Pakistan Declares Short Selling To be Un-Islamic!

In the recent US financial crisis, limits have been placed on short selling of financial stocks. It appears that Pakistan has actually found it to be a sin. I suppose the next step is for the financial industry to lobby for the application of Shariah law in New York City.

http://www.dawn.com/2008/10/25/top8.htm

Stocks short-selling against Islam: FSC

By Nasir Iqbal
ISLAMABAD, Oct 24: The Federal Shariat Court (FSC) on Friday held ‘short selling’ and ‘blank sale’, a common practice in stock markets, against Islam.

The court suggested to the federal government to amend the Companies Ordinance of 1984 within six months for safeguarding the interests of ordinary shareholders of a company.

A five-member bench, comprising Chief Justice Haziqul Khairi, Justice Dr Fida Muhammad Khan, Justice Salahuddin Mirza, Justice Muhammad Zafar Yasin and Justice Syed Afzal Haider, had taken a suo motu notice to examine different provisions of the Companies Ordinance to determine whether the law violated the injunctions of Islam.

Unrestricted short selling, under Section 223 of the ordinance, is done on a financial instrument that the seller does not own at the time of the sale, but purchases the same later at a lower price to earn profit from an expected decline in the value of the instrument.

Section 223 of the ordinance requires that: “No director, chief executive, managing agent, chief accountant, secretary or auditor of a listed company, and no person who is directly or indirectly the beneficial owner of not less than ten per cent of the listed equity securities of such company, shall practice directly or indirectly short-selling such securities.”

Similarly, under the “Regulations for Short Selling under Ready Market, 2002,” blank sale is a sale by a party that does not own shares or is a sale by a party that has not entered into a contractual borrowing arrangement to meet delivery requirements.

It was essential, the judgment observed, to protect the interest of an individual shareholder and collective interests from the clutches of vested interest of monopoly stockholders and mafia operating in stock markets. Such measures will also inspire confidence and good corporate governance in the business world, the judgment said.

It said that this objective could be attained only when the federal government took steps to eliminate fraudulent malpractices in stock markets.

In exercise of its powers under Article 203-D of the Constitution, the judgment held, the FSC required the federal government through the President to take steps for such amendments within six months as may not be repugnant to the Holy Quran and Sunnah of the Holy Prophet (peace be upon him), envisaging penal provisions in respect of short sale and blank sale.