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 reasons 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 company discloses its financial ratios every quarter. When you use the latest quarterly ratios for the company’s debt, cash, liquid assets, and accounts receivables, a company may not pass the shariah compliance test. 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 will likely 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 Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) advises Muslim investors should dispose of any non Shariah-compliant securities they currently own within a month of discovering the status of the securities. This one-month period is usually called as the grace period.
Investors must liquidate stocks that have lost their Shariah compliance status as soon as possible. They can keep any capital gains from the sale of these non Shariah-compliant instruments made at the time of the change-in-Shariah-status notification.
Investors should donate any excess capital gain they received from a market price higher than the closing price on the announcement day. If the market price of the Shariah non-compliant securities is less than the initial investment costs; investors can keep their investment. It is also permissible for investors to keep the dividends received during the holding period. Once the entire amount of dividends received and the market value of Shariah non-compliant stocks equals the initial investment costs; investors are advised to sell their stocks.
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