In this article, we will address one of the most common questions, “What to do if the stock I already invested in becomes non-Shariah compliant?” Firstly, we will explain three main reasons why stocks change their compliance status.
Why do stocks turn into non-Shariah compliant stocks?
3 factors can influence the Shariah status of the company:
1- Change in revenue
Usually, companies disclose their revenue composition in their annual reports. If the revenue that comes from non-permissible activities exceeds the 5% threshold, it will change the business sector compliance of the stock.
2- New financial numbers
Generally, every public company discloses its financial figures every quarter. When you use the latest quarterly figures for the company’s interest-bearing debt and assets, a company may not pass the Shariah compliance screening. This could happen because of the latest changes in the financial numbers exceeding the compliance threshold.
3- Changes in Market Cap
If the company’s market cap starts to decline, the company might change into a non-compliant one. Small market cap may be a reason for the company to fail from the financial screening test.
What to do if the stock becomes non-shariah compliant?
If the stock that you hold is reclassified as non-Shariah compliant, then you must liquidate them promptly. The Securities Commission Malaysia (SC) states the following:
“For securities that have lost their Shariah compliant status, investors must liquidate them promptly. Any capital gain arising from the disposal of these Shariah non-compliant securities made at the time of the change-in-Shariah-status announcement can be kept by the investors.
For disposal after the announcement day, any excess capital gain derived from market price higher than the closing price on the announcement day should be donated to charitable bodies.
Nonetheless, investors are allowed to hold their investment in the Shariah non-compliant securities if the market price of the said securities is below the original investment costs. It is also permissible to keep the dividends received during the holding period. Once the total amount of dividends received and the market value of the Shariah non-compliant securities is equal to the original investment costs, investors are advised to dispose of their holdings.”