Share & Stocks_Sharia Verdict

8/6/2019 Share & Stocks_Sharia Verdict

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Shari stance on

SHARES

&STOCKS


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http://www.al-inaam.com | http://www.askimam.org 2

In response to recent concerns regarding the difference of opinion in

the Shari permissibility of shares, stocks, companies, the concept of

limited liability and other interrelated transactions, we present this

treatise investigating the realities of these modern business practices

and examining how they fare in terms of the Shariah. We will

commence this discourse by providing an understanding of these

commonly misunderstood financial aspects. Thereafter, we will

proceed to mention various points of contention in regards such

misunderstandings between those who permit shares and those who

prohibit them. In conclusion, we will present the reasons of

impermissibility in light of the proofs presented.


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CHAPTER ONE

UNDERSTANDING COMPANIES, SHARES AND LIMITED LIABILITY

The majority of information in this chapter has been summarized from the book, Islam aur Jadid Maishat wa

Tijarat authored by the honorable Mufti Taqi Uthmani. The views and understanding of the workings of

shares are of those Ulama who deem shares permissible.

Understanding of a Company:In a Shirkah (partnership), every individual is deemed to have his own independent ownership in the business

Depending upon the amount of capital invested by the partner, proportionately he will be an owner of the

business as well as all of its assets and liabilities. The assembly of partners in this type of business is known as

the partnership. However, in a company, the collection of these individuals is established as one juristic

person. This juristic person is then referred to as the company.1 This company performs all the functions of

the business as a separate legal entity and not as an agent for the partners of the company. It bears its own

rights and responsibilities and accepts and bestows ownership in its own individual capacity as opposed to

playing the role of a Wakeel (agent). A more detailed explanation of a juristic person is forthcoming.

The Difference between a Partnership and a Company:

1. Every individual in a partnership is an owner of the assets and liabilities of a business in an undivided 2manner. Each partner acts as an agent for the other partners. Every partner shares the same degree of

liability in that if one partner incurs a debt on behalf of the business, all the partners will be equally liable

for it. On the contrary, a company does not function in this manner. A company is a juristic person andin theeyes of the law, it has its own independent existence apart from the existence of the shareholders.The esteemed Ulama who deem shares permissible are of the view that shareholders own the assets of the

company. Because of this ownership, in the event of dissolution of the company whereby some residual

assets remain, they will share in the assets proportionate to their investment. However, before the

dissolution of the company, shareholders are by law not able to transact in the assets of the company. It is

for this reason that an indebted shareholders personal assets, including his shares in the company, can be

seized to pay off his debts; however, the companys assets proportionate to his share allocation cannot beseized. The laws of the company do not allow outside transaction in any of its assets. Other Ulama disagree

with this supposition of shares as will be discussed further.

2. If an indictment is laid by or against any of the partners of the business, all of the partners will collectivelyassume the role of the plaintiff or defendant. On the contrary, a company is an independent juristic

person hence; it will in its individual right become the plaintiff or defendant in a court of law and not the

shareholders.

3. Outside of the partnership, there is no independent existence contrary to a company which is consideredan independent juristic person.

4. If any partner wishes to annul his partnership and reclaim his capital, he may do so. In a company, ashareholder will not be able to recover his investment. He can only sell his shares as an alternative.

5. In a partnership, the liability is generally not limited to its assets contrary to a company. The partners intheir personal capacities and properties can be sought to fulfill unpaid debts.

Initiation of a Company:

1 Islam aurJadid Maishat wa Tijarat, Mufti Taqi Uthmani, pg. 56, Maktabah Maarif al-Quran.

2 : Each person is owner of a proportionate percent of every individual unit of the business and assets.


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The first step in initiating a company or incorporating an existing business is obtaining approval for the

proposed name of the company. The second step involves drawing up a Memorandum of Association. This

Memorandum includes the name of the company, the classification of the company, its authorized share

capital, and the subscribers (original shareholders of the company). The next step is drawing up the Articles of

Association. These are the regulations and principles that govern the relationship between the shareholders

and directors of the company. The Articles of Association coupled with the Memorandum of Association

makes up the constitution of a company. Once the legal requirements are met for incorporation, the relevant

fees paid and the corresponding paperwork submitted, permission must be granted from the government inorder for the company to come into existence as a separate legal entity commonly referred to as a juristic

person.3 Once the company comes into existence, it will be necessary for it to issue a prospectus before it can

solicit funds through the sale of shares to the public. In this manner the public will be informed regarding the

inner workings, business and finances of the company in order to assess whether they deem it profitable to

invest in it.

Shares of the Company:

Once a specific amount of capital is paid to the company, the company issues the investor a Certificate stating

that the individual has a certain vested portion of funds in the company. This Certificate is what is referred to

as a share.4 According to some, the share represents one unit of the equally divided capital of a company.

For example, if a company maintains $10 million of capital and they issue 10 million shares, the value of each

share will be valued at one dollar. There is a difference of opinion among the Ulama in regards to what a share

actually represents. Does it represent an actual percentage of ownership of the company and its assets or does

it merely represent a percentage of rights to claim proportionate dividends (profit) without ownership? This

issue plays a pivotal role in the permissibility or impermissibility of shares. This topic will be discussed in

great detail in the subsequent chapters, insha-Allah.

An Illustration of the Workings of a Company:

The company is technically a juristic person which enjoys the legal rights and responsibilities of transacting

given to natural persons. However, considering the fact that it is not a natural person that can act and think for

itself, a group of shareholders will be designated as a Board of Directors to represent its interests. The Board isgenerally elected by the shareholders of the company. The Board of Directors will then elect one person as its

head known as the Chief Executive. Once a year, all the shareholders will conduct a meeting to discuss the

various affairs and policies of the company.

Assets:

1. Current Assets: These are such assets that are either current cash or easily turned into cash. These are offour types:

a. Cashb. Accounts Receivablec. Notes Receivabled. Investments2. Fixed Assets: These are such assets that are not easily turned into cash such as property and equipment etc.

3. Non Tangible Assets: These are such non-monetary assets that cannot be perceived by the senses thatdevelop over time with effort. Some types of intangibles are trade secrets, copyrights, patents, the

companys brand name and goodwill. Despite the fact that these assets are not physical in nature where by

some physical value can be attached to them, they can have great value to a company and to its profits.




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Liabilities:

Current Liabilities: debts or obligations of a company due within one year. Essentially, these are bills that are

due to creditors within a relatively short period of time.

Long Term Liabilities: liabilities of a company for leases, loans, bonds and other items not due within one year.

Distribution of Earnings:Once a year, the company will account for its losses, earnings, assets and liabilities. If the company yielded

earnings higher than its liabilities, it will distribute the earnings known as profit. First, a specific percent of

the earnings will be allocated to its Reserve. This is a precautionary measure for future unknown expenses and

liabilities. After allocating this reserve amount, the remainder of the earnings will be termed as dividends

which are distributed to the shareholders. The earning of the company as a whole is termed profit whereas

the earnings of the shareholders are termed dividends.

Limited Companies:

Limited Liability refers to the company bearing a limited or restricted liability to its creditors. The company

will only be legally responsible to pay off any debts or liabilities to the amount of its assets. Additionally, the

shareholders of the company are limited in liability to the extent of their investment. Neither the company nor

its shareholders will be responsible to pay creditors above and beyond these limitations. If the company

suffers any loss, the most that the shareholder will lose is his capital investment. If the company incurs a debt,

the shareholders cannot be sought to fulfill that debt. In the event of bankruptcy, only the assets of the

company can be seized and it cannot be sought for anything beyond that. For this same reason, it is binding

upon such companies to affix words like Limited Company etc to their company name. In this manner, the

creditor can be aware that in the event of a debt, there is a restricted level of liability.


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CHAPTER TWO

POINTS OF CONTENTION

Concept of a Company as a Juristic Person:

The first point of contention lies in the Shari permissibility of a company. There are five types of Shirkah

(partnership) as mentioned in the books of Fiqh, namely, Shirkat al-Mufawadah, Shirkat al-Inan, Shirkat al-Sani

Shirkat al-Wujuh and Mudarabah. Mufti Taqi Uthmani states that some Ulama contend that since a company

doesnt fall within the parameters of any one of these five, it will not be a permissible form of partnership. Hethen disproves this rationale by stating that the categorization of these five types of partnerships from the

Fuqaha (Jurists) does not constitute a binding proof since the Fuqaha never mentioned that if a partnership

doesnt fall within the classification of these types of partnership, it will not be permissible.

We accede to the fact that a company cannot be deemed impermissible simply because it doesnt fall under one

of these five types of partnerships. However, by looking at the individual rudiments of each type of

partnership, general all-encompassing principles and preconditions can be extracted for all partnerships. If the

company adheres to these principles then such a company will be permissible, otherwise not. One such

principle derived by the Fuqaha is that profits from a Shirkah are derived from one of three avenues; ownership

of the assets, work provided upon the assets as aMudarib or by bearing liability of the assets despite not being

the owner. 5

.

) :(

In the case of a shareholder, not a single one of these three factors is found entitling the shareholder a right to

the profits. Thus, how can it be argued that a company falls under the ambit of Shirkah (partnership) when itscorollaries oppose the rudimentary characteristics of partnership?

Another contentious issue involves the Shari recognition of the concept of a juristic person. For the benefit of

those who are not versed in legal and financial terminology, we present hereunder a definition and description

of a juristic person as presented in the books of law:

"We already know that the law regards a human being as a legal subject the natural person. But the law also

provides for the recognition of entities, called juristic persons, which may take the form of a company or close

corporation in the commercial world. (An "entity" can be described as something that exists independently,

that is, apart from the members of which it consists. Note that a partnership is not a juristic person, because it

does not exist as an entity apart from its members.) It is important for you to realize that a juristic person is nota human being. The only similarity between a natural person (human being) and a juristic person is that a

juristic person also has legal capacity and is therefore the bearer of rights and duties. Furthermore, you must

remember that it is not the human beings within, for example, a company, who are the juristic persons; it is the

company itself that is the juristic person. The company, a juristic person, exists as an independent entity. It has

an identity that is separate from its shareholders or members and it owns the assets and incurs the obligations

of the undertaking (the company). If the undertaking (the company) becomes insolvent, only the assets or

5 Badai al-Sanai, Imam Alaudin Abu Bakr Al-Kasani, vol. 5 pg. 82, Dar al-Kutub Deoband.


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property of the undertaking will be seized, and not the assets of any shareholder or member, because the

undertaking is a separate entity.6

Some Ulama are of the opinion that the concept of a juristic person as a viable entity with its own financial

responsibility capable of entering into transactions, taking possession and bestowing ownership is valid and

acceptable in Shariah. However, other Ulama oppose this opinion. In argument in favor of its permissibility, the

esteemed Mufti Taqi Uthmani presents four examples of the concept of a juristic person in the Shariah, namely

Waqf, Bait al-Mal, the residual wealth of an insolvent person and Khultat al-Shuyu.7

The purpose of this exposition is not to delve into the legitimacy of a juristic person as that will entail an in

depth explanation leading to undue length which will draw attention away from the actual matter of

discussion. For the sake of brevity, we will explore the consequences of both scenarios, namely, assuming its

permissibility and its impermissibility. This will be discussed in the final chapter, insha-Allah. At present, we

will suffice on presenting the following passage which indicated to its impermissibility.

)13:3( The Rukn (basic element) of Tasarruf(transacting) is legally acknowledged speech and that can materialize

from slaves. As for considering speech, it is based on the reason that it emanates from a discerning individual

and this (discernment) is not lacking in slaves. The emplacement of Tasarrufis a personal liability capable of

obligating legal claims upon itself and that is not negated due to slavery. The capability of obligating

something in ones liability is from the honorable traits of humanity and a person does not cease being a

human due to slavery.8

This passage clearly elucidates that only human beings have the capability and right conducting transactions

and obligating claims as opposed to the theory allowing abstract entities such as juristic persons to carry out

the same.

Limited Liability:

As previously mentioned, Limited Liability is a concept that limits the amount of accountability for which a

shareholder is accountable. The shareholder cannot be held legally responsible above and beyond his capital

investment. A brief history of limited liability shows that in and around the middle of the 19th century, various

laws such as the Limited Liability Act of 1855 were enacted legalizing the concept in numerous western

countries. This edict was enacted as a means of spurring economic growth in certain limited sectors.

Originally, this concept was considered nefarious due to the inequitable imbalance of risk to gain. In fact, in

countries such as England, a company needed a decree from Parliament before being registered as a Limited

Liability Company. By limiting the shareholders legal responsibility and risk of losing his personal assets, theshareholder will invest more of his capital. More access to this capital will increase the productivity and

profitability of the company. Furthermore, the directors and founders of the company, being practically

untouchable in terms of fulfilling the debts of the creditors, will invest in more precarious, high-profit ventures

without fear of accountability. Charlie Cray states the following, Thus, limited liability refers to the fact that

6 Pg. 61-62, Introduction to the Theory of Law, Unisa study guideILW102-5, Unisa 2001

7 Islam aurJadid Maishat wa Tijarat, Mufti Taqi Uthmani, pgs. 80-81, Maktabah Maarif al-Quran.

8 Mabsoot, Shams al-Din Abu Bakr Muhammad Al-Sarakhsi, vol. 13 pg. 3, Dar al-Fikr.


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outside investors (versus active participants) can pool their capital in new ventures without worrying that

they might lose their entire worth. It allows those with significant wealth to make capital available for

research, innovation and technical progress, without having to oversee the management of their investment on

a daily basis. Thus, the limited liability corporation has been considered a key feature of economic progress. 9

However, this economic progress comes at a price. The question then arises, What is the price? And, Who

bears the burden of this price?

Jacqui Cohen alludes to the answer in her thesis entitled Externalizing of Risk,andstates, A further advantageof limited liability is that it allows companies to externalize the risk involved with modern industrial

enterprise and passes the risk to the creditor.10

Explaining further, Lawrence Mitchell, in Corporate Irresponsibility presents the following, Because it shields

the owners and managers from personal liability, limited liability creates what economists call a moral hazard

an increase in the risk of bad behavior because the costs of that behavior are shifted onto someone else

(creditors). Put more blatantly he states, defining limited liability is simple. no matter how much pain it

causes, the corporation is responsible for paying damages (if at all) only in the amount of assets it hasYou

cant go after the stockholders for any more than theyve invested. You cant go after the managers or

employees except in limited and largely irrelevant cases. No matter what kinds of harms the corporation

causes, and no matter what kinds of judgments a court may levy against it, it must pay only what it has.11

Summing up the unjust disproportion of Limited Liability, Jacqui Cohen reiterates, Accordingly, the most a

member in the company can lose is the amount paid for the shares themselves and thus the value of his/her

investment. As such, creditors who have claims against the company may look only to the corporate assets for

the satisfaction of their claims as creditors and generally cannot proceed against the personal (separate) assets

of the members. This has the effect of capping the investors risk whilst, consequently, their potential for gain is

unlimited.

The concept of Limited Liability where the risk of the investment is placed on the credulous creditor and the

potential of profit rests as the sole privilege of the investor glaringly contrasts the ethical economic principleslaid down by the Shariah which demand equity and justice.

Shariah, not to mention rudimentary ethics, demand that the opportunity for gain be coupled with the risk of

liability.

:

Aisha states, Rasulullah decreed that proceeds are based on liability12

The circumstance of this judgment was that one person sold a slave to another person who assigned the slaveto work in the market and reaped proceeds from his labor. Shortly thereafter, the purchaser discovered defects

in the slave which led him to return the slave and demand a refund. The seller insisted that in exchange of the

refund, the purchaser should return the slave as well as the proceeds earned through his work. The two

9 Limited Liability and Other Limits on Corporate Liability, A draft discussion paper. Charlie Cray, www.corporatepolicy.org/topics/LL.htm

10 Veil Piercing a necessary evil? A critical study on the doctrines of limited liability and piercing the corporate veil. Jacqui Cohen, September 2006, Pg 13.

11Limited Liability and Other Limits on Corporate Liability, A draft discussion paper. Charlie Cray, www.corporatepolicy.org/topics/LL.htm

12 Sunan Tirmidhi, Imam Muhammad bin Easa Al-Tirmidhi, vol. 2 pg. 233, H.M. Said


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presented their case to Rasulullah who decreed that the purchaser of the slave was entitled tokeep the proceeds because the proceeds were earned in a period where he was liable for the slave. Had the

slave passed away during that period, the purchaser would have been liable for the loss thus; he was entitled

to the earnings. Decreeing in favor of the seller would have sanctioned him receiving profit and proceeds

without being liable for any loss. That would be unfair and unethical, thus Rasulullah prohibited it. This concept is more clearly presented in another Hadith wherein Rasulullah stated, There is no profit without liability.13

:

From theseAhadith, it becomes clear that the moral philosophy of Islamic Finance and Commerce differs from

the self-centered dog-eat-dog business policies of the modern era. The notion of Limited Liability pierces the

heart of ethical commerce as alluded to by even non-Muslim western critics such as the following editorial of

The Times of London of 25 May 1824. It declared: Nothing can be so unjust as for a few persons bounding in

wealth to offer a portion of their excess for the formation of a company, to play with that excess to lend the

importance of their whole name and credit to the society and then should the funds prove insufficient to

answer all demands, to retire into the security of their unhazard fortune, and leave the bait to be devoured by

the poor deceived fish.14

Furthermore, Allah Taala states,

O you who believe, do not devour each others property unjustly, save through trade conducted with your

mutual satisfaction.(4:29)

In the case of limited liability companies, how can it be perceived that the creditor would be content and

complacent to lose his commodities without being recompensed for them? The company and the shareholdersprotected by the law of the state, merely abdicate the responsibility to pay their debts after enjoying the

profitability and productivity of the commodities!

The Honorable Mufti Taqi Uthmani holds the view that this concept could be permissible according to the

Shariah and in Islam aur Jadid Maishat wa Tijarat, he presents a Shari example for it. The example presented is

what in Fiqh is termed as Al-Abd al-Madhoon, namely, a slave who is permitted to work. In such a scenario, a

master permits his slave to trade and conduct business. The master will stipulate a specific fee upon the slave

for this liberty of trade. This creates an opportunity for the slave to work his way to freedom. When he fulfills

a predetermined amount stipulated by the master, the slave purchases his freedom. If during the course of

trade he becomes indebted, he can be sold in lieu of the debt. The master will not be liable for the debt of the

slave. Thus, according to the Honorable Mufti Taqi Uthmani, a similar case applies to the shareholders of a

company. The shareholders are similar to the slave owner and the company is like the slave. If the company

becomes indebted, the shareholders will not be held liable. Despite the fact that outwardly this seems like a

13 Sunan Abu Dawud, Imam Sulayman bin Ashath, vol.2 pg. 139, H.M. Said.

14 As quoted in An Economic Analysis of Limited Liability in Corporation Law, Paul Halpern; Michael Trebilcock; Stuart Turnbull, The University of

Toronto Law Journal, Vol. 30, No. 2. (Spring, 1980), pg. 117.


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clear example of Limited Liability to a layman, in reality the two examples have a great deal of dissimilarity.

The Fuqaha (Jurists) mention that partnership is based on Wakalah (agency).15

) :(

Since the company and its directors, according to those who permit shares, act as agents on behalf of the

shareholders, the transactions in reality take place on behalf of all the shareholders as if they themselves

conduct the business deals. A company bearing a debt in reality symbolizes the shareholders bearing that debt

Hence, the shareholders are responsible to uphold the conditions of all the contracts and liable for any

deficiency. On the contrary, the slave is not considered as an agent for his master. The slave possesses his own

Milk-al-Yadd, (authority of possession). His business dealings are restricted to himself for himself, excluding

the fact that he happens to be the property of the master and obliged to pay his monthly dues. As such, the

slaves transactions are not considered as the masters transaction since he is not conducting business on behalf

of the master. If the slave incurs a debt, the debt will be restricted to him and would not transcend to the

master. As a means of protecting the general public from uncollected debts of working slaves, the Shariahpermitted selling the slave as a means of fulfilling the debt. Since the slave is not considered as an agent of the

master, the creditors are not allowed to demand the master to fulfill the outstanding debts. However, they can

force him to sell the slave and collect their debts from the sale. A further distinction between the slave and the

company is that in the event that the sale price of the slave fails to cover the debt of the creditors, they still

maintain the right to pursue the slave for the remainder of the debt after his freedom.16

) :(

In the case of a company, there is no such recourse for creditors after the company has claimed insolvency.

In conclusion, the Shariah has stipulated one particular set of rules for a slave permitted to work and a differen

set of rules for partnerships. It is not proper to analogize one to the other especially in light of clear Ayat and

Ahadith as mentioned above.

Ownership of Shares:

Before delving into the discussion of the permissibility or impermissibility of shares, it is imperative to get aproper understanding and denotation of shares. The crux of the difference of opinion regarding the legitimacy

of shares pivots around what the word share denotes. Ulama who permit trade in stocks and shares perceive

shares representing one connotation whereas the Ulama who prohibit it argue that shares represent a different

connotation. We will commence by presenting the understanding of shares by those who deem it permissible.


16 Radd al-Muhtar, Allamah Ibn Abideen Al-Shami, vol. 3 pg. 170 ,H.M. Saeed)


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Thereafter we will present the view of the Ulama who disagree coupled with proofs and explanations of the

experts of the financial and legal sectors.

The Understanding of the Ulama who Permit Shares:

The Ulama who surmise that shares are permissible consider them to represent definitive ownership of the

assets of the company proportionate to their investment. Respected Mawlana Mujahid al-Islam Qasimi states

in his compilation, Jadid Fiqhi Mabahith, the Ulama are unanimous that a purchased share from a company

represents the ownership of the shareholder. It is for this reason that when everyone mutually agrees todissolve the company, the shareholders will receive a proportionate percentage of the assets. Respected

Mawlana then presents approximately 25 30 names of other Ulama who agreed upon this understanding of

shares.17

Honorable Mufti Taqi Uthmani states These shares in reality represent a proportionate percentage of the

shareholders ownership in the assets of a company.18

After being asked about shares, esteemed Mawlana Ashraf Ali Thanwi by and large permitted shares with the

condition that no Haram transactions take place. This was based on the perception that the shareholder owned

the assets of the company in proportion to his investment. The following is the question and its reply:

Q: It has become rife that many people establish partnerships and start companies. Thereafter they conduct

business and sell a majority of the shares. Those who purchase these shares receive a proportionate profit from

the earnings of the company. At times it will be more and at times it will be less. Similarly, if the company

bears a loss, then the shareholders will be responsible for a proportionate amount of loss in their respective

shares. Will purchasing such shares be permissible or not? (Note: the answer of Mawlana Ashraf Ali Thanwi is

given based upon the understanding of shares given by the questioner. In reality, shares do not function

exactly in this manner.)

A: Trade companies conduct business in various fields (some permissible and others not) and are at times

involved in interest-bearing transactions. Considering the fact that each shareholder is an owner of his own

share (of the company) and that the directors are the agents of the shareholders in the transactions wherebythe acts of the directors are attributed to the shareholders according to the Shariah, if any impermissible

transactions take place, and they definitely do, to such an extent that they even receive interest from Muslims,

then this will be considered as if the shareholders themselves conducted it. Therefore, it will not be permissible

to become a partner of such a company(the understood meaning of this Fatwa based upon the previous

Fatwa on the same page is that if Haram transactions like interest-bearing loans dont take place, it will be

permissible.)19

In establishing the ownership of the assets by the shareholders, the majority of the Ulama present the following

two substantiations:20

1. The shareholder receives an equal portion of the profits as well as suffers from the loss of value in hisshare as opposed to bonds where he is guaranteed to receive his original investment as well as a certainfixed percentage of interest regardless of whether the company is profitable or not.

17 Jadid Fiqhi Mabahith, Mawlana Mujahid al-Islam Qasimi, vol. 16 pgs. 34-35, Idarat al-Quran wa Al-Uloom al-Islamiyah.

18 Fiqhi Maqalat, Mufti Taqi Uthmani, vol. 1 pg. 142, Memon Islamic Publishers.

19 Imdad al-Fatawa, Mawlana Ashraf Ali Thanwi, vol. 3 pg. 130, Dar al-Uloom Karachi.

20 Jadid Fiqhi Mabahith, Mawlana Mujahid al-Islam Qasimi, vol. 16 pg. 20, Idarat al-Quran wa Al-Uloom al-Islamiyah.


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2. The shareholder is entitled to receive the residual assets of the company after dissolution in proportionto his shares as opposed to receiving the exact value of the share certificate as in the case with bonds

and other loans.

In the above-mentioned substantiations, it is clearly visible that these Ulama are basing their understanding of

shares in comparison to bonds21, bills, notes and similar types of loans. Bonds generally refer to a long-term

loan to the company where the company guarantees the return of the principle amount of the bond certificate

coupled with a specific amount of interest upon maturity. Regarding these types of loans, it is unanimouslyagreed that the owners of such certificates do not own any assets of the company and that any surplus on his

original investment will be interest (Riba). Furthermore, in the event of bankruptcy, owners of bonds and bills

etc are entitled to receive the full amount mentioned on the bond certificate as opposed to shares certificates.

The Ulama who permit shares compare the characteristics of shares to bonds and other loans and infer that

shares must denote ownership of the assets since there is such a distinct difference with the loans. However,

merely having the right to receive residual assets after dissolution and the lack of assurance of profit on the

investment does not necessarily denote ownership of assets. Generally, when a person owns partial assets of a

company, the above two characteristics will be found. However, ownership of assets is not the sole cause of

this effect. There could be many other causes producing the same effect. A logical example of this principle is

that a person who leaps from a high-rise building will generally perish; on the other hand, it is not necessary

that every deceased person must have jumped from a building. There are many other causes that could have

led to his demise. Similarly in the case of ownership of assets, there are two effects which are not necessary

corollaries of the existence of ownership in the assets. Considering the fact that a company is a juristic person

as explained in the previous chapters, neither it nor the assets belongs to any shareholder. The assets belong to

this new juristic person. Thus, when the company is dissolved, a sort of metaphysical and theoretical death

of the company takes place. In such an instance the company can no longer remain the owner of its own assets

thus its residual assets must be wound up. The laws of the state suppose that who better to receive these assets

than the shareholders; therefore they allocate the assets to them. Hence, receiving these assets does not

necessarily substantiate ownership of the assets prior to the death of the company. A similitude of a

deceased relative and an heir can also be presented for better illustration. Inheritance of the assets of a relative

does not necessitate that the heirs are the owners of the assets prior to the death of the deceased.Furthermore, we fail to see how proportionately sharing in the profits and loss of a company necessitates

ownership of the assets. These two conditions can easily be allocated by the company for non-owners as well

They merely have to state that in return for purchasing the share certificate, a person will receive the right to

claim a proportionate profit in the event of gain. Similarly, they add the disclaimer that in the event of loss, the

value of the certificate will also lose its worth. Such conditions in no way prove ownership of the assets.

Understanding of the Ulama who Prohibit Shares Coupled with Juridical Corroboration:

If a person holds a share in a company, it does not imply that he owns the assets of the company.

Linguistically, one would assume that the word share denotes a portion or a percentage of ownership in the

assets of a company. However, this is not the case. The definition of the word share has undergone manychanges in history resulting in a departure from its literal meaning to more of a figurative meaning. The

following is a passage of The Conceptual Foundations of Modern Company Law describing thismetamorphosis of meaning:

21 Bonds: Bonds, bills and notes are various types of loans to companies that vary from long-term 10 year loans to mid-term loans between 1-10 years and

short-term loans less than one year.


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Throughout the eighteenth and early nineteenth centuries, the term 'share' was "used in its natural sense,

namely as an appreciable part of a whole undertaking".22 To possess a share in a joint stock company implied

ownership of a share of the totality of the company's assets. "Shareholders", says D. G. Rice, "were regarded as

owners in equity of the company's property."'23 It followed that, as property, shares were directly related to

and co-extensive with the assets of the company and that their legal nature depended on the nature of those

assets. Shares could be either real or personal estate depending on whether or not the company owned land

When the courts had to decide whether shares (in both incorporated and unincorporated companies) were

realty and, therefore, within the Statutes of Mortmain or Frauds, they uniformly held that the matter turned onthe nature of the company's asset. 24 In the early 1830s it was still consistently being held that company shares

were realty if "the corporation were seized of real estate".25 Crucially, while the share was legally perceived as

an equitable interest in the company's assets, shareholders the equitable co-owners of those assets - were

necessarily closely identified with their companies. They could not be 'completely separate'. From the 1830s,

however, the legal nature of shares began to be re-conceptualised, and by the mid-nineteenth century the close

link between shares and the assets of companies had been severed. The crucial case, Bligh v Brent, was decided

in 1837 and concerned shares in an incorporated waterworks company. The issue before the court was whether

the company's shares were realty and within Mortmain. In accordance with the prevailing view, counse

argued that the nature of the company's shares as property depended on the nature of the company's assets. In

every joint stock company, he asserted, "the shareholder has an estate of the same nature as the company"

Despite the overwhelming weight of the authorities, the court rejected this view. They argued that the case

turned on "the nature of the interest which each shareholder is to have", and in their view shareholders in

incorporated joint stock companies had interests only in the profits of companies and no interest whatsoever in

their assets. The shares were personalty, irrespective of the nature of the company's property. 26Bligh v Bren

was the turning point, although uncertainties remained for some years after, particularly in relation to the

nature of shares in unincorporated companies and in companies whose business activities were closely

connected to land. By the mid 1850s, however, these had largely disappeared. In Watson v Spratley, decided in

1854, the court had to determine the nature of the shares of an unincorporated mining company. It held that

the matter turned on "the essential nature and quality of a share in a joint stock company", and declared its

shares to be interests only in profits.27 Henceforth, shareholders, even in unincorporated joint stock companies

had no direct interest in the physical assets of their companies. Shares were personalty irrespective not only ofthe nature of the company's assets but also of its legal status. They were an entirely separate form of property:

legal objects in their own right. They had been freed from their direct link to the property of joint stock

companies. By 1861 Sir John Romilly was asserting that "shares in joint stock companies . . . are, in fact, in the

nature of property.28 Critically, as the share became property in its own right, a legal space emerged between

incorporated and unincorporated joint stock companies -owners of the assets - and their shareholders - owners

of the shares. The recognition of the share as a new form of property was not, however, without problems. The

exact legal nature of this new form of property eluded and continues to elude company lawyers. As L. C. B

Gower openly admits, the question "What . . . is the exact juridical nature of the share?" is more easily asked

22 W. R. Scott, The Constitution and Finance of English and Irish Joint Stock Companies to 1720

(3 Vols. 1909-12) Vol. I, p. 45.

23 D. G. Rice, "The Legal Nature of the Share" (1955, unpublished dissertation) p. 2.

24 See Howse v Chapman (1799) 4 Ves. 542; Buckridge v Ingram (1795) 2 Ves. Jun 652.

25 Sir John Leach in Exparte The Vauxhall Bridge Co. (1821) 1 Glyn. & Jac. 101.

26 Supra, n. 12.

27 10 Ex. 222.

28 Poole v Middleton 29 Beav. 646.


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than answered.29 Lawyers know what a share is not - a direct interest in the company's assets - but not what it

is. 30

From the above passage, we come to understand that by 1861 the word share came to denote something other

than a realistic representation of the assets of a company. However, no one as yet had placed some definition

to a share. It was only in 1901 that the latest and current denotation of share was defined. In Borland's

Trustee v Steel Farwell J described a share in the following terms:

A share is the measure of a shareholder in the company measured by a sum of money, for the purposes ofliability in the first place, and of interest in the second, but also consisting of a series of mutual covenants

entered into by all the shareholders inter se. The contract contained in the articles is one of the original

incidents of the share. A share is not a sum of money... but is an interest measured by a sum of money and

made up of the various rights contained in the contract.

Ellis Faran explains this statement, This description makes it clear that a shareholder is an investor: he pays a

sum of money in the hope of earning of return. The shareholder's financial interest is in the company itself and

it does not amount to a direct interest in the company's assets. These assets belong to the company which is a

separate legal person. Thus inMacaura v Northern Assurance Co Ltd it was held that a shareholder did not have

an insurable interest in the company's property. 31

Furthermore, supporting this definition of shares another Judge in 1948, Evershed L J, passed the following

ruling in Short v Treasury Commrs [1948]:

"Shareholders are not, in the eyes of the law, part owners of the undertaking (company). The undertaking is

something different from the totality of the shareholdings."

To illustrate that this very denotation is still used today, the following excerpts of a 2003 appellation in the

House of Lords will prove beneficial. Lord Millet in Opinions of the Lords of Appeal for Judgment in the

Cause - Her Majesty's Commissioners of Inland Revenue v. Laird Group PLC stated: The juridical nature of a share

is not easy to describe. It is not a share in the company's undertaking, for the company owns its property

beneficially and not in trust for its members: "shareholders are not, in the eye of the law, part owners of the

undertaking" (see (Short v Treasury Commissioners [1948] 1 KB 116, 122, CA). It is classified as a chose in action,

but this merely tells us that it is a species of intangible personal property. It is customary to describe it as "abundle of rights and liabilities", and this is probably the nearest that one can get to its character, provided that

it is appreciated that it is more than a bundle of contractual rights. He further describes what these rights

entail by stating, The rights of the shareholders in a company are set out in its articles of association. In the

case of ordinary shareholders they are normally those described by Lord Wilberforce in Joiner at p 1706-7

"rights to received dividends, if declared, rights to vote, rights in a liquidation to receive a share of surplus

assets after discharge of liabilities."

Moreover, as recent as 2006, the same denotation of a share was presented in Cambridge Gas Transpor

Corporation v. The Official Committee of Unsecured Creditors . Lord Hoffmann stated, Their Lordships consider

that this argument is based upon a misunderstanding of the nature of shares in a company. In the classic

definition of Farwell J (Borland's Trustee v Steel Brothers [1901] 1 Ch 279, 288), a share is the interest of ashareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of

interest in the second. In the case of fully paid shares, the question of liability does not of course arise. So a

29 L. C. B. Gower, op. cit., p. 397.

30 Paddy Ireland; Ian Grigg-Spall; Dave Kelly, The Conceptual Foundations of Modern Company Law as in the Journal of Law and Society, Vol. 14, No. 1,

Critical Legal Studies. (Spring, 1987), pp. 149-165.

31 Company Law and Corporate Finance, Ellis Ferran, OUP 1999, pg. 315


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share is the measure of the shareholders interest in the company: a bundle of rights against the company and

the other shareholders. As against the outside world, that bundle of rights is an item of property, a chose in

action. But as between the shareholder and the company itself, the shareholders rights may be varied or

extinguished by the mechanisms provided by the articles of association or the Companies Act.

The following is another citation clearly defining who the actual owner of the assets is and what the

shareholders possess:

"Important consequences of the fact that a company is a separate entity existing apart from its members are thefollowing:

(a) The company estate is assessed apart from the estates of individual members; consequently the debts of the

company are the company s debts and not those of its members. The sequestration of the estates of members

will not lead to liquidation of the company and, conversely, the liquidation of the company will not necessarily

entail the sequestration of estates of the members. The position is different with a partnership which does not

exist as a separate person: the estates of the partners and that of the partnership are sequestrated

simultaneously.

(b) The profits of the company belong not to the members, but to itself. Only after the company has declared a

dividend, may the members, in accordance with their rights, as defined in the articles of the company, claim

that dividend.

(c) The assets of the company are its exclusive property and the members have no proportionate proprietary

rights therein. Only on liquidation of the company are members entitled to share in a division of the assets of

the company." 32

From the above judicial verdicts and legal texts we come to know that a share has, in our era, come to denote a

set of rights rather than referring to partial ownership of the assets as previously understood. These rights

generally entail voting rights during the Annual General Meeting, rights to a monetary payout referred to as a

dividend in the event of a profitable fiscal term, and rights to the residual assets in the rare event of dissolution

of the company.

The Fuqaha have codified the following principle that fits quite aptly in the case at hand,

) :(

The ruling will, at times, change with the changing of eras.33 As previously explained, the term share in the

previous era denoted actual ownership in the assets of a company; therefore, in such an era, purchasing and

investing in shares would have been permissible according to the Shariah. However, as the times changed, the

meaning of share changed whereby a shareholder no longer purchased a fractional percentage of the

companys assets, therefore, in such an era, it will not be permissible according to the Shariah to purchase

shares since such a transaction does not fulfill the Shari prerequisites of Shirkah (partnership). It is due to this

reason that some illustrious Ulama of the past issued verdicts of permissibility regarding shares. However, it

will not be correct for Ulama of the modern era to issue a Fatwa of permissibility based upon the view of the

Ulama of the previous eras.

32 Entrepreneurial law, 3rd Edition, Pg. 60, Benade et al, LexisNexis Butterworths, 2003.

33 Al-Muheet al-Burhani, Imam Burhan al-Din Al-Bukhari, vol. 12 pg. 155, Al-Majlis al-Ilmi Idarat al-Quran.


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From the above passages, this much becomes clear that in the eyes of the legal and financial sectors, a

shareholder is not deemed the owner of the assets of a company. It is important to bear in mind that it is the

state that brings companies into their metaphysical existence. Therefore, the state decrees how the directors

and shareholders relate to a company. If the state decrees that the shareholders do not own assets of the

company, then under the authority of the state, the shareholder cannot own the assets. If the state decrees that

the company, in itself as a juristic entity, owns all of the assets of the company, then under the authority of the

state, only the company will be regarded as the owner.

We are convinced that if this proper understanding of companies and shares is presented before the Ulamathey will also issue the verdict of impermissibility. All of the Ulama agree in regards to two scenarios, namely

if the shareholder does not own the assets, his profit will be Riba and if he is the owner of the assets, then the

profit will be permissible as long as the other preconditions of trade are upheld. The main difference rests

upon the perception of who the owners of the assets are. Presenting the above-mentioned proofs clearly shows

that the shareholder does not own the assets. Therefore, it is a natural and juristic corollary that all of the

Ulama with this understanding pass the verdict of impermissibility.

The Fuqaha (Jurists) clearly mention that there is only one of three ways that a person can receive a profit upon

his investment:

1. Growth of his owned assets in a partnership2. Work conducted on behalf of the partnership as the case with aMudarib3. Bearing complete liability (as in the case of purchased assets on credit) despite not being the owner 34

.

) :(

Bearing the above three pointes in mind, we come to know that the shareholder is not entitled to receive any

amount of profit upon his purchase of shares. The shareholder neither bears complete responsibility of the

assets of the company, nor provides any service for the company as aMudarib, nor owns any percentage of the

assets of the company whereby the profits earned through the shares could be termed as the growth of his

personal assets. Thus, considering the fact that a shareholder receives dividends and profits in absence of any

exchange, the surplus amount beyond his initial investment will be considered as interest. This ruling is based

on the juristic definition of Riba, Riba is any excess amount free from a reciprocal substitute or exchange.35

) :(

The Corporate Veil:

The concept of a company or a corporation existing as a separate juristic person is frequently referred to as a

Corporate Veil. The Corporate Veil refers to an abstract cloak masking the founders, directors and

shareholders of a company from the being held personally responsible for any action conducted on behalf of

the company, directly or indirectly. All of the affairs of the company are deemed self existent and attributed


35 Radd al-Muhtar, Allamah Ibn Abideen Al-Shami, vol. 5 pg. 169 ,H.M. Saeed)


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directly to the company itself as a juristic person. The actions of those who run the company will not be

attributed to the individuals in their personal capacities, rather their actions will be deemed to be the actions o

the figurative organs and limbs of the company as subordinates to the corporation. However, there are certain

rare circumstances where the state decides to disregard the Corporate Veil and the juristic personality of a

company and regards the fraudulent activities of directors or shareholders to be actions conducted in their

personal capacities. In such a situation, the shareholder will not be able to mask his identity behind the

Corporate Veil attempting to elude the law. Section 424(1) of the Companies Act reads:

Where it appears that the business of the company is being carried on recklessly or with the intent to defraud creditors ofthe company, the Court may, on application, declare that any person who was knowingly a party to the carrying on of the

business in the manner aforesaid, shall be personally responsible, without limitation of liability for all or any of the debts

or other liabilities of the company as the Court may direct.

The general rule is that a company including its directors and shareholders will be deemed as a legal entity

However, when the concept of juristic person is misused to commit fraud, defend crime or any other illicit

activity, the law will regard the corporation or a segment of the corporation, namely the perpetrators of such

misdeeds, as merely a coalition of persons and not as a constituent of the company.

Jenkinson J, in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation, stated that:

The separate legal personality of a company is to be disregarded only if the court can see that there is, in fact

or in law, a partnership between companies in a group, or that there is a mere sham or facade in which that

company is playing a role, or that the creation or use of the company was designed to enable a legal or

fiduciary obligation to be evaded or a fraud to be perpetrated. 36

One of the most oft cited cases of piercing the Corporate Veil due to fraudulent activity is the case of Jones v

Lipman [1962]. In this case Lipman agreed to sell land to Jones but before completion of the contract he

changed his mind and sold the land to a company which he and another were the sole directors and

shareholders. The judges ordered specific performance (fulfilling the promised obligation) against Lipman and

the company. The company was described as a device and a sham, a mask which Lipman held before his face

in an attempt to avoid recognition by the eye of equity.

The court of law will only intervene in clear cases of deception and fraud. However, the court is very

precautious in its approach striving to maintain the fundamental principles established to protect legal law-

biding companies and its directors and shareholders.

An example of such precaution is the 2006 Supreme Court of Appeal case of Heneways Freight Services v Klaus

Grogor. Mr. Grogor was the sole director and manager of a company that imported exotic cars. Heneways

were clearing and forwarding agents contracted by Grogor. He applied to Heneways for credit and after being

granted, he incurred a debt of approximately R300, 000. Grogor sent a post-dated check for the amount

However, before the date of payment arrived, he stopped payment on the check. His company filed for

bankruptcy and thus was later liquidated. The Heneways did not receive payment and it seemed that they

were left with no recourse against Mr. Grogors company. With no other alternative, Heneways sued Grogor

personally for reckless and fraudulent trading under section 424(1) of the Companies Act. In their claim,

Heneways presented evidence that Grogor had a habit of issuing post-dated checks on behalf of the company

which were later stopped before the date of payment arrived. They claimed that Grogor was aware of the

companys unstable financial situation when he applied for credit. They alleged that he knew that his company

36 Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 272 (FC, Woodward, Jenkinson and Foster JJ).


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would not be able to pay its debts when they became due. They argued that his business practices were

fraudulent and/or reckless. In defense, Grogor admitted that the company was in financial straights thus he

adopted the method of settling more pressing debts first and making arrangements to settle the others. He

presented that the company was to be bought out by a large partner shortly after the R300, 000 debt was

incurred. He claimed that debt was to be paid from the proceeds of that deal. He further stated that in the

event that this deal did not materialize, the company would have been able to settle its debts by selling some

of its assets to revive the companys cash flow. The court accepted Grogors explanations and held that a

reasonable businessman in his position would have acted in the same way. His conduct was not found to bereckless or fraudulent.

The central aspect of concern here is that only such members responsible for the reckless behavior will be held

liable and not the innocent shareholders. When the personal liability is placed upon certain shareholders or

directors, it will be placed upon the responsible parties directly involved and not upon all the shareholders as

they were not directly involved in the fraud etc thus, they remain free from liability. Furthermore, in a typical

scenario where no fraud or deception takes place and the company incurs debt and thereafter files for

bankruptcy, the creditor will remain exploited with no legal recourse. The shareholders are absolved from any

personal financial accountability despite the fact that the level of profitability is limitless. The above-mentioned

Heneways Freight Services v Klaus Grogor case is a clear example of this injustice. Despite the fact that the secular

law doesnt consider this act as deceitful and fraudulent, the Shariah considers it nefarious and reprehensible

Assuming this company had shareholders, each shareholder would be proportionately responsible for this

oppression, injustice and usurpation of wealth.

The fact that the state, at times, restrictedly disregards the juristic person and Corporate Veil does not negate

the corruptive and iniquitous aspects of limited liability, lack of ownership of the assets and the legal reality o

the legal entity as a whole in respect to the general shareholders.

An apt example in the Shariah of a similar type of exemption from the general rule is the case of a person who

gifts away a considerable amount of his wealth whilst on his death bed. In this scenario, the dying person is

suspected of fraudulent activity by attempting to deprive some of his heirs from their rightful inheritanceThus, the Shariah will restrict the transactions of such a person looking after the best interest of the public,

namely the heirs who stand to inherit. The Shariah disregards the intrinsic right of the living person to transact

in his own property in order to circumvent his fraud. However, it would not be proper to state that the Shariah

does not consider a person to possess the right of disposal in his personal wealth. This case is merely an

exception to the general rule. Similarly, it cannot be said that shareholders are personally held liable for the

companys debt or that the juristic person is merely a legal fiction therefore; shareholders are not participants

of the usurpation of wealth and are the legitimate owners of the company respectively. The seldom cases

where the state pierces the Corporate Veil is an exception to the general rule and it applies in a very restricted

manner to specific individuals. It does not encompass the normal shareholders of a company who will still be

participants to the injustice of limited liability and the sin of earning interest upon un-owned assets.


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Thus, in this scenario, the partnership still fails to materialize; firstly due to the fact that such a transaction is

neither permissible nor recognized by the Shariah and secondly due to the fact that the partnership can only

commence after purchase a percentage of the physical assets and not a bundle of rights.

Before continuing further, it is important to understand why the commodity of sale is a bundle of rights and

not a percentage of the assets. We previously mentioned that the respected Ulama who permit shares presume

shares to be ownership in the assets based upon two indicative after-effects of ownership, namely;

1.

The shareholder receives an equal portion of the profits as well as suffers from the loss of value in his shareas opposed to bonds where he is guaranteed to receive a certain percentage of interest regardless of

whether the company it profitable or not.

2. The shareholder is entitled to receive the residual assets of the company after dissolution in proportion tohis shares as opposed to receiving the exact value of the share certificate as in the case with bonds and

other loans.

These effects merely indicate to the possibility of ownership of the assets. However, effects can have more than

one cause. Therefore such evidence is insubstantial.

As previously mentioned, a juristic person is an abstract intangible creation of the state. The state defines what

a juristic person is and what role it plays in the workings of a company. If a juristic person is likened to Waqf

(trust) as indicated by the Honorable Mufti Taqi Uthmani, then the authority of defining the juristic person

and its function is similar to what a Waqifdoes in the initiation of a Waqf. The Fuqaha state, The conditions set

by a Waqif(initiator of a trust) are similar to the clear text of the legislator of the Shariah.38

) :(

This precept demands that all conditions laid down by the Waqifin the initiation of the Waqf(trust) be treated

similar to a direct text of the Shariah in that all conditions must be fulfilled without fail by the guardians of the

Waqf. A Waqif initiates the existence of a Waqf; similarly, the state initiates the existence of the company

Therefore, similar to the conditions laid down by the Waqif, the conditions and directives of the state must be

recognized and upheld. Among various conditions, one includes the company being the sole owner of all the

companys assets. The Ulama, therefore, cannot disregard the definitions and denotations presented by the

state in regards to companies and juristic persons when deliberating over the aspect of shares.

Moreover, the Fuqaha mention the following principle,

The Implicit will not be granted any consideration in the face of the Explicit. 39

From this principle, we understand that the substantiation used by such Ulama will not be considered in the

face of an explicit edict given by the courts in regards to the nature of a share. The court has explicitly defined

a share as a bundle of rights; therefore, any implicit indication by means of inference that a share refers to a

percentage of the assets can not be juristically entertained.

38 Al-Bahr al-Raiq, Imam Zayn al-Din Ibn Nujaym, vol. 5 pg. 246, Maktabah Rashidiyyah.



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In the second scenario, namely in the event that the Shariah fails to recognize the concept of a juristic entity as a

viable entity that possesses its own dhimmah capable of entering into transactions, possessing and bestowing

ownership, all of the transactions will be directed and attributed to the founding members of the company

Similar to the above scenario, the prospective shareholder will be incapable of purchasing the required assets

of the company because, it is not the assets that are being sold, rather shares i.e. bundle of rights.

The question that might linger in the mind is that what if the purchaser and seller both agreed to this sale of

bundle of rights as opposed to the assets?

The answer is that the proceeds of such a transaction will be considered as Riba. As previously mentioned, theFuqaha state that there is one of three ways to earn a profit;

1. Growth of his owned assets in a partnership2. Work provided upon the assets on behalf of the partnership as the case with aMudarib3. Bearing complete liability of assets despite not being the owner as the case with Shirkat al-Wujuh etc.In the mentioned transaction and so-called partnership, the shareholder neither owns any physical assets

where the profit will be considered as the growth of his assets, nor does he provide any work for the company

as a Mudarib nor does he bear any liability for the assets of the company. Thus, the proceeds awarded to him

will be free from any exchange in a binding contract which fits the exact definition of Riba;

Our opinion, based upon the above-mentioned substantiations, is that purchasing shares is not permissible

and receiving proceeds upon them will be Riba. We urge the public to refrain from investing in such ventures.

There are other permissible income generating alternatives. Thus, we advise looking into other alternatives as

a means of saving ones income from Haram wealth. May Allah Taala grant us all the courage to remain

steadfast upon all the injunctions of Shariah. Ameen.

Ml. Yusuf bin Yaqub,

Student Darul Iftaa

Checked and Approved by:

Mufti Ebrahim Desai

Darul Iftaa, Madrassah In'aamiyyah

Share & Stocks_Sharia Verdict

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