You may have spent a lot of time searching for the world’s best investment destination for the years to come. In this post we have provided some background information on the Iranian capital markets that you need to know before becoming an investor. We will provide a brief review of Iran’s economy and then we will get into more detail on the market such as structures, terms, instruments and commissions. If you are already familiar with the market, please head to How to Invest in Iran’s Capital Markets to find out what your investment options are. As always, please feel free to drop an email to ask for more.
Economy of Iran
In the Middle East and North Africa, Iran is the second largest economy after its regional rival, Saudi Arabia. Its Gross Domestic Product (GDP) is estimated at about 406 billion dollars for 2014. The population of Iran is around 80 million and by this measure stands second only to Egypt in the region. The economy is mostly reliant on a large hydrocarbon sector and the government plays a prominent role in manufacturing and financial services. Iran comes second and fourth globally in natural gas and crude oil reserves, respectively. Iran’s economy is mostly oil-oriented being dominated by revenues from oil production and sales.
The government of Iran’s 20-year Plan envisages a full transition to a free market for goods and services by 2025. This is in addition to the key economic reforms that have already been implemented, that focused on the state’s indirect subsidy system on major staples like bread, electricity, water, and most importantly petroleum products . These reforms have resulted in considerable improvements in efficiencies in these areas.
Over the period since the commencement of the talks on nuclear related issues between Iran and the p5+1 and the consequent partial easing of the embargoes imposed on Iran, the economy managed to survive a deep recession and succeed in growing by around 3.0 percent in 2014 i compared with 1.7 percent the preceding year. The Iranian government has proposed several measures to help improve the economy for the better. These consist of prioritizing the non-oil economy, encouraging greater independence from government, increasing corporate taxation , re-establishing the Management and Planning Organization, and opening the doors to foreign investment in the oil industry.
The government has expressed its commitment to control and reduce inflation at the 15 percent level . The nuclear agreement signed between Iran and p5+1 on 14th July is a game changer for Iran and will open up a myriad of opportunities for an economy imprisoned by sanctions for many years.
Table 1: Economic outlook
Source: FEAS Book Federation of Euro-Asian Stock Exchanges, Annual Report Apr 2014
Iran’s Capital Market Review
The origins of the stock exchange in Iran go back to 1936 when Bank Melli of Iran issued a report, detailing a plan for an operational stock exchange in Iran with the help of Belgian experts. The Tehran Stock Exchange, abbreviated as “TSE”, was inaugurated in 1967, and dealt only in bonds issued by government and companies. After the Islamic Revolution in 1979 the circumstances completely changed and the banking system underwent major restructuring .Some laws were passed in banning financial institutions from paying interest on deposit accounts in compliance with sharia a law and thus an Islamic banking system was introduced .
The eight-year war with Iraq put an enormous strain on Iran’s resources but after it ended the Tehran Stock Exchange took on a new lease of life with the Budget Act in 1988 and in consequence the number of listed companies rose to 249 thereafter .A new automated system of trading came to existence over a four- year period between 1996 to 2000 and it culminated in the establishment of new methods of regulating transactions in the stock market.
Parliament, in December 2006, passed the “Capital Market Law” to enable the establishment of a modern securities underwriting system in the market. The restructuring of the capital markets was carried out to meet its new needs and establish the Securities and Exchange Organisation (SEO) as a separate entity to supervise and regulate the TSE and the other exchanges forming part of Iran’s capital markets .The TSE also underwent legal changes and reorganized as a public joint stock company with over six thousand shareholders at the time.
A major innovation was the establishment of new institutions in the capital markets such as investment banks, advisory companies and mutual funds. All these now play a vital role in financing projects and supporting entrepreneurs.
Since 1995, the TSE has been a full member of the World Federation of Exchanges (the former Fédération Internationale des Bourses de Valeurs or FIBV), and is a founding member of Federation of Euro-Asian Stock Exchanges (FEAS). Since July 2010, the TSE has also been a member of the International Options Market Association.
The Securities & Exchange Council is the capital markets highest authority and is responsible for all policy making , market strategies, and the supervision of the capital markets in Iran. The Chairman of the Council is the Minister of Economic Affairs and Finance; other members are:
- Minister of Commerce
- Governor of the Central Bank of I.R.I
- Heads of the Iranian Chamber of Commerce, Industries and Mines and the Chamber of Cooperatives
- Chairman of the Securities and Exchange Organization
- Attorney General and his deputy
- One representative on behalf of the Associations
- Three financial experts solely from the private sector in consultation with the professional bodies in the securities market as recommended by the Minister of Economic Affairs and Finance and approved by the Council of Ministers.
- One expert solely from the private sector as recommended by the responsible minister and approved by the Council of Ministers of each commodity exchange
Note: The Minister of Economic Affairs and Finance acts as chairman of the Council.
Tehran Stock Exchange
The TSE is open for trading five days a week from Saturday to Wednesday, excluding public holidays. Trading takes place through the Automated Trade Execution System from 9:00 am to 12:30 pm, which is integrated with a clearing, settlement, depository and registry system. Settlement is T+3. In financial markets T+3 is a shorthand for trade date plus three days indicating when securities transactions must be settled.
TSE has two markets, the primary market and the secondary market. The primary market has two Boards, the main board and the second board. Ordinary shares are listed on only one of the boards in the primary market or in the secondary market. Applicants must file and submit their listing application for the main or the second board of the primary or the secondary market to the Admission Board. Click here for more information on the TSE.
The prerequisites for the companies applying to list on the Tehran Stock Exchange are summarized in the following table.
Iran Fara Bourse
On the other hand the over the counter market, AKA, Iran Fara Bourse, has its own components. The first and the second markets are where the enlisted companies can be traded. The third market is where the new IPOs and underwriting of securities take place. There is also the base market, in which, stocks of any generally owned companies that cannot be enlisted on the other markets, is being traded here.
The requirements for offering and listing in IFB are indicated in Table3. Initial offerings and secondary transactions of securities are executed in the primary and secondary markets of Iran Fara-Bourse Company. Block offerings, retail offerings and subscriptions are executed in the third market of Iran Fara-Bourse Company. Transaction of some securities, including certificates of deposits (C.D.), Sukuk, Mortgaged-Backed Securities (MBS) and other instruments are also conducted at this specified market of Iran Fara-Bourse company.
The structure of offering and transaction in Iran Fara Bourse Company
The over the counter market, AKA, Iran Fara Bourse, has its own different structure . The first and the second markets are where the unlisted companies can be traded. The third market is where new IPOs and the underwriting of securities take place. There is also the base market, on which, stocks of any generally owned companies that cannot be listed on other markets, are traded.
The requirements for an offering and listing on the IFB are set out in Table 3. Initial offerings and secondary transactions in securities are executed in the primary and secondary markets of IFB. Block offerings, retail offerings and subscriptions are executed in the third market.. Transactions in some securities, including certificates of deposits (C.D.), Sukuks, Mortgaged-Backed Securities (MBS) and other instruments are also carried on a specific market operated by Iran Fara-Bourse Company.
. The listing conditions for Iran Fara Bourse companies are summarized in table 2.
List of Indices
TEPIX: TSE All-Share Price Index; the main index of Tehran Stock Exchange
TEDPIX: TSE Dividend & Price “total return” Index
Main Board Index: All companies listed on the main board of the main market
Secondary Index: All companies listed on the secondary market
Financial Index: All companies listed in the financial sector (Banks & Investment companies)
Industry Index: All companies listed in other sectors than the financial sector
TEFIX: TSE All-Share Free Float Adjusted
TSE 50: 50 top companies listed on the basis of market capitalisation and liquidity criteria
TSE 30: 30 top companies listed on the basis of market capitalisation and liquidity criteria
Each Sector Index: based on industry classification
IFX: The main index of Iran Fara-Bourse
Base volume means the number of securities of the same type which are to be traded daily so that the total percentage of spread during the day can serve as a base to determine the price for the following day. This was ratified by the regulatory body of the capital markets, SEO, to control unreasonable fluctuations in equity prices. Nevertheless, we should stress here that base volume differs for various companies in diverse industries in the market and is only applicable to companies listed on TSE. The O.T.C. Market is not restricted to base volume and it is presumed to be the digit “1” for all companies listed in this market.
Authorized Spread Range
Authorized Spread (Fluctuation) Range means the maximum authorized price changes in a security each day in proportion to the closing price of the previous trading day. The daily spread range is restricted to typically 5 percent positive or negative at both the TSE and the IFB. However, this range changes when we speak of the rights offerings and the number is doubled to 10 percent spread. It is noteworthy to mention that the TSE Board at times of unusual price movements changes the prescribed rules, resulting from extremely high or low P/E ratio announcements.
Taxes on both TSE and OTC transactions are as follows:
Cash dividend: no tax (22.5% at source from Company).
Share transfers: The Tax Amendment has changed the regulations regarding the calculation of tax on the transfer of shares and their rights in Iranian corporate entities. In the case of shares listed on the TSE the tax on transfer of such shares and other rights is 0.5 per cent of the sales price. In the case of the transfer of the shares and their rights to other corporate entities (i.e. those not listed on the TSE) a flat rate of four per cent of value of the shares and rights transferred applies. No other taxes will be charged. The Amendment has removed the requirement to value the shares in this category.
Central Securities Depository of Iran
The Central Securities Depository of Iran (CSDI) was established to to register, collateralize, and transfer the ownership of securities thus allowing for the clearing and settlement of transactions in securities between different parties in the capital markets. Shareholders consist of the SEO, TSE, IFB, IME, brokers, financial institutions, banks, and individuals. The purpose behind the establishment of the CSDI was to segregate post trade from trading activities agaist the background of a huge surge in the volume of transactions inof companies in the market. The supervisory body that monitors the CSDI is High Council of SEO.
The CSDI provides a variety of services such as
1. Central Depository & Registry; The registration of securities and the rights attaching to them are registered electronically in a book-entry form, in order to ensure the reliable and efficient performance of stock exchange transactions. Any changes to transactions on the TSE will be recorded in the system a day after the transaction.
2. Clearing & Settlement; The clearing and settlement system finalises the financial position of stock broking companies resulting from buying and selling transactions executed on the stock exchange. Generally the main objectives of the clearing and settlement system is to mitigate the potential risks emanating from the receipt and delivery of securities and to carry out the clearing and settlement of transactions and transfer of securities ownership within a defined time frame.
3. Clients’ Balance of Portfolio; The owner of securities, whether natural or legal, may obtain a statement of information on their trade activities for any period of time and also the balance of their portfolio. This report applies to all listed companies’ trade activities and clients’ positions on any of the listed companies. Clients can get this report totally for free from CSDI.
4. Futures Contracts; The clearing house, a division of CSDI, handles the clearing and settlement of futures contracts. The post trade activities for futures contracts are based on a broker-oriented system. However, unfortunately the volume and value of transaction are not substantial due to some structural inefficiencies in the market.
5. Margin Trading; Margin trading means the purchase of securities by the crediting broker for the customer based on the mutual agreement between the parties and upon signature of a contract and the relevant forms, before the remittance of the purchase price. If the customer wishes to purchase securities on demand through a broker, he/she should submit his/her request to the crediting broker on special application forms and sign a contract to that effect.
6. Net Clear; A new clearing, settlement and reporting system of the CSDI, NetClear has been created to provide electronic and dematerialized reports derived from the post trade systems in the capital markets and to present these to the beneficiaries. This system encompasses an electronic reporting system which includes a daily clearing report, commissions report, statements and certificates of share transfers for brokers’ use.
7. Pledging Securities; The pledging of securities is generally recorded through a book-entry bythe client or pledger for the pledgee (creditor) in the central securities depository system. The release of a pledge is made at the pledgee’s (creditor) request or bank as a result of the repayment of the debt or for any reason specified legally. If for any reason the pledgor is not able to meet the demand of the creditor, the creditor will be able to sell the securities under the terms of the agreement.
8. Settlement Guarantee Fund (SGF); TheCSDI, as the clearing house of TSE and the Iranian OTC exchanges, has recently designed and launched a new service , the Settlement Guarantee Fund (SGF) , as the first step towards guaranteeing the full settlement of the stock market transactions. Taking advantage of this newly established service, the traders can by and large extent be assured of the fact that in case a party fails to honour his trade settlement obligations within the set time, the clearing house will be able to fulfill the obligations of the defaulting member within the set time.
Although not very advanced, the capital markets of Iran provides for the trading of a numberof instruments available to investors which are summarized in the following paragraphs.
The particular features which come naturally with this kind of instrument are voting rights in general meetings plus the selection of companies’ board members.
This tradeable instrument is the by-product of a listed company’s capital increase, and represents the shareholders rights to subscribe for new shares on a pre-emptive basis and at an advantageous price
Housing Mortgage Rights (HMR)
These instruments are issued monthly on the TSE and each right expires in two years. By having seventy rights one can apply for housing loans from Bank Maskan of Iran.
The Debt market principally trades government bonds, which are risk-free in Iran as the government guarantees to redeem the principal with accrued interest. Other types of bonds transacted in the market are corporate, municipal and mortgage-backed or asset-backed securities. Two kinds of particular bond traded on TSE that are Sharia law compliant are as follows.
I. Participatory Certificate (Islamic Bond)
The first participatory certificate was issued for Iran Khodro Company in 2005 and it was authorized by the SEO rather than under the Central Bank of Iran’s statutory license. This was a move that reflected the inherent financing capacities of the capital market, which was neglected for a long time.
As it is clear from its name, it is an Islamic financial instrument that bears the name of the bondholder. What is important is that the issuer of this type of instrument is entitled to cover 100 percent of the redemption amount and periodically to pay the distribution amount it is subjected to, no matter how the underlying asset might perform. Mahan Airline was the first company to employ this kind of Sukuk in Iran’s Fara-Bourse for the first time to finance its projects in the capital market
Derivatives are securities whose price is dependent upon or derived from one or more underlying assets. The most common underlying assets in Iranian exchanges arestocks and commodities. The latter are traded in large volumes on Iran’s Mercantile Exchange in contrast to stocks where trade is only on a limited basis and as yet do not constitute an effective means of hedging risk.
The trading of this financial instrument began on 25th July 2010, with 1-to-10 leverage for futures contracts , and with the CSDI qualified toclear the contracts on due dates.
The TSE intends to introduce this practical risk-controlling derivative to hedge against fluctuations in stocks and commodities prices, with the approval of the Sharia committee of the SEO.
Unfortunately neither the futures nor the options markets have been active so far and they do not appear to be getting active in the near future.
It is an investment vehicle that is made up of a pool of funds to be invested in portfolios of stocks or commodities or other sorts of similar assets, providing access to the professional management of securities to small investors, who may not have access to this expertise given their limited amount of capital and knowledge of the markets. At the present time investors can invest in 157 active mutual funds.
In Iran funds can be classified by their size (small or large cap), primary underlying assets (stocks, fixed income securities, blended), kind of activity (securities, gold, commodities and etc.), liquidity (guaranteed liquidity and non-guaranteed liquidity) or by their return ( guaranteed minimum return, non-guaranteed minimum return and funds with expected return).
For small cap funds minimum capital of 5 billion Rials (approximately 150,000 USD) is required and 50 billion Rials (approximately 1.5 million USD) is needed to set up a large cap fund. The fund manager, settlement, custodian, trustee, auditor should be authorized by the SEO individually.
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. In September 2013 the very first ETF was listed nn the TSE.
Commission & Fees
As of July 2010, TSE and IFB trading fees include:
This was the minimum you needed to know about Iran’s capital markets. And of course it does not provide sufficient information for you to enter the market as a professional investor. You need to keep in mind that the capital markets in Iran are still growing and becoming more sophisticated. Currently there is lack of available data dissemination in English which acts as a barrier to entry. Following the signing of the nuclear deal the opportunities are immense. We at Agah group strongly suggest investors start investing in the Iranian capital markets through mutual funds which are more liquid and do not require the time consuming procedures and market expertise that other options require. To know more about Agah mutual fund, one of the longest established mutual funds in the market please read:
Agah Group International Team