Justice Shares Scheme in Iran
Supporting low income strata of society and improving income distribution have always concerned governments, economists, and sociologists. Not only is it an economic issue, income distribution is interpreted as one of the major social and political indices. Implementing what is called as the Justice Shares Scheme stood among one of those important attempts. According to this scheme, 40% of total value of divestible companies in each market, as the subject of the second law of Principle 138 of the Iranian constitution and Article 9 of the 4th Development Plan, were decided to be allocated to the 6 low-income categories of the country. In addition, a 50% discount in shares’ prices within a 10 year repayment period, with priority being given to villagers and nomads, was approved for the two lowest brackets.
Steps to Implement Justice Shares Scheme
The implementation method is divided into three major steps of a) selling state-run companies, on installment, to the Association of Justice Shares Investment Companies, b) selling shares of the respective companies, on installment, to Provincial Investment Companies and then, c) distributing shares of these companies to the eligible individuals. Although each of these three steps requires particular implementation mechanisms, the selection and valuation of divestible companies, identification of eligible individuals, valuation of shares allocated to each individual as well as determination and reception of installments of the allocated shares are of significant importance. The Privatization Organization of Iran is in charge of divesting state-owned companies. After being verified by the scheme’s Central Headquarters, these companies will be sold to the Association of Justice Shares Investment Companies and then, the Association will allocate shares to Provincial Investment Companies, after being confirmed by the Central Headquarters.
Justice Shares Valuation
Having been approved by the Council of Ministers, parent companies will be valuated by computing the shareholders’ equity after subtracting investments’ book value plus the daily net value of the investments made in other companies. This approval insists on the existence of other approved methods for valuating other companies’ shares. As the result, those listed companies whose tickers are open in the Stock Exchange Market will be priced based on their price index on the board on the day before the allocation approval by the High Commission of Divestiture.
Justice Shares Portfolio
Since its beginning, a part of 62 companies’ shares have been allocated to the Justice Shares Scheme. Out of these 62 companies, 33 companies have been listed on the Stock Exchange Market and the remaining 29 companies are non-listed. Besides, shares of 47 companies have been priced and divested while the final prices of 15 companies’ shares, which are not listed, have not been determined. Noteworthy to say, these companies are different in terms of the allocation ratio ranging from 1% (of Iran Khodro Company) to 95% (of companies in the business services).
The Accomplishments of Implementing Justice Shares Scheme
- Allocating a Portfolio of Shares to Provincial Investment Companies
Up until summer of 1392, shares worth 444,788 bn IRR of divestible companies had been divested to the Justice Shares Scheme. According to the fact that 75,000 bn IRR accounted for that 50% discount for the two low income brackets, as the subject of Paragraph “A” of Article 34 of the Amendment of the 4th Development Plan, the liability of the Justice Shares Scheme will amount to 369,788 bn IRR. All in all, the payment of a part of the annual installments of the divested shares from the generated revenue led to the release of 22% of the shares. In addition, during 1385 and 1386, a part of this revenue was distributed to the eligible individuals and based on the Council of Ministers’ approval, it was decided that those individuals who have not been able to receive their profit of Justice Shares during the mentioned period, could receive it by referring to the introduced banks. As can be seen, some 400 bn IRR of the profit deposited for individuals over 1385 and 1386 would also be paid to other 900,000 individuals of the Justice Shares Scheme.
- Preparing Grounds for the Entrance of the Justice Shares to IFB
Relying on Article 35 of the Act for implementing general policies of Principle 44 of the constitution, the required measures for the listing of Provincial Investment Companies on the Stock Exchange Markets must be taken. It has been decided that the Ministry of Economy and Financial Affairs shall provide grounds and define the proper model and implementation method for the entrance of a part of Justice Shares whose installments have been paid to become tradable. In this regard, the legal entities of 22 Provincial Investment Companies, out of 30, have been registered by the Securities and Exchange Organization of Iran (SEO) and the process of getting trading codes for all eligible individuals is in its final stage.
- Divesting and Transferring Shares
Contracts for selling and transferring shares have been made after the dissolution of Justice Shares Brokerage Firm and divesting its shares to Provincial Investment companies since 1388, which contain the names of 56 companies from different sectors to be divested. The different weights of such companies, particularly the significant difference in terms of the level, profitability and activity domain will create challenges for managing portfolios of Provincial Investment Companies in the future. As an example, comparing a company like Iran Telecommunication Company with Alborz Industrial Company proves such a dissimilation and makes the need to assimilating the shares of companies to be divested more felt.
Another important issue is the non-completion of divestiture and ownership transfer of these shares in accordance with the contracts signed between the Privatization Organization and Provincial Investment Companies. In fact, such large companies have not yet recognized Justice Shares as their new shareholder and their registration process neither have been done nor completed yet. Being said, settlement of Justice Shares installment which is obtained from the generated revenue, will hit impediments.
Furthermore, Justice Shares has played no part at management level in these companies. And, some of the divested shares, mentioned in the signed selling contracts have undergone changes through time and some others have taken over. As the result, the necessity of re-writing contracts as well as clearing the ambiguities in companies’ financial statements is totally felt. The most important point in such divestiture is the primary valuation and pricing which is on account. In other words, the major volume of shares to be divested to the Provincial Investment Companies has not been yet priced and are still registered in these companies’ financial statements on account. Final pricing is the pre-requisite for a transparent report to be handed over to the SEO and being listed on the stock market.
- Introducing the Identified Justice Shareholders to Provincial Investment Companies
It is worth mentioning that if the current way of issuing a temporary share transfer certificate is about to be imitated for 40 mn people, a huge amount of time and paper work will be required. In this regard, a solution must be found by the SEO and Justice Shares Secretarial to save time and share issuance cost.
- Raising Capital of Provincial Investment Companies
Since the number of shares to be transferred to Provincial Investment Companies is equal to Justice shareholders and 10 mn IRR per person, considering the 50% discount for the two low income brackets and the 70 mn people population of the country, shares worth some 350,000 bn IRR must have been divested to Provincial Investment Companies and the respective companies have to raise their capital by the similar figure when allocating shares to shareholders. Although examining the legal content required for determining how to raise capital is a matter of debate, it seems that this capital raise will be operational relying on retained earnings.
- Allocating Provincial Investment Companies’ Shares to Shareholders
Considering the nominal price of 1000 IRR per share, each Justice shareholder will be allocated with 10,000 shares of Provincial Investment Companies. Despite Article 37 of the implementation of general policies of Principle 44, which insists on the release of shares equivalent to the installments paid, Privatization Organization has not yet managed to release shares of portfolios of Provincial Investment Companies. As the result, Provincial Investment Companies are still deprived of using their rights to buy and sell Justice Shares and benefiting from the market fluctuations and this valuable portfolio has been remained untapped. Resorting to the mentioned measures, however, the Privatization Organization has to start releasing Provincial Investment Companies’ shares.
- Listing on IFB
Being listed on IFB is subordinate to Provincial Investment Companies’ portfolio transparency, final pricing, precise determination of the amount of their assets and the real number of shareholders; such is not possible unless by pursuing the previously mentioned measures. The major challenge ahead, however, is the way such companies’ general meetings are going to be held. Let’s imagine that Tehran Provincial Investment Company issues a note inviting shareholders to attend its ordinary general meeting; according to the law, at least half of shareholders must be present in this meeting. The question is how such a meeting can be held?
- Trading Shares by Justice Shareholders
Having been listed on the Stock Exchange Market and discovered their price, shareholders can start trading or keep their shares and enjoy the annual returns distributed in general meetings. Albeit, the risk of collecting shares by one or a few individual or institutional shareholders to even 1% of the existing shares and holding the meeting and becoming in control of a company’s management exist. Consequently, before listing and discovering the price of Provincial Investment Companies, the risk and threat of collecting shares by major shareholders and taking control of management of these companies must be thought through. Under the current circumstances, it seems that the Special Commission of Principle 44, the Secretarial of Justice Shares, the Office to Supervise General Policies of Principle 44, the Association of Justice Shares Investment Companies, and other pertinent organizations should accelerate the implementation of the above mentioned steps in order to accomplish the goals firstly set by the leader’s decree.
- Challenges Ahead of Keeping Minor Shareholders’ Rights
The main question under this title is how one can be sure that after divesting a part of state-owned industries’ shares in the form of Justice Shares to a broad class of people and reducing the supervisory role of the government, minor shareholders’ benefits will be met? Since Justice Shareholders do not have a voting right at companies’ management level, this issue becomes of a particular importance. The contradiction between management and shareholders’ benefits is among main issues discussed in the recent decades in the capital market; considering the designed governance structure in Justice Shares transfer, it seems that such a contradiction will lead to undesired effects.
As one of the important aspect of this scheme, which was to identify the main eligible individuals, at first the two low income strata were covered benefiting a 50% discount in the price of shares to be divested. Then, other classes gradually joined this scheme and this figure has now reached more than 40 mn shareholders. Since its beginning, a part of shares of 62 companies with the value of 444.788 bn IRR have been allocated to Justice Shares portfolio. However, one of the major effects of this plan was to develop shareholding culture and improve public knowledge about investment in productive markets instead of speculation in parallel market such as gold and housing; a matter which will be realized when the possibility of trading Justice Shares in the Stock Exchange Market becomes a reality.