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Friday, 9 December 2011

INDIA: Kerala is seeking regulatory approvals from SEBI for Shariah-compliant NBFC

After its dream of launching the country’s first Islamic bank got shattered by the banking regulator, the Kerala state government now plans to launch a non-banking finance company (NBFC) that will offer Shariah-compliant private equity, venture capital, portfolio management services and mutual funds.

Speaking on the sidelines of a conference organised by the Indo Arab Chamber of Commerce and Industries, T Balakrishnan, additional chief secretary at the government of Kerala, said, the government is seeking regulatory approvals from Securities and Exchange Board of India (Sebi), which has the power to grant such licences for capital market products. “However, we will continue talks with the Reserve Bank of India (RBI) for getting an NBFC licence to offer interest-free lending too,” he added. Under Islamic Shariah-compliant lending, for instance, the NBFC, instead of giving an interest bearing loan to a borrower to acquire an asset, would purchase the asset itself and lease/hire it out to the borrower in return for a rental.

The state government had first floated the idea of establishing the bank under an entity registered as Al-Baraka Financial Services way back in December 2009. The bank was also to have a body of Islamic scholars to advise whether the principles of Shariah were being complied with. However, its plans to launch an Islamic bank did not materialise as the RBI said that the present banking laws do not permit an Islamic bank, which is based on the principles of neither receiving interest nor giving interest.

“Within the existing laws, certain forms of Islamic finance is permitted such as private equity, venture capital, portfolio management services and mutual funds. The company is an NBFC and we are seeking Sebi licence to offer Shariah-compliant investment products,” said Balakrishnan. A number of such Shariah-compliant PMS services are at present being offered in the Indian market. Such schemes do not invest in firms that engage in production or sale of intoxicating substances such as cigarettes or alcohol or restaurants/pubs that serve such inebriating substances.

Speaking about the shareholding of Al Baraka Financial Services, Balakrishnan said that the Kerala government holds 11 per cent stake, while the remaining 89 per cent are from investors of different faiths who see opportunity in such a venture. The state government also plans to invite smaller investors to pick up stake in the NBFC, he added.

The Kerala government’s decision to invest in an Islamic bank was questioned in the Kerala High Court. However, the Kerala High Court, in February 2011, dismissed petitions filed by Janata Party president, Subramaniam Swamy, challenging the Kerala government’s decision to establish India’s first Islamic bank, which will work on the principles of Shariah.

K Rehman Khan, deputy chairman Rajya Sabha said, “A large number of Islamic international funds want to fund infrastructure projects in India but regulatory hurdles are preventing them to do so.” (Financial Chronicle)
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