Though recent years have been challenging for capital markets in Iran, experts hope that the lifting of international sanctions will catalyze renewed investment and sustained growth. With companies like Boeing and the UAE’s Rotana Group making major deals, there is sizable interest and optimism regarding Iran’s economic potential. A few hurdles remain, however, and a lack of transparency, inconsistencies in corporate reports and data, and financial systems and procedures unaccustomed to navigating global markets are a notable few. Still, 2016 is certain to see major improvement in every area of operation, attracting investors intent on participating in what has been called the “biggest emerging market since the collapse of the Soviet Union,” by former Chancellor of the Exchequer, Lord Lamont.
Since 2005, there have been two major regulatory and supervisory bodies responsible for overseeing the Iranian capital market: the Securities and Exchange High Council (The Council) and the Securities and Exchange Organization (SEO). Working in tandem, these two institutions work to ensure that capital markets function in a fair, orderly, and efficient manner. The Council is responsible for crafting and approving capital market policy and ensuring that these policies are in accordance with the government’s general macroeconomic strategy. The Council supervises the activities of the SEO as it assesses and administers market rules and regulations. The SEO issues 12 types of licenses, and as of 2015 the SEO had approved 101 brokers on the TSE, 100 on the IFB, 107 on the IME, and 42 on the IRENEX.
Exchanges in Iran
In Iran there are four exchanges, consisting of two equity markets—the Tehran Stock Exchange (TSE) and the Iran Fara Bourse (IFB)—and two commodity markets—the Iran Mercantile Exchange (IME) and the Iran Energy Exchange (IRENEX).
Established in 1967, the TSE is the oldest and largest exchange in Iran, and while it initially listed only six companies, it now hosts more than 318 firms spread across 41 industries. One of the largest exchanges in the Middle East, the TSE has a market capitalization hovering near USD100 billion and trades at roughly 5.5 times earnings. The TSE’s market capitalization has grown by nearly 15% since December of 2015 and its broad index has recorded gains of nearly 24%. According to leading Iranian financial newspaper Donya-e-Eqtesad, nine sectors account for over 75% of the TSE’s market cap: chemical firms represent 23.26%; banking, 11.68%; base metals, 7.92%; telecommunications, 7.62%; conglomerates, 7.62%; automotive, 5.8%; oil products, 5.44%; metal ores, 5%; and pharmaceuticals at 3.65%.
Founded in 2008, the IFB operates as a typical OTC market but with slightly augmented features. As a market for listed and unlisted securities, the IFB hosts a large number of financial instruments, including sukuk products, equities, ETFs, stock repurchases, block trading, intellectual property, and underwriting, among others.
After the merging of the metal and agriculture exchanges in 2007, the newly formed IME began operating in Kish, one of the economic free zones in Iran. According to the latest data from IME, there are 218 listed commodities and 455 listed companies on the exchange. In 2015, the exchange handled over IRR472 trillion worth of transactions.
Founded in 2012, IRENEX is a public joint-stock company that serves as the country’s energy exchange. Physical energy commodities as well as derivative products are traded on the exchange.
From bank based to capital based
Before Iran’s capital markets can take their rightful place on the world stage, a transition from a bank-based economy to a capital-based economy is required. Financing systems geared toward equity and debt markets have been a major point of interest for investors, regulators, and observers for many years. Debt markets that are capable of adequately servicing foreign and domestic investors are widely considered to be key if Iran hopes to fully capitalize on its potential. In a recent interview with TBY, Amir Hamooni, CEO of Iran Fara Bourse (IFB), discussed efforts on the part of both the government and private industry to transform the current system. “The transition is based on one major principle: being a transparent market toward shareholders and investors,” said Hamooni. “Getting finance from public funds and making a transition to the fiscal market means building trust between the government and the business community.” These sentiments were echoed by Mahmoud Reza Khajehnasiri, CEO of Arman Investment Bank, who noted that new and improved financing models will, “change the paradigm of the Iranian economy.”
Accuracy & transparency
A major concern for investors at home in Iran and across the globe has been the accuracy and transparency of financial information. In an effort to ensure that the highest quality information is easily accessible, a wide variety of changes are being implemented. In an exclusive interview with TBY, Dr. Mohammadreza Mohseni, President and CEO of the Central Securities Depository of Iran, discussed two of the most important infrastructure requirements in Iranian capital markets: “One of the most important pillars [to achieve the internationalization of capital markets] is preparing a legal framework,” said Mohseni. “Moreover, in order to prepare the market for additional financing, we also need operational infrastructure that could be defined in the IT structure and internal processes as well as services offered to investors.” By focusing their efforts on creating a solid legal and technical foundation, private companies and government entities are correcting an important oversight and laying the groundwork for future success. In the last year there has been a veritable revolution in the way reporting is handled, and in coming months and years due diligence standards are expected to become even stricter.
Opening to the world
Establishing foreign partnerships and attracting foreign capital has been a central strategy for both capital market firms, exchanges, and the government. Nearly every firm interviewed by TBY had not merely a general interest but an exact and clearly articulated vision for wooing partners from abroad. While discussing his firms attempts to partner with firms in the European credit rating sector, Ali Ghasemi Armaki, Managing Director of Mellat Investment Bank, expounded on the utility of joint ventures: “Iran is not an easy country; there are many opportunities but companies need someone who can grab their hand and bring them to the right spot, one who understands their situation and knows the legal framework, economic conditions, returns, and risks of the country.”
Broadly speaking, foreign investors in Iran are broken into the two categories of strategic or portfolio, based on their level of ownership. Strategic investors are eligible for 100% ownership of a firm, and they typically focus on long-term investments. Funds for strategic investors are locked into the market for two years. Portfolio investors are individually qualified to own up to 10% of a listed firm’s shares and are allowed to own up 20% of a firm in total. There is no lockup period for portfolio investors. As Iran continues to open up to firms across the globe, partnerships of all kinds are expected to flourish and evolve.