With the objective of protecting the interest of investors seeking Shariah compliant investments and rationalizing the construction and publication of Shariah compliant Whitelist Equity Indices in the capital market, the Securities and Exchange Commission of Sri Lanka (SEC) has issued new regulatory directions to Market Institutions and Market Intermediaries operating Whitelist Indices.
Shariah compliant equities are equity securities which have been determined to be Shariah compliant. The process of determining whether an equity is Shariah compliant, and therefore appropriate for investment by investors seeking Shariah compliant investments, is done through a Shariah screening methodology of listed securities and consists of a set of qualitative and quantitative components.
Recognizing the growing demand for Shariah Compliant Debt Securities such as Sukuks, both domestically and internationally, the SEC recently took a proactive step by approving an enabling regulatory framework to introduce and list such products on the Colombo Stock Exchange (CSE). The list of Accredited Shariah Scholars and the compliance certification process approved by the SEC provides credibility to the products listed on the CSE.
In order to provide investors assurance that the Whitelist Indices operating in Sri Lanka are in compliance with Principles and Rules of Shariah and that the securities screening methodology is on par with globally recognized screening thresholds, the SEC requested the approved list of Accredited Shariah Scholars, recognized as Supplementary Service Providers under the SEC Act, to develop a Shariah Securities Screening Methodology standard that is comprehensive, comparable to global benchmarks, and relevant to local market conditions. Thereupon, a Standard Shariah Compliant Securities Screening Methodology was developed by the Accredited Shariah Scholars and was approved by the SEC Commission.
Accordingly, the SEC now requires Market Institutions and Market Intermediaries to obtain approval for the Shariah Securities Screening Methodology by any three (3) Shariah Scholars from SEC’s list of Accredited Shariah Scholars, prior to publishing or circulating a Whitelist Equity Index to their clients or the general public. The Shariah Scholars shall review and revise as may be necessary the Shariah Compliant Securities Screening Methodology standards every three years to adapt to the changes in the capital market.
It would be the responsibility of market institutions and market intermediaries who publish Whitelist Indices to inform the investors who wish to be guided by a Whitelist Index for investment purposes that the Whitelist Index is approved by three (3) Shariah Scholars from SEC’s list of Accredited Shariah Scholars.