Us vs. Them; the strange must lift off!
By Alireza Hojjatnia and Mahdi Goodarzi
“The first step toward success is taken when you refuse to be a captive of the environment in which you first find yourself – Mark Caine”
As tempting as “Iran Capital Market” sounded at first, now it is no news that the reopening of what the world call “one of the last untapped emergings of the world” walked sprightly like a pigeon and sat like a tortoise. The expectations were topped the sky and in operation everything happened much slower than anticipated. There are awful lot of writings that addressed the issue, yet non measured the domestic facts against realities of the world.
Yes, us Iranian did a great endeavor trying to reach world-class standards, however, if a system fails it has its roots on something beyond what have happened until today. It is only logical to doubt the measures that been taken so far and see what is the source of this anxiety when it comes to Iran Capital Market Investments.
First things first. If we were the money manager of a multi-national investment fund, what would seduce us get to take the risk of investments in a previously unknown environment? Okay, we have our list now:
- Ridiculously abnormal risk free interest of 25%;
- Undervalued companies on TSE or IFB;
- Guaranteed T-bills with YTM of 30%;
- Businesses thirst for funds;
- and … (thousands of other points make the market enchanting)
As a professional we have to be iron maiden and not be fooled easily with figures. It cannot be right that all these come without any harm. What would we consider as the risks of engaging in to this?
- No IFRS financial statements;
- No big fours to put their stamp even on local statements;
- No global custodians and depositories;
- No company ratings;
- Managers with no acquaintance to international financial literature;
- Most of the compliance check-list items are not ticked (Oh no, wait a minute, this is not the risk that we are taking, this is the mistake that we are making which later will come back and bite us in the face)
Yes, this is the sad story of what have been misinterpreted in our market which never been addressed accordingly. There is huge difference between the rational risk of investment and compliance requirements before any investment can take place. What we might consider as the logical risk and expect foreigners to understand and truth be told to take, is a deal breaker in world’s financial environment. When we sit with our clients which battled tooth to nail and eventually passed the barriers to get into our market, we are being told that the some of the simplest requirements of our compliance officers are not met. Of course getting into details of each and every client’s needs are out of questions here, however, what we are trying to draw is a world-class compatible framework that we need to build for ourselves before expecting too much from the outside world.
The international investment firms, financial institutes, investment funds and alike organizations have their very own set of rules and regulatory bodies in their respected nations, like London’s FCA, Luxembourg’s CSSF, Germany’s BaFin or Dubai’s DFSA, and it is absurd to ask neglecting them just for the fact that “this isn’t something we can provide!”. When it comes to compliance, there is a defined and frankly not that hard to provide set of needs to address. Answering the bare wants of foreign investors like “Who is the Ultimate Beneficiary Owner (UBO)?”, “How friendly or strange is the legal environment of the nation?”, “What kind of investors protection schemes they offer?” or “Are there any bilateral investment treaties (BIT) in place amid Iran and our country?” would not only put their minds at ease, but also will create a safe looking environment.
Bottom line is that there is an absolute zero tolerance policy for the compliance check-list on foreign institutional investors side and we have to make our peace with the fact that only by taking solid steps towards addressing all mentioned concerns in our rule books, we will be able achieve what we want from the world’s investment society.
One of the challenges that affect presence of foreign investors the most, was and still is a banking solution for a safe transfer of funds. This article is not to iterate previously discussed shortcomings of Iran’s banking sector. Here we are to address one of the biggest decisions made by the market regulator to act as a step forward bringing foreign investors closer to Iran.
With no doubt, the inception of “Blue Model” offered by the Iranian depository (CSDI) was indeed a bright light showing the tireless efforts of our policy makers to calm the nerves of foreigners. The scheme is to eliminate the risk of third parties (mostly brokers) in trades settlement process by offering them to directly wire funds into the local custodian account. However, there are some points hidden to naked eyes there.
The depository banks of CSDI are truly professionals, yet the fact that none of them are concerned with having exposure to capital market side, by providing related services to international investors, remains. Most of them are scaled to do the massive-sized trade finance deals with huge governmental or private corporations. They won’t bother themselves to deal with establishments doing the portfolio investments and maybe they are right for now mainly due to the fact that the transactions volume is not even near considerable to be profitable. Therefore, in order for the model to be effective, the spectrum of Iranian depository banks must develop to include the ones with investments and capital markets involvement.
The grounds that are going to be used for selecting these banks is another issue that need to be addressed accordingly. First thing comes to mind is the fact that they must have “The International Face”. Truth be told, no well-respected global fund will go after an unknown micro sized bank domiciled in a risky country with low levels of financial transparency. Frankly because none of their clients will chip-into a structure with a bank account there. They might loosen up the chain a bit and go for a bank lowering their expectations, yet they will never choose “no” over “lower” standards. “What that has to do with Iranian banks?”, It has all to do with them. It demonstrates that Iranian banks to be chosen as CSDI settlement arms must be the ones with a vast colorful international correspondent network with good counterparts based in reputable environments. If we choose an Iranian bank that have limited correspondents, the establishment of any Iran oriented structures could be questioned by international funds mother holdings.
In closing, considering the measures taken so far, it is solid to say that Iran capital market participants are properly informed of what shall be done for the market to be most dynamic on international scale. However, stairways to heaven for now is passing though the enigmatic banking sector and until after the routs there are somehow fixed, the voodoo will not happen.
There must be a great will behind the agenda of attracting foreign capital into our market and the idea shall be seriously perused and not just in words. Therefore, until after proper steps are taken, neither the foreigners will come nor we shall expect them to.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
To contact the writer: Inter@agah.com