KOLKATA - The relentless rise of the price
of oil over the past two years has hardly been
good news for India's stock markets and economy.
While high oil prices gave the country's stock
investors many sleepless nights, its impact on the
economy was greater, including a spike in
inflation rates and higher costs across
industries.
Lately, however, there seems
to be at least one upside emerging from the
oil-price rallies. A part of the immense wealth
that the Islamic - primarily Persian Gulf -
countries generated from the
years
of escalating oil prices is trickling into India's
stock markets and other investment avenues, such
as the property and commodities markets, for the
first time.
Of course, direct or indirect
investments from Islamic countries are not new to
India. Every year, India sees inflows of billions
of dollars in its stock and real-estate markets,
and even industries, but until recently, much of
it came from the huge population of non-resident
Indians working is such regions as the Persian
Gulf. Islamic investors hardly invested any money
in India.
Now, however, say industry
sources, India (along with China), which has been
ignored for so long, has begun to feature
prominently on the radar screens of Islamic
investors as they look to expand beyond their
traditional markets - mainly the United States and
Britain - and explore emerging investment
destinations.
"Over the last year or so,
there has been a marked increase in investment
inflows from Islamic countries," said Anand
Tandon, founder and managing director of Gryffon
Investment Advisors, a Mumbai-based firm that is
trying to promote Islamic investments in the
country. "And although it is hard to put a number
to the amount of investments that have come in
lately, anecdotal evidence indicates that the
interest of the Islamic investors for investing in
India is significant."
Indeed, thanks to
almost five years of high oil prices, the coffers
of the Gulf countries are overflowing. Although
those countries do not provide much information
about their outward investments and wealth,
according to the estimates of the Washington,
DC-based Institute of International Finance, a
global bankers' group, the total export earnings
of the member countries of the Gulf Cooperation
Council (GCC - Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and the United Arab Emirates) during
2002-06 exceeded US$1.5 trillion, which is more
than double those in the previous five-year
period. About $1 trillion went toward imports. The
remainder of the earnings - some $542 billion -
represented surplus funds that entered global
capital markets and contributed to an increase in
the GCC's foreign-asset holdings.
Again,
no firm numbers are available on how much of that
booty went where, but the Institute of
International Finance estimates that of the
accumulated surplus of $542 billion, about $300
billion must have gone to the US, $100 billion to
Europe, $60 billion to the Middle East and another
$60 billion to Asia, while $22 billion was
invested in other locations.
But the India
story may not be all about numbers. "The point
is," said Talah Sareshwala, "after investing in
Islamic countries in Asia like Malaysia, Indonesia
and Pakistan, Islamic investors are turning to
India because they realize that India may be the
best option for them now." Sareshwala is the
co-founder of Parsoli Corp, an Indian
stock-brokerage firm that adheres to Islamic
investment laws and has also created the country's
first Islamic equity stock index, the Parsoli
Islamic Equity Index.
To understand why
India is emerging as the best option, it is
important to understand the principles or rules
that govern investments of the Islamic community
in general. One of the biggest drawbacks of
Islamic investments is that the principles
(sharia) laid out by the Koran do not allow the
division or separation of profit from risk in any
of a person's commercial dealings.
Muslims
who follow sharia investment principles therefore
cannot invest in ventures that earn from giving or
taking interest, and as an extension of sharia,
neither can they invest in ventures that are
involved in activities that the Koran identifies
as unethical, such as tobacco, fashion,
pornography, alcohol, hotels and entertainment.
"To a large extent, therefore, the
investment options of the sharia investors are
limited compared [with] the options available to
non-Islamic investors," said Dr Shariq Nisar, an
expert on Islamic finance.
Against this
background, India's biggest attraction for them is
that it offers investment opportunities in a wide
variety of sectors. Take the stock markets for
instance. A study undertaken by Gryffon Investment
Advisors on the compliance of stocks of the Bombay
Stock Exchange (BSE 500) reveals that the market
capitalization of sharia-complaint stocks is more
than 58% of the total market capitalization.
And according to a study conducted by
Idafa Investment, the other Indian stock brokerage
that adheres to Islamic investment law, there are
more than 840 sharia-compliant stocks in the
indices of the Bombay (BSE Index) and National
(NSE Index) stock exchanges.
"That is
higher than the sharia-compliant listed stocks in
countries like Malaysia, Pakistan, Indonesia and
the GCC countries put together," said Sareshwala.
"Moreover, it is also a fact that over the past
three years the returns on investments like stocks
and real estate in India have also been higher
than [in] most other Asian economies."
The
shift in the center of gravity for Islamic
investments is actually not a recent phenomenon.
According to Nisar, investors started slowly
moving away from established and wealthy economies
like Europe and North America as far back as just
after the September 11, 2001, terrorist attacks on
the US.
After those attacks "and the
restrictions imposed on money flows from Muslim
states, Islamic investors realized back then that
they must look elsewhere and reduce their
dependence on developed markets. which have been
their favorite destinations for decades", Nisar
said.
Consequently, China and India in
particular, with their red-hot economies, have
emerged as ideal alternatives. The fact that Gulf
investors are now increasingly looking at China as
well is evident from the fact that in the recent
$19 billion initial public offering made by the
Industrial and Commercial Bank of China - the
largest ever - Middle Eastern investors picked up
as much as $2.5 billion worth of shares. Besides,
reports suggest that GCC investors in recent times
have also poured $1 billion in China's property
markets and infrastructure sector.
However, Nisar said that while China,
riding high on its manufacturing capacity, has
recorded tremendous economic growth recently, it
is still viewed with suspicion by Islamic
Investors, mainly because of its political
ideology and economic structure. On the other
hand, India, the world's largest democracy, offers
some very clear advantages.
"With a
population of over 1.3 billion, huge human and
natural resources, and with costs that are at the
very low end of the global average, India
represents economic opportunities on a scale
almost equivalent to China," Nisar said. "But its
legal framework, which protects foreign
investments, is one of the best in the region, and
that's where India scores higher over many Asian
countries."
Nevertheless, entry to India
is not always easy. According to Ashraf Abdul-Haq
Mohamedy of Idafa Investments, while China
welcomes Islamic investors with open arms, India
still treats money from Islamic countries with
suspicion.
"For instance, any money from
the United Arab Emirates and Mauritius is
scrutinized microscopically and seen as terrorist
funds," said Mohamedy, "which is why you will find
Islamic investments these days are mostly taking
other routes, like the Singapore or the United
Kingdom route, or are coming in through joint
ventures with local partners."
That may be
another reason Islamic investment inflow numbers
are hard to track - most so far have been in the
country's real-estate sector, which is largely
unorganized, or in sharia-complaint industrial
ventures via local partners.
However,
that's changing. According to Nisar, over the past
few months Islamic investment of close to $750
million in the stock markets and infrastructure
sector have been announced. During the same period
last year, India saw just $50 million of Islamic
investments in its capital markets. "The recent
announcements, therefore, may be a precursor to
the billions that may be waiting to get in," he
said.
The trend is clear, said Amrit
Pandurangi, director of global audit firm
PricewaterhouseCoopers, in a comment to India's
Economic Times. "Everybody is looking at India as
a good place to invest."
Indrajit
Basu is a Kolkata-based journalist.
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