03/09/2026
Question of the Week #137 asks:
Are Singapore Depository Receipts (SDRs) Shariah compliant?
Answer:
First, let us understand what Singapore Depository Receipts (SDRs) are. According to the SDR official website, SDRs are investment instruments listed on the Singapore Exchange (SGX) that enable investors to gain economic exposure to shares listed on overseas stock exchanges without purchasing those shares directly in the foreign market. Instead, investors hold SDRs issued by a licensed depository, which holds the underlying shares. SDR holders receive substantially the same economic benefits as shareholders, such as dividends, bonus issues and certain corporate actions, while the legal title to the underlying shares remains with the depository and the investor holds the corresponding beneficial interest. SDRs therefore provide a convenient way for investors to gain exposure to overseas securities through the Singapore market and in Singapore dollars.
Although SDRs are similar to ordinary shares because their value is linked to the performance of the underlying company, they differ in their legal structure. When an investor purchases an ordinary share, the investor directly acquires an ownership interest in the company. With an SDR, the underlying shares are held by the depository, while the SDR holder obtains the beneficial or economic interest represented by the receipt. Therefore, from a Shariah perspective, an SDR should not simply be treated as an ordinary share; its underlying representation, ownership arrangement and custodial structure must also be examined.
From the Shariah perspective, an SDR can be understood, in substance, as a certificate or document (wathīqah) representing an ownership or beneficial interest in an underlying asset, rather than as an independent asset whose permissibility is determined solely by its form. This is important because Shariah does not necessarily require the investor to hold the legal title to the underlying asset directly, provided that a valid and recognised ownership or beneficial interest has been established. Accordingly, the Shariah assessment of an SDR involves two related aspects: (i) the Shariah status of the underlying shares and (ii) the contractual and custodial structure through which the SDR represents those shares.
The main Shariah considerations therefore include:
- The underlying company must be Shariah-compliant. Its principal business activities and relevant financial ratios should satisfy a recognised Shariah screening methodology.
- The SDR should represent a genuine ownership or beneficial interest in the underlying shares, rather than merely providing synthetic exposure to the share price.
- The underlying shares should be genuinely held by the depository in accordance with the SDR programme and should sufficiently correspond to the SDRs issued.
- The rights attached to the SDR should correspond to the underlying shares, including the relevant economic benefits such as dividends and corporate actions.
- The custodial arrangement must be Shariah-compliant. Where the depository acts as an agent (wakīl) or custodian, it must perform its duties according to the terms of the mandate and must not deal with or utilise the underlying shares in a manner that conflicts with the beneficial owner's rights or Shariah principles.
- The overall arrangement must not involve riba, excessive gharar or maysir, or other prohibited elements.
The custodial relationship is particularly relevant. Where the depository holds the underlying shares on behalf of SDR holders, its role may be characterised as a form of wakālah (agency) and/or custodianship. As an agent, the depository is required to act within the scope of its mandate and in the interest of the beneficial owners. It should therefore not, for example, independently utilise, dispose of, pledge or otherwise deal with the underlying shares beyond what is authorised under the SDR arrangement. This does not mean that every act of voting or dealing with corporate rights is prohibited; rather, the relevant rights and authority must be determined by the terms of the SDR programme and the agency arrangement.
Accordingly, each SDR listed on SGX should be assessed individually. For example, an SDR representing shares in a conventional bank, casino operator or alcohol manufacturer would remain Shariah non-compliant because the underlying company's principal business is not Shariah-compliant. Conversely, an SDR representing a company that satisfies a recognised Shariah screening methodology may be permissible in principle, provided that the SDR's contractual, ownership and custodial structure also satisfies Shariah requirements.
This approach is consistent with contemporary Shariah treatment of securities and agency arrangements. AAOIFI has separate Shariah Standards addressing shares and bonds (SS 21), agency (SS 23), and possession (SS 18), reflecting the importance of examining both the underlying financial asset and the contractual mechanism through which ownership and possession are established. The Securities Commission Malaysia's Shariah Advisory Council likewise applies Shariah analysis to the substance and ownership characteristics of structured securities rather than merely their legal labels.
Therefore, IFSG is of the view that SDRs are not inherently halal or haram. Their Shariah status depends on both the underlying securities and the SDR structure itself. Investors should verify that the underlying company passes a recognised Shariah screening methodology and that the SDR genuinely represents an ownership or beneficial interest in the underlying shares, with an appropriate custodial and agency arrangement and without prohibited elements. Where the structure or ownership arrangement is unclear, investors are encouraged to seek advice from qualified Shariah scholars or invest in products that have been reviewed or certified by a recognised Shariah supervisory body.
And Allah knows best.
Read the full details here: https://islamicfinance.sg/docs/commercial-matters-in-islam/faq-181/
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