PIF2153 Chapter 5 Equity Securities PDF

ISLAMIC CAPITAL MARKET CHAPTER 5 EQUITY SECURITIES Learning Outcomes: At the end of the chapter, the student should be able to:  Explain the definition and types of equity securities  Differentiate between Syariah Compliance and Conventional Equities  Explain legal...

ISLAMIC CAPITAL MARKET CHAPTER 5 EQUITY SECURITIES Learning Outcomes: At the end of the chapter, the student should be able to:  Explain the definition and types of equity securities  Differentiate between Syariah Compliance and Conventional Equities  Explain legal and regulatory framework  Explain the process and the benefits of shariah compliant.  Explain trading procedure 5.1 The Definition The investment in the equity capital market allows investors to own part or all of the company. In public market shares, the investor that buys the share can be traded or sold on the stock exchange. The investor can be individual or institutional. The investor can buy the share existing in the market or through new share issues from initial public offerings. According to Xudoyberdiyev, E. E. (2024), equity securities are defined as ownership in a company commonly known as stocks or shares. 5.2 Differences between Syariah Compliance and Conventional Equities Islamic Equities Conventional Equities Primary business and investment No specific restriction for the investment. activities align with Shariah Investment can be done in all sectors. principles. Prohibited investment in sectors such as alcohol, gambling, pork products and conventional financial services involve interest. Emphasizes ethical investing by Ethical considerations vary and are avoiding companies involved in typically determined by individual or activities considered harmful or institutional investor preferences. unethical in Islam. ISLAMIC CAPITAL MARKET Islamic Equities Conventional Equities Earnings must be derived from No specific requirements regarding the permissible (halal) sources, and any source of income, as long as it is legal. income from prohibited activities must be purified through donations to charity. Requires both qualitative and Does not involve such screening unless quantitative screening to ensure aligned with specific ethical or socially compliance with Shariah principles. responsible investment strategies. This includes assessing the company's core activities and financial ratios. Overseen by a Shariah board or Governed by standard corporate committee that ensures all governance structures without the investments comply with Islamic law. necessity for religious oversight. 5.3 Types of Equities Securities 1. Ordinary Shares It is also known as a common share or stock, whereas the undivided ownership by a shareholder in the business of the company. The shareholder can gain the profits of the company and earn dividends only if declared. The shareholders also have the right to vote on the corporate policy and arrangement of the members of the board of directors. The shareholders received dividends after all the payments to the creditors and holders of other securities. 2. Preference Shares This share is also undivided ownership by a shareholder in the business of the company. The preference shareholder receives a contractual dividend and o voting right given by the shareholder. Types of preference shares consist of cumulative, non-cumulative, convertible, redeemable, and exchangeable. ISLAMIC CAPITAL MARKET Type Cumulative Non- Convertible Redeemable Exchangeable Issue cumulative Relationship Undivided Undivided Undivided Undivided Undivided limited limited limited limited limited liability liability liability liability liability ownership ownership ownership ownership ownership May be Convertible Issuer may exchanged for into ordinary buy back, an asset share usually belonging to within a the issuer specified time Dividend A fixed A fixed May have a May have a May have a periodic periodic fixed fixed fixed periodic dividend dividend periodic periodic dividend dividend dividend Non- Due in the Cancel, not Depends Depends Depends payment future, accruing upon upon upon prospectively interest cumulative cumulative cumulative or accruing or non- or non- non- interest cumulative cumulative cumulative status status status Liquidation Possible Possible Possible Possible Possible residual residual residual residual residual claim claim claim claim claim 5.4 Legal and Regulatory Framework The Regulatory Authorities consist: 1. The Securities Commission Malaysia Shariah complaints securities in Malaysia comes under purview of Securities Commission (SC) Act that involves: - Securities Commission Act (SCA) 1993 – 1st march 1993 ISLAMIC CAPITAL MARKET - Capital Market and Services Act (CMSA) 2007. – 28th September 2007 SC is empowered by the SC Act 1993 to regulate and supervise the capital market, and the CMSA 2007 provides the legal framework that the SC enforces. This means that the CMSA 2007 operates under the supervision and enforcement of the SC. CMSA 2007 is the legislation that governs the activities in Malaysia’s capital market, such as securities trading, licensing of market participants, and the conduct of capital market services. SC Act 1993 is the legislation that established SC as the regulatory authority for Malaysia’s capital market. It defines the structure, powers and functions of the SC, giving it the legal authority to supervise, regulate and enforce laws related to the capital market. The Securities Commission should report to the Minister of Finance and the need to be presented in Parliament annually. 2. Bursa Malaysia act as a stock exchange in Malaysia as a platform where equity securities are traded fairly, transparently, efficiently and giving investors’ confidence in the market. They also oversee the companies that are publicly listed on the stock exchange to ensure the companies follow listing requirements such as corporate governance, financial reporting, disclosure and others. 5.5 Benefits of Syariah Compliance Review Process  Exposure to institutional investors whose mandate is only to Shariah-compliant investments such as Islamic Fund Managers, Tabung Haji, Takaful and Retakaful operators.  Opportunities to attract investors from the ‘ethical’ investors  Linkage to Middle East North African (MENA) investors who are looking for Shariah-compliant investment  Linkage to investors from other regions that have been affected by the credit crunch crisis. Many investors look for safer, ethical investments including Shariah-compliant, which are seen as less risky due to their prohibition of interest-based and speculative investments. ISLAMIC CAPITAL MARKET 5.6 Syariah Compliance Review Process Step 1: Extraction of relevant financial information from audited financial report and other material information Step 2: Undertaking Shariah compliance review process to identify contribution from non-permissible activities. Step 3: Compare with Shariah financial benchmark Step 4: Tabulate the result to Shariah Advisory Council (SAC) of Securities Commission Malaysia for final consideration/decision Step 5: Compile the result and issue list of Shariah compliant securities in May and November. 5.7 Trading Procedure 1. Account Opening Investors open Central Depository System (CDS) account with Participating Organisation (PO) or Broker such as BIMB Securities Sdn Bhd, Kenanga Investment Bank Berhad, Maybank Investment Bank Berhad. You also will be engaged with remisier. 2. Engage Remisier To buy or sell specified share, the investor needs to give the order to the remisier by providing the CDS account number for order entry. 3. Placing an Order Your order is key in the Automated Trading system at the PO or key in via the PO’s internet trading system such as Affin Hwang Invest or MTrade for Maybank. 4. Matching Order Order is matched automatically by the system. All the price order matched determined by market forces of supply and demand through process of bods and offers. ISLAMIC CAPITAL MARKET 5. Trade Confirmation The trade confirmation is printed out providing details such as original order number, stock number, price and quantity matched and the counter-party PO. The remisier confirms with the investor or client that he has bought/sold the specified number of shares and the price. In order to avoid confusion, the PO has different coloured slips for ‘sell’ and ‘buy’ orders. 6. Contract Notes The investor will be given contract notes consist of details transaction such as brokerage, stamp duty and clearing fee. 7. Delivery and Settlement (T+2) The delivery and settlement for normal transactions is 2 trading days sfter the transaction date (T) hence the term T+2. No physical delivery of shares under CDS. The CDS use as book entry system to keep track of the movement of shares which arise from trades on Bursa Malaysia. Example, If you buyer of Share Z, your CDS account will credited with Share Z and the seller’s account will show a debit of Share Z. ISLAMIC CAPITAL MARKET References 1. Abdul Rahman, N., Shahrim, Z., & Ramli, F. (2014) Understanding Islamic Capital Market. IBFIM 2. Xudoyberdiyev, E. E. (2024). Securities: General concepts and classification. European International Journal of Multidisciplinary Research, 11(10), 145–148. Retrieved from https://www.eijmr.org/index.php/eijmr/ 3. https://www.sc.com.my/regulation/acts/securities-commission-malaysia-act- 1993?utm_source=chatgpt.com 4. https://www.bursamalaysia.com/trade/trading_resources/equities/trading_proc edures 5.