeds that CP of the
(RM9.00 – RM5.50) announcement that was RM 8.50)
- Thus the balance of RM0.50 is to be
channeled to approved charitable bodies.

June 20 RM 8.30 RM 2.80 RM 2.80


(today’s CP is less than CP of the
(RM8.30 – RM5.50) announcement date that was RM 8.50)
- Thus investor is allowed to kept the
capital gain.

RM 0.00 (Exceed a month of period


July 7 RM7.50 RM 2.00 after the announcement. Hence only
(RM7.50 – RM 5.50) Original Investment Cost retain, The
RM 2 channeled to charity)

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