I wish to start a personal care products manufacturing company in India. I have very limited capital to invest and I do not wish to take interest based loans from bank or individuals. Can I seek venture capital? Is it Halal?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT and software. The typical venture capital investment occurs after the seed funding round as the first round of institutional capital to fund growth (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a type of private equity.
In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value).
When seeking a venture capital, the firm will provide capital for a business start-up, usually in exchange for one of the following:
In a convertible debt, the debtor owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest and/or to repay the principal at a later date, termed the maturity date.
Accordingly, if the capital is being provided in exchange of a convertible debt, seeking this type of venture capital will be impermissible.
In ownership equity, the creditor is simply investing into a portion of your business; hence, making him a legal shareholder of your company. This transaction will be permissible if they are in accordance to the Shari’ah laws of shirkat (partnership). You may refer to the musharakah (partnership) contract on the following link http://www.daruliftaa.net/index.php/resources/publications/finish/27-publications/272-partnership-agreement.
However, some broad rulings of partnership in Shari’ah are:
- Each partner will have a share in the net profit in accordance to the pre-agreed ratio.
- The profit ratio does not have to be according to the percentage of the capital contribution. Rather, it should be in accordance to the profit accrued in the partnership. However, if the partner is a sleeping partner, his profit cannot exceed the percentage of his capital contribution.
- If the partnership is to suffer a loss, each partner will suffer a loss only according to the percentage of his capital contribution.
And Allah Ta’āla Knows Best
Student Darul Iftaa
Chicago, IL, USA
Checked and Approved by,
Mufti Ebrahim Desai.
 Intro to Islamic Finance, Mufti Taqi, p. 37