Question Summary:
Is investing in Virgin Gold Mining Corporation (VGMC) Halaal?

Question Detail:

I had invested in one gold mining company who produces gold. The name of the company is “Virgin Gold Mining Corporation”. The details of the company are available on their website www.vgmc.com. They give CPS (convertible preferred share) with 1.35$/cps each. If we buy 10000 cps they give us 1 oz of gold as dividend monthly. The gold we can sell or we can keep it, it’s up to us. This scheme is only open till 2015, when they will launch as IPO in share market.
The price of cps also increases regularly, from 0.80$ in jan 2010 to 1.35$ in feb 2012.
Please go through it and guide us, regarding the investment is Halaal or Haraam.

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
We have studied the contents of your email, hereunder are our observations:
According to our understanding, the structure of the product in reference is as follows:
1. The client subscribes to purchase Convertible preferred stocks (CPS) shares from Virgin Gold Mining Corporation (VGMC).
2. The client pays VGMC for the shares by depositing the required amount into a VGMC credit account.
2. The shareholder receives a fixed monthly dividend on the CPS shares. These dividends are paid in the form of gold.
3. The shareholder acquires access to the following three accounts:
3.1) a gold account, value in ounces (oz)
3.2) a credit account, value in United States Dollar (USD)
3.3) a trading account, to hold/trade paper gold positions
4. Every shareholder is allocated a credit facility equivalent to 3 times their share subscription monetary value to hold a gold position. For example: If John subscribes to 100,000 shares at 1.20/share = USD360, 000; John will be given trading margin USD360, 000 to hold/trade paper gold positions[1]
Definition of CPS Shares
A convertible Preferred Shares is defined as follows: “These shares are corporate fixed-income securities that the investor can choose to turn into a certain number of shares of the company's common stock after a predetermined time span or on a specific date. The fixed-income component offers a steady income stream and some protection of the investors' capital. However, the option to convert these securities into stock gives the investor the opportunity to gain from a rise in the share price.”

A practical demonstration of the above definition is espoused in the following example: “To demonstrate how convertible preferred shares work and how the shares benefit investors, let's consider an example. Let's say Acme Semiconductor issues 1 million convertible preferred shares priced at $100 a share. These convertible preferred shares (as these are fixed-income securities) give the holders priority over common shareholders in two ways. First, convertible preferred shareholders receive a 4.5% dividend (provided Acme's earnings continue to be sufficient) before any dividend is paid to common shareholders. Second, convertible preferred shareholders will rank ahead of common shareholders in the return of capital if Acme ever went bankrupt and its assets had to be sold off.”[2]
Juridical Ruling
According to Shari’ah, the contract in reference is termed as “Musharakah” (Joint Business Venture)”. In this contract, the bank (shareholder/Partner A) contributes gold (kind) and the client (Shareholder/Partner B) contributes money (cash).
One of the most important and fundamental principles of Islamic Finance and Economics is “No Profit without Risk”.
In the above contract, the bank would be paying the client a fixed monthly dividend; this is not permissible according to the laws and maxims of Shari’ah since there is no element of risk being undertaken from the side of the client. If the investment/company runs at a loss, the client would not be able to receive the fixed dividends.
According to Shari’ah, it is not permissible for the shareholders/partners of a Musharakah to fix a stipulated/fixed return on an investment.
Therefore, the above contract is not Shari’ah Compliant since there would be a fixed monthly return on the investment.
And Allah Ta’āla Knows Best
Ismail Desai,
Student Darul Iftaa
Durban, South Africa
Checked and Approved by,
Mufti Ebrahim Desai.