Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.

6; January 2012

SHARIAH COMPLIANT STOCKS IN INDIA- A VIABLE AND ETHICAL

INVESTMENT VEHICLE
P. Natarajan1 and M. Dharani2
1
Professor and Supervisor, Department of Commerce, Pondicherry University,
Puducherry-605014, India,
2
Ph.D. Research Scholar, Department of Commerce, Pondicherry University,
Puducherry-605014, India,

Abstract
The Shariah compliant stocks are tradable stocks which are adhere the Shariah Investment
principles. Shariah investment has been growing gradually in India for the last two decades. This work
empirically examined the risk and return behavior of the selected Shariah Compliant Stocks and
nd th
benchmark indices during the period from 2 January 2007 to 29 July 2011. The closing prices of
the selected Shariah Compliant stocks and closing value of the Nifty Shariah index, Nifty index and
BSE Sensex index were collected from the CMIE Prowess, NSE and BSE websites. The study
objectives were examined by employing the t-test, CAPM to estimate beta, and correlation Matrix. The
study reveals that the average returns of the Shariah Compliant Stocks and benchmark indices were
almost similar. In the sameline, average return of the Shariah index and Common index in India
during the study period were also highly resembled each other. With all Shariah principles, the
Shariah index provides same return as common index provide. Hence, the study reveals that the
equity based Shariah Compliant investment is a viable and ethical investment avenue.

Key Words: Shariah Index, Islamic Investment, Risk and Return, Islamic Finance, Nifty Shariah,
Behavior of the Stocks.

1.1. INTRODUCTION
Shariah investment has been growing gradually in India for the last two decades. Nisar
(2007) in his article suggested that a number of Shariah-compliant stocks in India are much higher
than in Muslim countries put together, thus providing larger scope for ethical investors. He stated that
61 per cent Indian companies are Shariah-compliant against 57 per cent in Malaysia, 51 per cent in
Pakistan and a mere 6 per cent in Bahrain. He also said that 335 out of 1000 listed firms at National
Stock Exchange of India and 237 out of 500 listed at Bombay Stock Exchange are Shariah-compliant.
The Shariah compliant stocks are tradable stocks which adhered the Shariah Investment principles.

This paper divided into 8 sections including introduction part. The section 2 provides review of
earlier studies regarding Islamic investment. The part 3, 4 and 5 reveals rationale, objectives and
hypotheses of the present paper respectively. The section 6 and 7 explain the methodology and
empirical results of the study. Finally, summary of the present study is discussed in the last section.

The key Shariah principles are:

 Primary business must be halal (permissible according to Islamic law -- Shariah), therefore
companies engaged in gambling, alcohol, armaments, tobacco, pornography or pork are
excluded,
 The company which has total Debt to Market Value of Equity (12 Month average) greater than
or equal to 33 %, is not consider as a Shariah Compliant stocks.
 The company which has Accounts Receivables / Market value of Equity (12 Month average)
greater than or equal to 49 %, is excluded from the Shariah indices.
 The company which has (Cash + Interest Bearing Securities) / Market value of Equity (12
Month average) greater than or equal to 33%, is not eligible to involve in Shariah Index.

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Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.6; January 2012

 In certain cases, revenues from noncompliant activities are permissible, if they comply with
the following threshold: (Non-Permissible Income other than Interest Income) / Revenue less
than 5%.
Shariah Compliant stocks in India

Status of the Shariah Compliant companies is given in the table 1. According to the table 1,
the 3450 companies’ are traded in the Indian stock market on July 2011.
Table 1: Status of Companies as on July 2011.

Compliant Status No. of No. of Mark Mak

Stocks Co’s in % Cap (Cr) Cap %
Shariah Compliant Stocks 935 27% 38,58,716 57%
Industry Base non Compliant 628 18% 13,83,671 20%
Ratio Based Non Compliant 1887 55% 15,34,050 23%
Total Traded Stocks 3450 100% 67,76,437 100%
Source: Islami Tijara, August 2011. Pp-31.

Out of the 3450 companies, 628 companies based on the business and industry and 1887
companies based on the accounting ratio are not treated as the Shariah Compliant stocks. Only 935
companies among the 3450 are following the Shariah investment principles and considered as the
Shariah Compliant stocks in Indian stock market. In term of percentage, 27 percent of the companies
are considered as the Shariah Compliant stocks with the market capitalization of Rs 38,58,716 Cr. out
of total market capitalization of Rs. 67,76,437 Cr. It shows that around 57 percent of the market
capitalization is belonging to 27 percent of companies in Indian stocks market. This clearly indicates
that Shariah Compliant stocks have been performing well in the stock market and many large
companies are having Shariah Compliant stocks.
Sectors wise Shariah Stocks

The table 2 provides the details of the Shariah Compliant stocks at industry wise. The table
provide complete picture of the Shariah Compliant stocks with the market capitalization at industry
wise.

Table 2: Sectors wise Shariah Compliant Stocks as on July 2011

S.No. Sectors A B C % D E%
1 Automobiles 58 324455.50 8.38 1,71,505.47 10.67
2 Construction & Reality 71 129364.07 3.34 59822.25 3.72
3 Consumer 347 647464.31 16.72 300519.54 18.69
4 Healthcare 175 591776.96 15.28 238484.42 14.83
5 Industrials & Capital Goods 77 269929.87 6.97 124735.51 7.76
6 Information Technology 124 625040.54 16.14 276828.21 17.22
7 Metals & Mining 53 394055.15 10.17 102130.65 6.35
8 Oil & Gs 19 622711.76 16.08 258842.96 16.10
9 Power & Utilities 11 268252.03 6.93 74732.24 4.65
Source: Islami Tijara, August 2011. Pp-31.
Note: A = Number of Companies, B= Market Capitalisation (Rs Cr), C = weight of Market
Capitalisation, D= Free Fload Market Capitalisation (Rs Cr) and E = weight of Free Fload Market
Capitalisation.

There are 58 stocks in Automobiles, 71 in Construction & Reality, 347 in Consumer, 175 in
Health care, 77 in Industrials & Capital Goods, 125 in an Information Technology, 53 in Metals &
Mines, 19 in Oil & Gas and 11 in Power & Utilities industries in Indian stock market. Most of the
companies are belonging to Consumer goods industry and few firms from the Oil & Gas industry.
Informational Technology yields maximum 16.08 percent of the market capitalization. It shows that IT
companies are performing well because 124 Shariah companies under 945 Shariah stocks yielded
16.08 percent of the market capitalization in the market. This indicates that the favorable sign of
Shariah indices to perform well in the future. The behavior of the Stocks and indices were examined in

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Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.6; January 2012

term of risk and return during the study period which depicts the equanimity of Shariah stocks and
Shariah index.

1.2. REVIEW OF EARLIER STUDIES

The research studies on Islamic investment are minimum. Mostly, they may be the carried out in
developed country like UK, USA. The studies such as Abdullah and Bacha (2001) examined the
impact of inclusion and detection of the stocks in the Shariah index on return and trading volume of
the Shariah stocks in Malaysia. They employed event study methodology for daily closing prices and
trading volume of the Shariah stocks during 1997 to 1999. The study found that inclusion of the
stocks in the Shariah index increased the returns and trading volume and exclusion of the stocks
reduced the returns and trading volume of the Shariah stocks in the Malaysia.

Ahamad and Ibrahim (2002) compared the risk and return performance of Kuala Lumpur
Shariah Index (KLSI) with Kuala Lumpur Composite index (KLCI) during the period 1999 to 2002. The
sample period of the study is divided into growing period, decline period and overall period. They have
employed relative return technique, Standard deviation, risk adjusted performance measurement and
two sample t - test to measure the performance of both indices. The study found that KLSI
underperforms during overall period and decline period but it overperform in growing period. Finally
they find that there is no significant difference in performance of both indices during three sample
period.

Hakim and Rashidian (2004a) investigated the risk and return of Dow Jones Islamic Stock
Market Indices (DJIM) from 1999 to 2002. The study found that the three month T bill returns
dominate both the Islamic Index and the Wilshire 5000 stock market index. However, return and risk
of the Islamic index is less than the Wilshire 5000. The study also examined the long run and short
run relationship existing among the variables using unit root test, co integration and causality test. The
study found that T bill returns, Islamic index returns and Wilshire 5000 returns are not co- integrated.

Hakim and Rashidian (2004b) analysis the risk and return of the Dow Jones Islamic World Index,
Dow Jones World index and Dow Jones Sustainability (DJS) World index by using weekly closing
value of the indices and LIBOR, a proxy of the risk-free rate during period January 5, 2000 to August
30, 2004. By employing CAPM, the results of the study reveals that the most popular index is market
competitive but has underperformed in relation to another morally restricted but non-Islamic index.
The study concludes that investors in the Muslim index are not suffering a discernible cost for
complying with the Shariah restriction.

Hussein (2004) evaluated the performance of ethical investment with their unscreened
benchmarks. The study empirically tested whether returns of FTSE Global Islamic Index are
significantly different from their index counterpart (FTSE All- World Index). The sample period has
been divided into two sub-periods, bull period (July 1996 – March 2000) and bear period (April 2000 -
August 2003). Both indices were performed in similar manner during entire sample period. On the
other hand, the Islamic index yields statistically significant positive abnormal returns in the bull market
period, whereas it underperformed in the bear market period. In general, the results show that the
application of ethical screening does not have an adverse effect on the FTSE Global Islamic Index
performance.

Hussein (2005) made an effort to test whether monthly returns of Financial Time Stock
Exchange (FTSE) Global Islamic index and Dow Jone Islamic Market Index are significantly different
from their common index for the period January 1996 to December 2004. The sample period is
divided into bull market and bear market. The study employs Capital Asset pricing model, Risk
adjusted performance measurement, t–test, Wilcoxon Signed test, buy and hold return method and
cumulative return method for examining long run and short run relationship between indices. In short
run period, Islamic indices statistically overperfom during whole period and second bull market period.
In long run, Islamic indices overperfomed during entire period and second bull market period. Finally
the study finds that there is a similar performance between indices.

Hussein and Omran (2005) examine the impact of ethical screening on the performance of the Dow-
Jones Islamic indexes during December 1995 to June 2003 by using monthly closing value of the
DJIWI and its 13 sub indexes. The sample period is divided into two sub periods, January 1996-March

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Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.6; January 2012

2000 and April 2000-July 2003, in order to track the behavior of Islamic indexes under bull and bear
market conditions. By employing CAPM, Sharpe ratio, treynor ratio, the study finds that Islamic
indexes provide positive abnormal returns over the entire period and the bull market period, but they
underperform their index counterparts over the bear market period.

Ahmad (2005) made an attempt to examine the relationship among the daily closing price of the
Bursa Malaysia Shariah index, EMAS index and the daily Malaysian three months T-bills rate during
the period April 1999 to December 2004 in Malaysia. The study employs the unit root test, Johansen-
Juselius cointegration test, Granger Causality test and Vector Error Correction Model (VECM) to find
the relationship among the variables. The results of the study reveal that the Bursa Malaysia Shariah
index, EMAS index and three months T-bills share a long run relationship. In the short run, only
changes in EMAS index tent to raise the value of BMSI and t-bills do not significantly affect both
indices in Malaysia.

Albaity and Ahamad (2008) investigated the performance and relationship between KLSI
and KLCE over the period of April 1999 to December 2005 in Malaysia. The study applied risk
adjusted performance measurement, causality and Johansen co integration test. They found that
there is an insignificant return difference and long run bidirectional relationship between both indices.

Sadegi (2008) investigated the impact of the introduction of Bursa Malaysia Islamic index on
the financial performance and liquidity of the screening securities involved in the Islamic index in
Malaysia. The study employed event study methodology to estimate mean cumulative returns of the
Shariah compliant stocks in the days surrounding the event and also investigate the changes in
liquidity using trade volume and bid ask spread surrounding the event days as liquidity proxies. The
study found that the introduction of the Shariah index has positive and strong impact on the financial
performance of the Shariah compliant stocks.

Dharani and Natarajan (2011a) compared the risk and return of the S&P CNX Nifty Shariah index
and S&P CNX Nifty index at day wise, moth wise and quarter wise during 2nd January 2007 to 31st
December 2010. The study finds that there is a significance return difference between both indices
during third quarter in India. Finally, the study found that Ramalan effect prevailed in the Shariah
index during third quarter of the study period.

Dharani and Natarajan (2011b) empirically examined the risk and return of the Nifty Shariah index
and Nifty index during the period 2nd January 2007 to 31st December 2010. The sample period is
further divided into bull market period and bear market period based on the movement of the both
indices during the study period. The objective of the study is to analyse the performance of the Islamic
index and common index and to test whether any significant difference between both indices in India.
They employ Risk adjusted measurement such as Sharpe index, Treynor Index and Jensen alpha.
The t- test is used to test the mean returns difference between both indices. The study concluded that
Nifty Shariah and Nifty indices in India are performing in a similar manner.

1.3. OBJECTIVES OF THE STUDY

The specific objectives of the study are:

1. To examine the Risk and return of the Shariah Compliant Stocks
2. To estimate the existence of association among the selected Shariah Compliant Stocks
3. To study the relationship between Shariah compliant Stocks and benchmark indices
4. To estimate and compare the Risk and Return performance of the Shariah indices and
Common indices

1.4. HYPOTHESES OF THE STUDY

The following hypotheses were framed based on the objectives of this study.
1H0 = There is no difference between mean returns of the Shariah Compliant Stocks and
mean return of the benchmark index
2H0 = There is no correlation among returns of the Shariah Compliant Stocks
3H0 = The returns of the benchmark indices don’t not influence the behavior of Shariah
Compliant Stocks

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4H0 = There is no difference between mean returns of the Shariah Index and Common
index

1.5. DATA AND METHODOLOGY

The study exclusively based on secondary data. The data set comprises of daily closing
prices of the selected Shariah Compliant stocks and daily closing values of the S&P CNX Nifty
Shariah index, S&P CNX Nifty index and BSE Sensex index. The closing prices of the Shariah
Compliant stocks were collected from the CMIE Prowess data base from 2nd January 2007 to 29th July
2011 for selected 27 Shariah Compliant stocks. The closing value of the Nifty Shariah index and Nifty
index were extracted from the index segment of the National Stock Exchange of India (NSE) during
nd th
the period from 2 January 2007 to 29 July 2011. The closing value of the BSE Sensex index has
been obtained from the index segment of the Bombay Stock Exchange (BSE) website during the
same period.

Direct statistical analysis of financial prices is difficult, because consecutive prices are highly
correlated and the variances of prices increase with time. Prices are not ‘stationary’. Consequently, it
is more convenient to analyse changes in prices.

The return of the financial asset such as stock comprises dividends which are periodic cash
receipt on investment in stock and capital appreciation which is taken place due to the price chances
in the stock market. In this study, daily returns, without any adjustment for dividends, has computed
by using this formula:

Rt = ln(Pt / Pt – 1)* 100

Where:
Rt is the daily return on the individual stock
Pt is the daily price in time period t
Pt-1 is the daily price one period before t

Nifty Shariah, Nifty Shariah and BSE Sensex were used as market benchmark to measure
and estimate market beta of the stocks. The daily market returns are computed as follow:

Rmt = ln(Vt / Vt – 1)* 100

Where:
Rmt is the daily return of market index
Vt is the daily value of index for the period t
Vt-1 is the daily value of index for the period before t

The expected return of the stocks or portfolio has been estimated by using Capital Asset
Pricing Model (CAPM). The empirical version of the Capital Asset Pricing Model (CAPM) was used to
analyse relationship between risk and return of stocks by the following equation:

E(Rt) = α + β Rm + et

Where:
Rt is expected return on the individual stock or portfolio
α is the intercept of the Security Market Line (SML) with the returns (Y-axis)
Rm is the returns of the market represent by Nifty and Nifty Shariah
β is the market risk of the stock or portfolio
et error term

Finally, the two sample t-test was used to find the significant difference between the average return of
the Shariah Stock and Benchmark indices and also between return of the Shariah Index and Common
index

1.6. EMPIRICAL RESULTS

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Behavior of the selected Shariah Compliant stocks

This part of the study narrated the risk and return behavior of the selected Shariah Compliant
stocks. The daily return of the individual Shariah stocks were calculated as natural logarithm of today
price divide by tomorrow price. The risk of a stock has been assumed as the standard deviation of the
particular return series. The average return and standard deviation of the Shariah stocks were
presented in the table 3.
nd th
Table 3: Return Behavior of the Shariah Compliant Stocks 2 January 2007 to 29 July 2011.
Shariah Stocks Mean S.D. Skew Kurt JB Prob
ACC -0.007 2.47 -0.463 7 960 0.000
AMBUJA -0.010 2.60 0.112 6 442 0.000
BHARTI -0.033 3.35 -6.979 147 987429 0.000
BHEL -0.020 3.30 -7.623 164 1232114 0.000
CIPLA 0.018 2.10 -0.356 8 1110 0.000
DRREDDY 0.060 2.11 -0.242 6 571 0.000
GAIL 0.049 2.84 -3.541 59 150603 0.000
HCL -0.024 3.78 -5.749 114 584688 0.000
HERO 0.073 2.27 0.798 11 3076 0.000
HINDALCO -0.005 3.42 -0.190 6 461 0.000
HINDUSTAN 0.036 2.01 -0.036 5 176 0.000
INFOSYS 0.018 2.21 -0.022 7 582 0.000
JINDAL -0.120 8.55 -17.78 387 7002766 0.000
LT 0.015 3.46 -7.024 150 1032379 0.000
MARUTI 0.019 2.40 -0.251 5 263 0.000
NTPC 0.022 2.27 -0.002 8 988 0.000
ONGC -0.105 4.94 -22.09 647 19593249 0.000
RANBAXY 0.027 2.94 -0.468 11 2745 0.000
RELIANCEINDUS -0.039 3.41 -8.530 184 1554443 0.000
RELIANCEINFRA 0.003 4.03 -0.344 8 1153 0.000
SAIL 0.029 3.40 0.122 6 403 0.000
SESAGOA -0.146 9.39 -27.04 846 33542935 0.000
SIEMENS -0.019 3.65 -7.287 152 1053623 0.000
STERLITE -0.110 5.28 -13.50 337 5281109 0.000
SUNPHARMA -0.057 5.30 -24.780 754 26636452 0.000
TCS -0.008 3.26 -8.382 184 1553114 0.000
WIPRO -0.040 2.98 -4.210 74 238886 0.000
SENSEX 0.024 1.94 0.201 9 1978 0.000
NIFTY 0.028 1.93 0.094 11 2690 0.000
NIFTY SHARIAH 0.015 1.88 0.215 11 3118 0.000
Note: Complied form the closing prices which are collected from Prowess and NSE

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Table 4: Correlation matrix of the Shariah Compliant stocks during the Study period

Stocks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
1 1.00
2 0.62 1.00
3 0.38 0.32 1.00
4 0.28 0.29 0.26 1.00
5 0.29 0.28 0.25 0.25 1.00
6 0.22 0.20 0.22 0.16 0.29 1.00
7 0.38 0.32 0.32 0.25 0.32 0.27 1.00
8 0.30 0.31 0.25 0.22 0.29 0.23 0.26 1.00
9 0.27 0.27 0.19 0.19 0.26 0.18 0.25 0.23 1.00
10 0.44 0.40 0.39 0.30 0.35 0.31 0.35 0.36 0.31 1.00
11 0.30 0.28 0.22 0.20 0.34 0.22 0.28 0.24 0.28 0.31 1.00
12 0.29 0.30 0.28 0.30 0.29 0.30 0.29 0.43 0.27 0.39 0.24 1.00
13 0.30 0.18 0.22 0.15 0.19 0.18 0.23 0.18 0.17 0.29 0.16 0.20 1.00
14 0.36 0.32 0.43 0.28 0.26 0.21 0.33 0.27 0.22 0.41 0.25 0.30 0.22 1.00
15 0.40 0.32 0.32 0.25 0.31 0.27 0.33 0.27 0.38 0.42 0.32 0.33 0.18 0.37 1.00
16 0.41 0.39 0.42 0.31 0.38 0.29 0.42 0.33 0.25 0.50 0.37 0.36 0.34 0.39 0.39 1.00
17 0.21 0.17 0.19 0.14 0.15 0.15 0.23 0.18 0.17 0.22 0.17 0.18 0.13 0.22 0.19 0.29 1.00
18 0.28 0.27 0.25 0.21 0.32 0.27 0.27 0.28 0.17 0.36 0.27 0.24 0.16 0.27 0.28 0.31 0.19 1.00
19 0.37 0.37 0.36 0.32 0.32 0.23 0.39 0.32 0.24 0.46 0.24 0.38 0.25 0.40 0.35 0.44 0.22 0.29 1.00
20 0.48 0.43 0.45 0.34 0.35 0.30 0.46 0.34 0.29 0.56 0.33 0.36 0.32 0.50 0.42 0.59 0.28 0.36 0.51 1.00
21 0.16 0.15 0.11 0.11 0.05 0.05 0.11 0.09 0.09 0.17 0.08 0.15 0.13 0.11 0.09 0.13 0.04 0.10 0.14 0.18 1.00
22 0.33 0.28 0.33 0.25 0.23 0.21 0.27 0.27 0.15 0.39 0.22 0.28 0.20 0.39 0.30 0.34 0.18 0.26 0.33 0.43 0.12 1.00
23 0.48 0.44 0.43 0.37 0.35 0.27 0.42 0.36 0.30 0.64 0.30 0.36 0.33 0.48 0.43 0.54 0.26 0.38 0.49 0.60 0.21 0.40 1.00
24 0.25 0.26 0.26 0.22 0.20 0.20 0.28 0.24 0.17 0.37 0.18 0.29 0.20 0.28 0.25 0.30 0.17 0.18 0.32 0.36 0.09 0.23 0.40 1.00
25 0.05 0.09 0.09 0.09 0.17 0.11 0.08 0.09 0.09 0.12 0.11 0.08 0.05 0.12 0.11 0.11 0.07 0.12 0.09 0.11 0.03 0.10 0.13 0.06 1.00
26 0.25 0.25 0.25 0.24 0.24 0.24 0.24 0.33 0.23 0.32 0.20 0.55 0.15 0.29 0.29 0.30 0.15 0.22 0.33 0.29 0.11 0.21 0.28 0.24 0.07 1.00
27 0.30 0.32 0.27 0.29 0.31 0.26 0.28 0.40 0.23 0.41 0.25 0.61 0.15 0.31 0.36 0.35 0.19 0.26 0.34 0.34 0.14 0.28 0.39 0.25 0.12 0.48 1.00
Sources: Complied from the closing price of the Shariah Compliant stocks which are collected from the Prowess, NSE and BSE

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2012

The table 3 depicted that the 15 Shariah Compliant stocks yield negative returns and
12 stocks gain the positive returns during the study period. Among the 27 sample companies,
Sesagoa offers highest lower return and highest standard deviation. Hero Honda motors yield
higher return than other Shariah stocks. The standard deviation of the returns is lower for
Hindustan. The results of the skewness showed that all the sample companies except
Ambuja, Hero Honda and Sail were negatively skewed and also greater than zero. The
negative skewness implies that there is higher probability of earning negative returns The
value of the kurtosis for the sample companies was higher than 3 which shows that the
distribution is leptokurtosis. The JB test is significant for the selected sample companies
which indicate that the return distribution is not normally distributed during the study period.

The sample companies under the study have provided higher standard deviation than
benchmark indices i.e. Sensex, Nifty and Nifty Shariah. The 6 companies were outperformed
and 21 companies were underperformed with respective to the Sensex index. Five companies
yielded higher return and 22 companies have been providing lower return than Nifty index.
While comparing with Nifty Shariah index, the results further revealed that 11 companies
outperformed and 16 Shariah companies underperformed. It clearly discloses that 40% of the
companies were able to yield higher return than the Nifty Shariah Index return in India.

The correlation coefficients among the selected Shariah Compliant stocks are
presented in the table 4. The results of the correlation coefficient shows that the selected
Shariah Compliant stocks are relatively less associated with each other. Further, it indicates
the selected Shariah Stocks are affected less during the crisis period due to its least
correlated nature. The table 5 indicated the least correlated stocks among the selected
Shariah stocks. The correlation between Sun Pharma and SAIL is 0.03. The list of the least
correlated securities was presented in the table 5 and it will be useful to the ethical investors
to select the least correlated stocks to construct the portfolio.

Table 5: Least Correlated stocks among the selected sample Shariah stocks
Port. N. Portfolio Correlation
1 SUNPHARMA and SAIL 0.03
2 SAIL and ONGC 0.04
3 SUNPHARMA and ACC 0.05
4 SAIL and CIPLA 0.05
5 SUNPHARMA and JINDAL 0.05
6 SAIL and DR.REDDY 0.05
7 SUNPHARMA and STERLITE 0.06
8 SUNPHARMA and ONGC 0.07
9 TCS and SUNPHARMA 0.07
10 SUNPHARMA and GAIL 0.08
11 SAIL and HINDUSTAN 0.08
12 SUNPHARMA and INFOSYS 0.08
13 SUNPHARMA and AMBUJA 0.09
14 SUNPHARMA and BHARATI 0.09
15 SUNPHARMA and BHEL 0.09
16 SUNPHARMA and HCL 0.09
17 SAIL and HCL 0.09
18 SUNPHARMA and HERO 0.09
19 SAIL and HERO 0.09
20 SAIL and MARUTI 0.09
21 SUNPHARMA and RELINACE INDUS 0.09
Note: Complied from the closing prices which are collected from Prowess and NSE

Next, the study investigated whether the return of the individual Shariah companies
significantly differ from the benchmark index in India. The two sample t-test employed to find
the same. The results of the two sample t-test are presented in the table 6.

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2012

The results of the two sample t-test revealed that the calculated value of the t-test is
not significant for the all selected sample Shariah Companies and hence supports the null
hypothesis that there is no difference between return of the Shariah compliant stocks and
returns of the benchmark index in India. It reveals that the return of the Shariah Compliant
stocks is equal to the returns of the benchmark index such as Sensex, Nifty and Nifty Shariah.
The ethical investors can select any Shariah stocks to invest in the Indian stock market
because return of the Shariah stocks and return of the benchmark index is an average equal
in Indian context.

Table 6: Shariah Compliant Stocks Return Vs and Benchmark Indices Returns

Shariah Index Sensex Index Nifty Index
Shariah Stocks
t-test Prob t-test Prob t-test Prob
ACC -0.24 0.81 -0.33 0.74 -0.37 0.71
AMBUJA -0.26 0.79 -0.35 0.73 -0.39 0.70
BHARTI -0.42 0.67 -0.49 0.62 -0.53 0.60
BHEL -0.31 0.76 -0.38 0.70 -0.42 0.68
CIPLA 0.03 0.98 -0.07 0.94 -0.12 0.90
DRREDDY 0.53 0.60 0.42 0.67 0.38 0.71
GAIL 0.33 0.74 0.25 0.80 0.21 0.83
HCL -0.31 0.75 -0.38 0.71 -0.41 0.68
HERO 0.66 0.51 0.55 0.58 0.51 0.61
HINDALCO -0.17 0.86 -0.24 0.81 -0.28 0.78
HINDUSTAN 0.25 0.80 0.15 0.88 0.10 0.92
INFOSYS 0.03 0.98 -0.07 0.95 -0.11 0.91
JINDAL -0.52 0.60 -0.55 0.58 -0.56 0.57
LT 0.00 1.00 -0.07 0.94 -0.11 0.91
MARUTI 0.05 0.96 -0.04 0.96 -0.09 0.93
NTPC 0.07 0.94 -0.02 0.98 -0.07 0.94
ONGC -0.76 0.45 -0.81 0.42 -0.84 0.40
RANBAXY 0.11 0.91 0.03 0.98 -0.01 0.99
RELIANCEINDUS -0.47 0.64 -0.53 0.59 -0.57 0.57
RELIANCEINFRA -0.09 0.92 -0.16 0.88 -0.19 0.85
SAIL 0.12 0.91 0.05 0.96 0.01 0.99
SESAGOA -0.57 0.57 -0.60 0.55 -0.61 0.54
SIEMENS -0.28 0.78 -0.35 0.73 -0.38 0.70
STERLITE -0.75 0.45 -0.80 0.42 -0.82 0.41
SUNPHARMA -0.43 0.67 -0.48 0.63 -0.50 0.61
TCS -0.21 0.83 -0.28 0.78 -0.32 0.75
WIPRO -0.53 0.60 -0.60 0.55 -0.64 0.52
Note: Complied from the closing prices which are collected from Prowess and NSE

Then, the researcher were attempted to know the influences of benchmark indices
such as Sensex, Nifty and Nifty Shariah on Shariah Compliant stocks by using CAPM. The
individual Shariah stock return is taken as a dependent variable and benchmark return is
considered as independent variable in this study. The results of the beta coefficients are
presented in the table 7.

The table 7 revealed the results of the regression model between return of the
Shariah Compliant stock and return of the Nifty Shariah index during the study period.

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According to the results, beta value of the 10 Shariah stocks is more one which indicates that
these stocks are more volatile than Shariah index. The beta value of the 12 stocks is nearer
to one and indicates that they are equally volatile like Nifty Shariah index. The beta value of
the 5 Shariah companies is less than 0.5 and discloses that the volatility of these 5
companies is less volatile than Shariah index in India. L&T is more volatile and Dreddy is less
volatile than Nifty Shariah index. The beta values for the all Shariah stocks were highly
significant.

Further, the table 7 described the results of the beta coefficient with respective to
Nifty index. The beta value of the 8 Shariah stocks is more one which indicates that these
stocks are more volatile than Nifty index. The beta value of the 13 stocks is nearer to one
and indicates that the volatility of these 13 Shariah stocks were nearer to volatility of the Nifty
index. The beta values of the 6 Shariah companies were nearer to 0.5 and disclosed that the
volatility is less than Nifty index in India. Jindalco is more volatile and Dr.Reddy is less volatile
than Nifty index. The beta values for the all Shariah stocks are highly significant. Finally, beta
coefficients of the Shariah stocks with Sensex index were measured and results are
presented in the table 7.

Table 7: Beta coefficient of the Shariah Compliant stocks with respect to Benchmark
indices
Shariah Stocks Shariah Index Nifty Index Sensex Index
ACC 0.770 0.757 0.740
AMBUJA 0.766 0.741 0.724
BHARTI 0.901 0.868 0.848
BHEL 0.999 0.979 0.975
CIPLA 0.546 0.531 0.505
DRREDDY 0.454 0.435 0.429
GAIL 0.849 0.827 0.788
HCL 1.022* 0.997 0.989
HERO 0.491 0.484 0.474
HINDALCO 1.246* 1.251* 1.220*
HINDUSTAN 0.486 0.487 0.473
INFOSYS 0.773 0.691 0.720
JINDAL 1.678* 1.650* 1.546
LT 1.172* 1.115* 1.119*
MARUTI 0.723 0.726 0.723
NTPC 0.805 0.823 0.774
ONGC 0.911 0.941 0.895
RANBAXY 0.732 0.727 0.703
RELIANCEINDUS 1.252* 1.187* 1.180*
RELIANCEINFRA 1.600* 1.590* 1.562*
SAIL 1.326* 1.336* 1.281*
SESAGOA 1.033* 1.005* 0.965
SIEMENS 1.018* 0.986 0.971
STERLITE 1.321* 1.273* 1.255*
SUNPHARMA 0.466 0.459 0.426
TCS 0.896 0.828 0.837
WIPRO 0.920 0.870 0.875
Sources: Complied form the closing prices which are collected from Prowess and NSE

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Note: * Indicates the aggressive stocks.

According to the results, beta value of the 7 Shariah stocks is more one. It indicates
that these stocks are more volatile than Sensex index. The beta value of the 15 stocks is
near to one and indicates that the volatility of these 15 Shariah stocks are an average near to
volatile of the Sensex index. The beta value of the 5 Shariah companies is less than 0.5 and
discloses that the volatility of these 5 companies is less volatile than Sensex index in India.
Jindalco is more volatile and Sun Pharma is less volatile than Sensex index. The beta values
for the all Shariah stocks are highly significant. DW test is around 2 and indicate that model is
suitable. The R square is very low for all the stocks and discloses that return of the Shariah
stocks is not depending on only Sensex index but also many other factors.

Behavior of Shariah Index and Common index in India

The descriptive statistics of the Nifty Shariah index, Nifty index and BSE Sensex
index are presented in the table 8. The table 8 tests the following hypothesis.

Table 8: Descriptive Statistics of the Shariah, Nifty and Sensex indices in India
Variables Shariah Sensex Nifty
Mean 0.015 0.024 0.028
Median 0.026 0.089 0.070
Maximum 16.619 15.990 16.334
Minimum -11.919 -11.604 -13.014
Std. Dev. 1.879 1.939 1.926
Skewness 0.215 0.201 0.094
Kurtosis 11.130 9.472 10.559
Jarque-Bera 3117.728 1977.771 2689.771
Probability 0.000 0.000 0.000
Observations 1129.000 1129.000 1129.000
Source: Complied from the closing prices of the Indices which are collected from Prowess
and NSE, BSE

1H0 = Returns of the indices are normally distributed during study period.

2H0 = There is no different between mean returns of the Shariah index and common index
during study period.

The table 8 provides more details on the property of the daily returns of the both
Shariah index and common index in India. The normality test suggests the neither of the
returns is normally distributed. The Jarque- Bera (JB) normality test is significant at 1% level
suggesting that the null hypothesis of the normality of the data should be rejected, and
implying that series are not normally distributed. Both indices are positively skewed that is
distribution has a right tail and non- symmetric. The kurtosis values are more than 3 and
indicate that the distributions of the both indices are leptokurtic or tall tail.

The study involves 1129 daily observations of returns for the period of 2nd January
th
2007 to 29 July 2011. The mean return for the Nifty Shariah daily returns is 0.015 percent
which is lower than 0.024 percent and 0.028 percent of the mean return of Nifty index daily
returns Sensex daily return respectively. The standard deviation or the measure of dispersion
for the Nifty Shariah, Sensex and Nifty is 1.879 percent, 1.939 and 1.926 percent
respectively. This indicates that the returns of the Sensex Nifty are slightly more volatile than
the returns of the Nifty Shariah. The other words, the Nifty Shariah index is less risky than the
Common index in India. The results of the correlation and t test are presented in the table 9
and 10 respectively.

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Table 9: Correlation Matrix among the Indices

Indices Shariah Nifty Sensex
Shariah 1
Nifty 0.98363 1
Sensex 0.980214 0.990123 1
Note: Complied form the closing prices of the Indices which are
collected from Prowess and NSE, BSE

In comparing the returns of the both indices, the mean return of the Nifty Shariah is
slightly lower than the mean returns of the Sensex and Nifty. The correlation between the
returns of the Nifty Shariah and benchmark index is positive and highly correlated. This
indicates that there is a strong linear relationship between returns of the both indices in India.
This relationship is very similar to the result of Ahama and Ibrahim (2002) in Malaysia.

Table 10: Results of the t-test for returns of the Indices

Indices Mean diff t stat p value
Shariah and Nifty 0.013 -0.156 0.876
Shariah and Sensex 0.009 -0.104 0.917
Nifty and Sensex 0.004 0.051 0.959
Note: Complied from the closing prices of the Indices which are collected
from Prowess and NSE, BSE

The study also uses a t-test to test whether there is a difference between the means
of the indices. The result shows that there is no significant difference in mean between the
indices. This is consistent with the results of Ahamad and Ibrahim (2002), Statman (2000),
Hussein and Omran (2005), and Albaity and Ahamad (2008) that the returns of Shariah
investments are not significantly different from those of conventional investment.

1.7. CONCLUSION
The present study empirically analysed the risk and return of the selected Shariah
nd th
Compliant Stocks and benchmark indices during the period from 2 January 2007 to 29 July
2011. The closing prices of the selected Shariah Compliant stocks and closing value of the
Nifty Shariah index, Nifty index and BSE Sensex index were collected from the CMIE
Prowess, NSE and BSE websites. The study employed the t-test, market model and
correlation to examine the study objectives. It found that there is no difference between
Shariah Compliant Stocks and benchmark indices returns and also from among the Shariah
index and common index in India during the study period. Even speculation and gambling
activities were prohibited in Shariah Compliant stocks and Indices, Shariah index provides
same return as common index provide. Hence, the study infers that the equity based Shariah
Compliant investment is the viable and ethical investment avenue to the investors especially
to small and individual ethical investors.

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