More investors eye entry into Shariah-based funds

Last Updated: Thu, Dec 20, 2012 04:46 hrs

Ajmal Ahammed is not a familiar name in the venture capital (VC) sector in India. Still, the VC entity where he's operations head, while still in his late 20s, has launched its second fund in a short time.

What makes this fund different is its investors - they want to comply with Islamic law, as detailed in the Shariah. Secura India Real Estate Fund is India's first ever shariah-compliant VC fund, owned by Kozhikode-based Secura Investment Managers.

At a time when Indian private equity or VC firms are struggling to raise funds, this one (it's listed with Sebi, the Securities and Exchange Board of India) has started disbursing a return from its first fund, Secura India Real Estate Fund Scheme-I, while raising Scheme-II with a corpus of Rs 75 crore simultaneously.

IL&FS is trustee of this fund. According to Ahammed, Secura offers a hurdle rate of return of 18 per cent for its investors. The fund will not accept carry (carried interest) if the return goes below 18 per cent, he said.

According to experts, more financial institutions are ready to launch Shariah-compliant funds in India, as investors have shown interest in these. Shariq Nisar, director - research and operations, Taqwaa Advisory and Shariah Investment Solutions (Tasis), said: "We have been approached by at least six financial institutions with plans to launch Shariah-compliant funds in India. We are likely to witness Rs 1,000-crore worth of Shariah-compliant funds by the end of 2013 in India." He refused to disclose details.

Tasis provides guidance and support to individuals and companies having an interest in Islamic finance.

According to sources in the know, Al Barakah Financial Services Ltd, the newly launched Islamic finance company partnered by the Kerala State Industrial Development Corporation, is among those which have shown interest in launching a Shariah-compliant fund.

Interestingly, financial institutions from the Jain and Christian communities have also shown interest in launching Shariah-compliant funds. "Besides doing only equity investments in interest-free instruments, Shariah-compliant funds work in an ethical manner. The funds ensure no investors or investees are exploited. Also, the funds will never invest in companies lacking social commitments - which do business in alcohol, tobacco and interest-lending businesses. That is why non-Muslim investors are also attracted to Shariah-compliant funds," said Nisar.

However, some experts give a thumbs-down to Shariah-compliant VC funds in India. Mahendra Swarup, president of the Indian Private Equity & Venture Capital Association, believes there is no great advantage for Shariah-based VC funds over other typical VC funds in India. "They have the advantage to raise funds from LPs (Limited Partners or investors) from the Middle East. Indian investors, typically HNIs (wealthy individuals) or institutions will not see any opportunity in such funds, which also have limited investment opportunity."

Creating more awareness among investors on Shariah-based products is a concern, say fund managers. Also, according to Nisar, Sebi's new regulation demanding a minimum investment size of Rs 1 crore for VC funds is likely to hit the new Shariah-compliant funds.

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