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PARSOLI ISLAMIC EQUITY INDEX (PIE)

The Parsoli Islamic Equity (PIE) Index was created for people who wish to invest according to Islamic investment guidelines. The index track Shari’ah compliant stocks from listed equities on the Indian Stock Exchanges.

Key Attributes
Shari’ah Law Compliance: The Parsoli Islamic Equity (PIE) Index is stringently monitored to ensure their continued compliance with Shari’ah Law. The independent Shari’ah Board supports index integrity by conducting periodic reviews.

Liquidity: The Parsoli Islamic Equity Index include only actively traded stocks that are easily accessible to investors. It excludes very small and thinly traded stocks in the selection universe for the components of the PIE index. Average rupee turnover is also considered during component selection.

Comprehensive Coverage: The Parsoli Islamic Equity (PIE) Index provides broad coverage across industry sectorial regions and Shari’ah-compliant industries. Diversified exposure is ensured by selecting components from lists of stocks grouped by industry group and by sectors.

Systematic Methodology: The Parsoli Islamic Equity (PIE) Index has been created and maintained according to a consistent, quantitative methodology. Lines of business deemed incompatible with Shari’ah Law are excluded, and financial ratios are screened through carefully defined parameters. Stocks passing the screens are then selected according to an established set of rules.

Methodology Overview
The project involves continuous monitoring and screening of over 5000 listed stocks on Indian bourses. Data used for studies are sourced from Capital Market Publishers India Pvt. Ltd.

Screen
In line with the existing thinking among leading Fiqh scholars around the globe, the screen involves eliminating such companies from that do not meet the criteria listed in the following sections. According to the well-known scholar Mohammad Taqi Usmani, the following conditions must be met before a stock is found acceptable.

  • The main business of the company is not in violation of Shari’ah. Therefore, it is not permissible to purchase or trade in stocks of companies providing financial services on interest, such as conventional banks and insurance companies; companies involved in some other business not approved by the Shari’ah, such as, companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

  • If the main business of the companies is halal, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

  • If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par. The screens used in compilation of the Parsoli Islamic Equity (PIE) Index relate to: (1) primary business activities; and (2) financial ratios. Companies whose primary business is in the following areas are not found to be suitable for Islamic investment purposes and are excluded from the index: alcohol, tobacco, pork and poultry related products, banking, insurance, financial services, gaming, amusement parks, hotels, casinos, cinema, pornography, music, etc. After filtering out companies with unacceptable primary business activities, the remaining stocks are passed through several financial ratio filters based on the criteria set up by Shari’ah scholars in order to remove companies with unacceptable levels of debts or impure interest income.

I. Universe Creation

The first step in constructing the Parsoli Islamic Equity (PIE) Index is to exclude from the index universe any industry group that represents an incompatible line of business. Companies classified in other industry groups also may be excluded if they are deemed to have a material ownership in or revenues from prohibited business activities.

Once companies with unacceptable primary business activities have been eliminated from the universe, the remaining stocks are tested according to three "filters" designed to remove those with unacceptable financial ratios. The three filters are as follows:

  • Exclude companies if Total Debt divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%. (Note: Total Debt = Short-Term Debt + Current Portion of Long-Term Debt + Long-Term Debt)

  • Exclude companies if the sum of Cash and Interest Bearing Securities divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 33%.

  • Exclude companies if Accounts Receivables divided by Trailing 12-Month Average Market Capitalization is greater than or equal to 45%. (Note: Accounts Receivables = Current Receivables + Long-Term Receivables)

  • Exclude companies if impure income (income from non Shari’ah compatible sources) is greater than 10% of Total Revenues

Companies that pass these screens are included in the Parsoli Islamic Equity (PIE) Index investable universe, from which index components are selected.

For more details please refer to our website: http://www.islamicequity.co.in

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