This is the 20th article on the Musharakah contract and I have taken you all to a full circle on the subject and explained everything, except joint stock companies, which I had kept as the last topic since discussing it in the middle would have created confusion in readers’ minds.
Joint stock companies or Sharikat Musahamah are referred to as the modern corporations and the most important contemporary form of capital partnerships.
The capital of a joint stock company is comprised of a certain decided number of small inseparable and equal units, each of which is called a common stock or common share. In a publicly listed joint stock company, the common stock is freely traded at a price which may not necessarily be its original value (par value) and which keeps fluctuating from time to time based on the principle of demand and supply, similar to a commodity.
If the joint stock company is privately held, ie not publicly listed, it does not see active trading of its equity which only changes hands if the existing stakeholders want to exit or its capital is enhanced by welcoming new investors. The equity of a privately held joint stock company is also traded when the entity is the target of an acquisition or merger. At times, a successfully run private joint stock company may opt for public listing through an IPO.
In a publicly listed joint stock company, an investor’s liability is restricted to the nominal aggregate value of the shares that he or she holds. It means if the company’s share of US$1 is traded at US$3.5 in the bourse, the investor’s liability is always capped at US$1 and not at US$3.5. Similarly, if the share value is 80 US cents, the investor’s liability shall be US$1 and not 80 US cents. It means if the company is wound up, the investor may lose part of or the full capital it has invested in it, and shall not be responsible if the company’s liabilities exceed its assets.
As is widely known, a joint stock company is governed through a board of directors which appoints and supervises the experienced senior management staff to run the company to achieve the assigned objectives for the benefit of shareholders and the overall economy. The senior management then recruits other staff which cascades down to fill different hierarchy levels. All of them are considered the employees of the shareholders
In this type of company, the senior management is not allowed to make the company indebted by an amount exceeding its nominal capital. If it does so, it will be at their risk and responsibility and as explained above, the shareholders shall be held liable only up to the nominal value of their shares.
Profits (dividends) in a publicly listed joint stock company are annually distributed and prorated to the shares held by an investor. Some scholars have termed it as the ‘anonymous’ partnership, due to the reason that the ‘partners’ do not know each other.
The only source of communication between the publicly listed company and its investors is through the periodic (mostly quarterly) financial reports and the annually audited accounts. However, such communication with the shareholders is one-sided, except when they meet at the annual general meeting to approve the company results and reappoint the board of directors and the company auditors. Having attended many such events, the proceedings seem predesigned in that they are hush-hush and even if a shareholder wants to criticize the company’s performance, he is not given an adequate opportunity to express his opinion.
Now for the big question: are such kinds of partnerships permissible under Shariah principles? And the answer is yes. Islamic principles do not oppose forming such a partnership since it is established with the shareholders’ mutual consent, provided the objectives of the partnership remain compliant to Shariah principles. This is the reason that such a company cannot issue preference shares where the annual dividend is guaranteed, cannot raise funding through interest-bearing bonds and must refrain from trading in forbidden goods and services.
As per AAOIFI Shariah Standard No 12, the rules of Sharikat Al-Inan apply to this type of partnership except on the issue of the limited liability of the shareholders and the fact that this type of company cannot be unilaterally terminated by one party or a minority of its shareholders.
The articles of association of the company guarantee its continuation for the satisfaction and comfort of third parties in their dealings with the company, unless a majority of the partners (shareholders) have approved to dissolve it. However, if a shareholder wants to exit, he is allowed to sell his shares at the prevalent market price through the bourse.
What if the company wants to increase its capital by selling more shares? It can do so provided the purpose of raising the capital is Shariah compliant. The new shares can either be issued at the original face value, at a premium if the company is faring well or at a discount should the board of directors believe there is a reason to do so.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Discussion on joint stock companies shall continue.