Nov. 3 (Bloomberg) — Tata Group’s investment unit is seeking to attract about $100 million within three years to India’s first Shariah-compliant fund aimed at global investors, targeting equities in a country that lacks regulations for establishing an Islamic debt market.
The Tata Indian Shariah Equity Fund has $3 million after being set up in June to tap investment mainly from the Middle East, said Mumbai-based Tata Asset Management Ltd., which oversees $5 billion in stocks and bonds, in an e-mailed reply to questions yesterday.
India has no Islamic finance policies, restricting sales of Shariah-compliant bonds in a nation with 157 million Muslims, according to Paris-based BNP Paribas SA and Standard Chartered Plc. The nation’s benchmark Sensex stock index rallied 16.5 percent this year, compared with a 13.6 percent advance for MSCI Inc.’s emerging-market share index. Overseas investment in Indian equities climbed 86 percent this year to a record $26.1 billion as of Nov. 1.
“India remains a great story for most institutional investors globally,” Rohit Chawdhry, who helps manage $350 million of assets at Bahrain Islamic Bank, the Persian Gulf country’s second-largest Shariah-compliant lender, said in an e- mail Nov. 1. “An Indian sukuk would likely see a blow-out response if there is one, given that there is almost nothing in terms of external sovereign issuance from India.”
A 13-member panel of experts headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended in April 2008 that India introduce banking that complies with the religion’s ban on interest to attract capital.
Prime Minister Manmohan Singh said last week during an official visit to Kuala Lumpur that he would ask the central bank to learn more about Islamic finance from Malaysia, the world’s biggest market for sukuk. “There have been, from time to time, demands that we should experiment with Islamic banking,” he said.
The Reserve Bank of India will conduct a study when the need arises, Deputy Governor Subir Gokarn told reporters in Mumbai yesterday. Gokarn said the central bank hasn’t received a formal request from the government on the proposal.
India’s southern state of Kerala’s plan to set up an Islamic investment company to sell India’s first sukuk was blocked by a provincial court in January after a petition was filed against it by Subramanian Swamy, whose Janata Party opposes the national Congress Party-led government, according to a Jan. 6 report on The Hindu newspaper’s website. The Kerala high court heard arguments from Swamy, a former member of the national parliament, against the plan yesterday, Press Trust of India reported.
Several non-banking institutions in India offer financial products that adhere to Muslim tenets, Kuwait Finance House Research Ltd., owned by Kuwait Finance House KSC, said in an Oct. 26 report without specifying the services.
Funds are able to tailor products to comply with Shariah law by excluding investments in businesses involved in tobacco, liquor, pork and gambling that are prohibited. Islamic debt markets require changes in tax rules because they often base payments on the exchange of assets, given the religion’s ban on interest.
The Dow Jones Islamic Market World Index, a global gauge that tracks shares which meet Shariah law and has a market value of $12.7 trillion, rose 7.2 percent this year. The Dow Jones Global Index of stocks worldwide gained 7.8 percent.
Islamic Bond Sales
Global sales of sukuk fell 29 percent to $13.5 billion so far this year, from $19.1 billion in the same period of 2009, according to data compiled by Bloomberg.
Islamic bonds, which use asset returns instead of interest, returned 12.2 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 16.9 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The difference between the average yield for emerging- market sukuk and the London interbank offered rate has narrowed 22 basis points, or 0.22 percentage point, in the fourth quarter to 351 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 21 basis points since Sept. 30 to 392, according to data compiled by Bloomberg. The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 was little changed at 2.46 percent today, prices from Royal Bank of Scotland Group Plc show.
The Tata Select Equity Fund, a similar stock-investment product that’s restricted to domestic investors, returned 19.5 percent annually over the past 14 years, beating the Sensex’s 13 percent gain, according to the statement from Tata Asset. Tata Group is India’s largest industrial company.
Not all Shariah-compliant funds in India received a positive response from the market. HSBC Asset Management (India) Pvt. discontinued its HSBC Amanah India Shariah Fund in November 2009 because it didn’t attract sufficient demand a year after it was introduced, Vikramaditya, chief executive officer of the Indian investment unit of HSBC Holdings Plc who uses only one name, said in an e-mailed response to questions yesterday.
Pakistan, which has the world’s second-biggest Muslim population totaling 175 million, plans to sell 80 billion rupees ($933 million) of sukuk this month and next, the central bank said on Oct. 29.
Hindus account for 80.5 percent of India’s 1.2 billion population, while Muslims make up 13.4 percent, according to the U.S. Central Intelligence Agency’s World Factbook.
Countries with smaller Muslim populations are taking steps to develop Islamic finance. Australia plans to amend laws to ensure products are taxed fairly, the national taxation board said on Oct. 13. South Africa, whose 737,000 Muslims account for 1.5 percent of its population, will forgo charging tax on three Islamic structures to allow home loans that meet Shariah principles, the country’s Treasury department said in August.
Thailand is considering issuing as much as 50 billion baht ($1.7 billion) in 2011, Dheerasak Suwannayos, president of the state-run Islamic Bank of Thailand, said in an interview in Kuala Lumpur on Oct. 25.
“The intentions are there, but you need the political will to do it,” Singapore-based Rafael Martinez Dalmau, head of portfolio management for BNP Paribas, said in an interview in Kuala Lumpur on Oct. 26. “I think each country will have to evolve at its own pace.”
–With assistance from Anurag Joshi and Anil Varma in Mumbai. Editors: Simon Harvey, Garfield Reynolds.
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at [email protected]
To contact the editor responsible for this story: Sandy Hendry at [email protected]