Directive on Whitelist Indices dated 26th February 2026

[SEC Logo] SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA ශ්රී ලංකා සුරැකුම්පත් හා විනිමය කොමිෂන් සභාව | இலங்கை பிணையங்கள் மற்றும் பரிவர்த்தனை ஆணைக்குழு

26th February 2026 | Ref: SEC/DDG/2026/02/50

TO: ALL MARKET INSTITUTIONS AND MARKET INTERMEDIARIES

DIRECTIVE ISSUED IN TERMS OF SECTION 16(c) OF THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA ACT NO. 19 OF 2021 (SEC ACT)

Further to the Directive dated 5th September 2024 (Ref: SEC/DG/2024/09/194) issued by the Securities and Exchange Commission of Sri Lanka (SEC), the SEC at the 528th Commission Meeting held on 13th January 2026, approved the following in relation to Accredited Shariah Scholars recognized as “Supplementary Service Providers” under the SEC Act No. 19 of 2021, providing the service of certifying the Shariah compliance of Whitelist Equity Indices prior to publishing of the said Whitelist Equity Index.

Accordingly, all Market Institutions and Market Intermediaries are instructed to comply with the following:

1. Prior to publishing or circulating a Whitelist Equity Index among clients or the public:
   1.1 the operating entity that issues or publishes the Whitelist Equity Index shall adopt the Standard Shariah Compliant Securities Screening Methodology developed by the Accredited Shariah Scholars of the SEC; and
   1.2 the operating entity shall obtain the approval of two (2) Shariah Scholars from the Accredited Shariah Scholars list of the SEC, certifying that the Securities Screening Methodology of the Whitelist Equity Index is in line with the Standard Methodology and complies with the Principles and Rules of Shariah.

2. Any Market Institution or Market Intermediary operating or subscribing to a Whitelist Equity Index shall ensure that the Whitelist Equity Index has been approved by two (2) Accredited Shariah Scholars of the SEC.

3. Market Institutions and Market Intermediaries shall ensure that investors are informed of and made aware of this Directive.

The Standard Shariah Compliant Securities Screening Methodology developed by the Shariah Scholars of the SEC is enclosed hereto.

[Signature]
Tushara Jayaratne
OFFICER IN CHARGE
DEPUTY DIRECTOR GENERAL

Encl: The Standard Shariah Compliant Securities Screening Methodology developed by the Shariah Scholars of the SEC

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The Standard Shariah Compliant Securities Screening Methodology

Introduction

The Colombo Stock Exchange (CSE) has 284 companies representing 20 GICS industry groups as of 28th June 2024, with a Market Capitalization of Rs. 4,760.00Bn. Investors who are based on Islamic faith, can invest in such companies, provided that they meet the Shariah requirements.

There are several Shariah screening standards such as AAOIFI, FTSE Global Shariah, S&P 500 Shariah Index, and Dow Jones, which are globally accepted. However, considering that Sri Lanka is a relatively small market and susceptible to external factors, it is considered appropriate that a unique Shariah screening standard that suits the Sri Lankan capital market is developed. This may help to standardize the process and establish a uniform methodology among all the whitelist publishers in the country.

Thus, Securities and Exchange Commission (SEC) of Sri Lanka, has Six (6) Accredited Shariah scholars to oversee Shari'ah-related matters related to the Capital market in Sri Lanka. The following method has been reviewed and recommended to the SEC by the six accredited scholars as the most suitable technique to execute the screening for the Sri Lankan market.

Proposed Methodology

The Shariah Scholars accredited by the SEC adopt the view that each security (Ordinary Share) shall undergo a two-tier screening process of qualitative and quantitative approaches, which applies the business activity benchmarks and the financial ratio benchmarks, in determining the Shariah status of the listed securities. Hence, the securities will be classified as Shariah-compliant if their business activities and financial ratios are below these benchmarks.

A. Qualitative Screening (Business Activity Benchmarks)

Any company that is mainly involved in the following core business activities is considered impermissible and therefore would not qualify under the whitelist.

• Financial services based on Riba (Interest)
• Conventional insurance
• Manufacture or sale of non-halal products or related products
• Gaming and gambling
• Entertainment activities that are non-permissible according to Shariah
• Manufacture or sale of tobacco-based products or related products
• Arms and ammunition
• Stock broking or share trading on Shariah non-compliant securities,
• Other activities deemed non-permissible as determined by the accredited Shariah scholars of the SEC.

a) Further, the accredited scholars of the SEC at the time of signing of whitelist for publication, shall consider the qualitative aspect which involves public perception or image of the company's activities from the perspective of Shariah rules and principles. b) If any such impermissible activity is known but does not constitute their core business, the accredited scholars of the SEC, may or may not consider such businesses to be excluded until their portion of income in the total revenue is proved.

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B. Quantitative Screening (Financial Ratio Benchmarks)

For the financial ratio benchmarks, the six accredited scholars by the SEC consider the following:

i. Impermissible Income

Impermissible Income/ Total Income < 5%

Impermissible Income includes income from gambling, income from interest based transactions, income from Gharar (Uncertainty) based transactions i.e. derivatives, insurance claim reimbursement from a conventional insurance company, any penalty charged on late payment in credit sale, income from casinos, addictive drugs, alcohol, dividend income from above mentioned businesses or companies which have been declared Shariah Non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance etc.

Elimination of Impermissible Income of < 5%
It is important for the investors to ensure the Elimination of impermissible income (Purification). It has two elements. Impermissible income in a) Dividend Distributed and b) Capital Gain. The following formula/ ratio shall be adhered to compute the purification amount for Dividend Distributed.

Purification Amount = (Total Dividend Received / Number of Shares Owned * Percentage of Impermissible Income)

ii. Interest Bearing Borrowings

Interest Bearing Borrowings/ Total Assets or Market Capitalization < 33%
(whichever is higher)
Debt only includes interest-bearing debt whereas Islamic financing or sukuk is excluded from the calculation. Interest-bearing borrowings, in this case, is classified as any interest-bearing debt including Bonds, TFCs, Commercial Paper, Conventional Bank Loans, Finance Lease, Hire Purchase, issuing preference shares etc.

iii. Impermissible Investment

Impermissible Investment or deposit / Total Asset < 33%
Impermissible Investments, include investments in conventional mutual funds, conventional money market instruments, Commercial Paper, interest bearing bank deposits, Bonds, PIBs, FIB, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives etc.

iv. Liquidity Ratio

Illiquid Asset/Total Asset < 70%

• The current assets of the company are taken into consideration and the main purpose of this ratio is to avoid trading in debt.
• Cash only includes cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments is excluded from the calculation.
• Liquid assets include Cash & cash equivalent, Short-term deposits, Other financial assets, Receivables, Trade receivables, Tax receivables/ returns etc.
• However, the accredited scholars by the SEC may look at any exceptions based on the nature of certain industries, that need to be considered specially for the service industry, as it is not practical to hold them under this category.

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Conclusion

Further, the six accredited scholars recommend the following.

a. Three accredited Shariah scholars of the SEC shall sign off the publication of whitelist securities of any publisher. b. In addition to publication of the whitelist securities, the publisher shall advise the investors the dividend purification ratio/amount bi-annually which shall be endorsed by the accredited Shariah scholars of the SEC (this would not include any additional cost to the index operator).
c. Investors shall consult their equity brokers for purification of impermissible income of capital gain.
d. The proposed Shariah Compliant Securities Screening Methodology shall be revised every three years by the accredited scholars of the SEC to accommodate and adopt the changes in the capital market. e. The publication of the whitelist securities shall be carried out bi-annually by the publisher. f. The cumulative accounts will be adopted for screening methodology.

References

Proposed Thresholds	References
Impermissible Income/Total Income < 5%	AAOIFI, FTSE Russle, Dow-Jones, Meezan, and SC Malaysia
Interest Bearing Borrowings/Total Assets < 33%	FTSE-Russle, SC Malaysia
Impermissible Investment/Total Assets < 33%	FTSE-Russle, SC Malaysia
Liquid Asset/Total Asset < 70%	AAOIFI