Core business of the company must be halal and in line with the dictates of Shari'ah. Hence, investment in securities of any company dealing in conventional banking, conventional insurance, alcoholic drinks, tobacco, pork production, arms manufacturing, pornography or related activities is not permissible.
Level two - Types of Share screening
The company should not have issued preference shares that have special financial features leading to the granting of priority to these shares at the time of liquidation or the distribution of profits. It is permitted to grant certain shares features related to procedural or administration matters, in addition to the rights attached to ordinary shares, like voting rights.
Level three - financial ratio screening
I. Debt to Total Assets
Debt to Asset ratio should be less than 40%. Debt, in this case, is classified as any interest bearing debts. Zero coupon bonds and preference shares are, both, by definition, part of debt.
II. Non-compliant Investments to Total Assets
The ratio of non compliant investments to total assets should be less than 33%. Investment in any non-compliant security shall be included for the calculation of this ratio.
III. Illiquid Assets to Total Assets
The ratio of illiquid assets to total assets should be at least 10%. Illiquid Asset means any valuable asset other than cash and receivables. Thus Illiquid Assets include Tangible assets, benefits and rights such as property, plant & equipment, building, furniture & fixture, Intangible Assets, Stock in trade, Raw materials, Stores and spares and all similar assets.
IV. Net Liquid Assets to Share Price
The market price per share should be greater than the net liquid assets per share calculated as: (Total Assets - Illiquid Assets - Total Liabilities) divided by number of shares.
Level four - Screening of non-Halaal generated income
Non-complaint Income to Total revenue Purification of Non-compliant income
The ratio of non compliant income to total revenue should be less than 5%. Total revenue includes Gross revenue plus any other income earned by the company. The obligatory purification figure which should be given in charity, is arrived by following mechanism
Prohibited income = Haram portion in each share
Number of shares of the company
Haram portion in each share x Number of shares owned by ATI = Purification amount