May 12, 2008	Monday	Jamadi-ul-Awwal 6, 1429

THE Securities and Exchange Commission of Pakistan (SECP) has started work on introducing the Islamic Index at the Karachi Stock Exchange (KSE) that will allow investment in companies compatible with the Islamic principles of doing business.

The SECP move to introduce the Islamic index is designed to attract a new breed of investors---the people who are shy of investing in stocks while considering the ways of doing business of the listed companies not compatible to Islamic principles.

The commission has started looking at around 120 companies for their possible inclusion in the Islamic index.

SECP Chairman Razi ur Rehman told Dawn that companies on the Islamic index would be listed simultaneously with the KSE index. He expected some progress on the new products in the coming weeks.

The companies listed on the Islamic index would not include companies dealing in pork, alcohol, cigarettes, and usury, among other taboos in the Muslim faith.

Today, the level of global Islamic finances have touched around Rs51 trillion and grew last year by 20 per cent.

It was in 1999 that the Dow Jones Islamic Market Indexes were introduced. They were the first benchmarks to represent Islamic-compliant portfolios. At present, the series encompasses more than 70 indexes and remains the most comprehensive family of Islamic market products.

The indexes are maintained based on a stringent and published methodology. An independent Shari’ah supervisory board counsels Dow Jones Indexes on matters related to the compliance of index-eligible companies. The board also includes Hafiz Mohammed Taqi Usmani from Pakistan, vice-president of Darul Uloom, Karachi.

The Dow Jones indexes exclude producers of alcohol and pork-related products, providers of conventional financial (banking, insurance, etc.) and entertainment services (hotels, casinos/gambling, cinema, pornography, music, etc.). Tobacco manufacturers and defence and weapons companies, although not strictly forbidden for investment under Islamic Law, are excluded from the indexes as well.

In addition to the industry screens, stocks are also subjected to a series of financial-ratio screens to remove companies based on debt and interest income levels.

In Pakistan, a somewhat similar formula is likely to be followed while constituting the Islamic Index. But, introduction of the Islamic index is not the sole target of the SECP.

Over the last couple of years, the SECP has pursued some transparency and risk management reforms including new products- related policy to diversify the investment landscape. Some of these reforms have already been implemented; work on others is in progress, while some legal barriers and lack of consensus have slowed down the process of a few.

The commission now wants the Karachi, Islamabad and Lahore stock exchanges to extend their services to Peshawar, the capital of NWFP, with moderate potential for investing in the stock market. Initially, the three bourses will install their screens in Peshawar with the functioning of a few brokerage houses. The Islamabad Stock Exchange has already started some work on the project in collaboration with the Lahore Stock Exchange.

SECP Chairman Razi ur Rahman said the commission had introduced the Book-Building Process in Initial Public Offer (IPO) through amendments in the listing regulations of the KSE. He said the book-building was a capital issuance process used in IPO which aided price and demand discovery. It was a process used for marketing a public offer of equity shares of a company.

It was a mechanism where, during the period for which the book was open, bids were collected from investors at various prices. The offer price was determined after the bid closing date based on the market demand of security.

In the Book-building process since the price of shares was determined on the basis of market demand, as such the chances of over/under pricing were minimised. Further, the issuer company had the option to withdraw from the market if the demand for the security did not exist.

Book-building is an established practice in most developed countries and becoming common in developing countries as well. It is considered an efficient and transparent process of price discovery. It is hoped that the process will encourage new listing.

The SECP has also started installation of the surveillance software (AWACS) equipped with sophisticated tools which will facilitate monitoring on real time basis. With the help of this software, multi-segment and multi exchange monitoring of the market on live basis will be possible. The software is believed to greatly augment the commission’s ability to detect market abuse and assist in bringing in more transparency and fairness in the market.