INTERVIEW-Octaware’s successful IPO lights a path for Shariah-compliant equity options in India

Photo: The Bombay Stock Exchange (BSE) logo is seen at the BSE building in Mumbai, India, January 25, 2017. REUTERS/Shailesh Andrade

In March this year, software development company Octaware Technologies Ltd. raised funds from a 148 percent oversubscribed initial public offering (IPO) in the Indian financial market, pointing to healthy investor interest in Shariah-compliant equities in the country. But it wasn’t domestic funds that was channeled into the company.

“More than 80 percent of our current investment is from non-Indians, primarily from the Middle East,” Aslam Khan, chairman and managing director of the Mumbai-based company told Salaam Gateway.

“Compliance with Shariah helped us get investment from Muslims and from investors in the Middle East,” added Khan.

He conceded, however, that the company’s IPO did “raise some eyebrows” when pitched to the general investment community.

THE IPO

Promoted by Khan and Octaware vice president Sajid Hameed, the company opened its IPO with an issue size of 955,200 equity shares of 10 Indian rupees each for cash at a fixed price of 90 rupees per share.

This halved the market capitalization the firm could have claimed to 45 million rupees ($6.7 million), due to the promoters’ conviction in the strictures of Shariah business that at least 10 percent of a company’s assets should be fixed in proportion to its market value.

Complying with Indian conventional financial standards, the company could have done the IPO for double that amount.

Octaware’s closing price on November 30, 2017, the last trading day before the new week began on Monday, was 95 rupees.

‘ETHICAL PLUS PLUS’

Octaware is listed on the Bombay Stock Exchange (BSE) and is a constituent stock on the S&P BSE SME IPO Index.

The company is not listed on a Shariah index but adhering to Shariah is important for Khan, even if it is not formally certified Shariah-compliant.

“The religious beliefs and value system of the promoter (Aslam Khan) have metamorphosed into a business model that, though not structured formally into a Shariah-compliant company, strives to inculcate what he believes is the best business practices of Islam,” said Dr. Shariq Nisar, who was instrumental in developing India’s first Shariah index for the BSE in 2010. He sits on the Octaware board as an independent director to advise on Shariah and ethical issues.

“Corporate social responsibility (CSR), business strategy, business operations, corporate culture and corporate governance including marketing, sales and human resources all should be in sync with the Islamic outlook of purpose of life,” said Khan.

For him, the wellbeing of business partners, investors, employees and customers should form the essence of practice for companies claiming to be Shariah-compliant.  

For these practices, Octaware has gained a reputation for going beyond “basic” Shariah criteria. “Ethical plus plus” is how a merchant banker who didn’t want to be named described Octaware, which is a zero-debt and zero-haram company that had delivered year-on-year growth for more than 10 years before its IPO.

Khan by his own volition and from the very inception has adopted certain business practices that are more rigorous than those recommended by Shariah advisors.

“With zero debt, we did not have to worry about the debt-to-asset ratio for compliance,” he said, referring to the leverage compliance for Shariah-compliant stocks, which is typically around 33 percent.

“We spend all our incidental interest earnings on charity, while 2.5 percent of our profit goes toward payment of zakat,” he added.

Additionally, Khan claims the company has consistently maintained “truthfulness in our sales pitch” and a “no-bribe policy” for business contracts. 

Bribery affects a large number of Indians, and the nation was found to have the highest bribery rate in the Asia Pacific, according to a survey of 16 countries conducted from July 2015 to January 2017 by international non-governmental organisation (NGO) Transparency International.

OTHER DIFFERENTIATORS 

Shariah compliance and ethical business practices are not Octaware’s only differentiators.

 “The way we handle our processes, technology and market operations are also strong differentiators in our pitch to investors,” said Khan.

He said he realised early that he shouldn’t be chasing a “me-too” business model, citing India’s IT majors such as Infosys and Wipro that cover an extensive range of industries from aerospace to utilities.

Instead, he said Octaware carves out its expertise in the three verticals of healthcare, finance, and government solutions.

This has helped the company build a client list that includes global names like Accenture, Human Rights Commission, Microsoft, United Nations Foundation, and Qatar Islamic Bank, as well as Indian majors such as Essel Propack, Indian Railways, Reliance, Tech Mahindra and Wipro. Khan himself is an alumni of multinational corporations such as Microsoft, Citibank and Askme.com.

The company wants to diversify from fee-based services into other areas of IT, such as high-end architecture, big data analytics, and the internet of things, said Khan. Helping it achieve these goals is Level 3 CMMI (Capability Maturity Model) rating and an NSIC-CRISIL rating of SE-2A, denoting High Capability and High Financial Strength.

Geographical diversification is also a thrust. “When we started 10 years ago, our market was in the USA and Singapore. Since 2007-08, we started focusing on the Middle East, mainly Dubai, Qatar and Saudi Arabia,” said Khan.

“We are now tapping into emerging markets like Nigeria and Zimbabwe while looking for expansion in places like Senegal, Bulgaria, Romania, and Croatia,” he added.

Octaware now has two non-India subsidiaries – Octaware Gulf FZE in Dubai, and Octaware Gulf QFC in Qatar – alongside an Indian subsidiary, Octaware Information Technologies Pvt. Ltd. at SEZ, Mumbai.

FUTURE PROSPECTS

Khan sees opportunity for more investment into Shariah-compliant equity instruments in India, particularly for companies backed by strong fundamentals.

A large pool of funds has stayed away from the Indian equity bourses, especially the money that comes in as remittance from the Middle East of about $36 billion in 2016, according to data collated by S&P analytical company CRISIL.

This pool is about half of the total global remittance to India of about $65.5 billion in 2016, according to World Bank estimates, and more than half of the country’s total foreign direct investment of $60.08 billion in 2016-17, according to figures released by government body the Department of Industrial Policy and Promotion.

 “There will be challenges, but Shariah-compliant business has potential in India,” said Khan.

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