As 9th International Exhibition of Bank, Exchange & Insurance of Iran starts tomorrow 10th July, it sounded a wise idea to brief our readers on the structure of capital market of Iran.
Legal Infrastructure of Iran’s Capital Market*
Capital Market of Iran
Social and financial changes in the 1960’s caused Iran’s economy to move towards the one being more market-based. This made financing the economy undoubtedly necessary by designing new markets and instruments.
Thus, capital market foundation was put into the agenda and the respective law was passed by the Parliament, leading to establishment of Tehran Stock Exchange (TSE), with the aim of encouragement of private section development across the economy of Iran.
In February 1968, TSE started its activity by listing the shares of Bank of Industry and Mine Development of Iran, Oil Company of Pars, governmental securities, treasury bills and Abbas Abad securities.
Tehran Stock Exchange continued its activity under the old structure of Iran’s capital market till 2006. Securities and Exchange Brokers Association, as the only executive pillar, was in charge of managing the stock exchange. Also, Exchange High Council was tasked with functions of supervision and policy-setting.
New Stock Exchange Act was ratified in 2006, due to low efficiency of the old law to meet the new requirements of the capital market.
This law is thought to be the most important parameter of quantity and quality enhancement of Iran’s capital market.
The law of development of financial instruments and entities was also passed by the Parliament in 2008 with the aim of overcoming problems related to new financial entities supervision and tax issues. This law was regarded as a turning point in the history of Iran’s stock market.
Overcoming money laundering problems and the 5th Development Plan are the other effective criteria on completion of Iran’s capital market. Various financial and professional mandates, with the intension to accelerate investment momentum in the capital market, have been ratified in recent years to reinforce the legal infrastructure of capital market of Iran as perfectly as possible.
A quick summary of such laws is given in the table below:
The Exchange High Council
According to the rules and regulations governing securities market of Iran, this council has been founded to support investor’s rights, organize, maintain, and develop a transparent, fair, and efficient securities market. This council is defined to extend standards in the capital market namely:
- maintaining highest level efficiency in the securities market in Iran
- Formation of the most important supervisory entities in Iran’s capital market
- Taking macro-policies decisions for the capital market of Iran
Supervising the Enforcement of the Law
The Securities and Exchange Organization of Iran (SEO):
This organization was founded based on Article 1 of “The Rules and Regulations Governing Iran Securities Market, in 2007.” The SEO is a public, non-governmental entity, which has an independent corporate and financial body and acts as the supervisory and regulatory body in the capital market, supervising all the existing institutions in Iran’s capital market. The SEO has various duties, some of which are as follows:
- Preparing bylaws required for market’s regulations enforcement and submitting them to the council
- Supervising the quality of rules and regulations enforcement
- Registering and issuing public offering of securities and supervising them
- Taking required measures to prevent violations
- Suggesting the Council to use new financial instruments
- Issuing, suspending, and nullifying financial entities and associations
- Supervising foreign individual and institutional investors in the exchanges
- Ratifying maximum charges and commissions for exchanges and other financial entities
What comes below is an illustration of the entities monitored and kept under close watch by the regulator.
Tehran Securities Exchange (TSE):
According to the first Securities and Exchange Foundation Law in 1967, “Tehran Securities and Exchange Brokers Organization” was founded in February 1968. This organization was dissolved just after the ratification of The Rules and Regulations Governing Iran Securities Market. Its supervisory and executive duties were assigned to the SEO and TSE, respectively.
Based on the rules and regulations governing Iran Securities Market, TSE is responsible for tasks such as establishing and organizing securities and exchange, registration of securities, supervising the quality of trades, data gathering and processing, and supervising the activities of issuers.
Iran Farabourse Company (IFB):
Iran Farabourse Company was founded in order to enforce Article 28 of the rules and regulations governing Iran Securities Market in 2009. The most important duty of Iran Farabourse Company is to organize and guide part of capital market, not qualified for being listed on TSE. For this purpose, admission process to this exchange is that interested companies are allowed to enter this bourse with minimum entry conditions. Easiness of procedures, tax exemption, introduction of the company to the market, data transparency, calculating fair value of shares, and bonds issuance capability are the benefits of being listed on Iran’s Fara Bourse.
Iran Fara Bourse consists of five markets, including: first market, second market, third market, new financial instruments market, base market. Each one of these markets has specific functions. Shares of issuers can be listed and traded in one of these, with respect to how much they are able to fulfill the required specifications.
The existence of an organized market for free exchange of supply and demand of commodities can play a very crucial role in economy of any country.
As a result, Tehran Metal Exchange, as the first mercantile exchange of Iran, was founded in 2004. After that, the agricultural products exchange was established in 2005. Then, by merging these two exchanges, Iran Mercantile Exchange Company (IME) was inaugurated as a new and absolutely independent company in September 2008, based on Article 58 of rules and regulations governing Iran Securities Market, which states: “government is in charge of taking required measures in order to activate mercantile exchanges and maintain its accordance with the law, offering required legal solution”. In this exchange market, various petrochemical, oil, industrial, mineral, agricultural products are traded through different contracts such as: cash, credit, Salam, and futures.
Iran Energy Exchange (IRENEX):
Iran is known as one of the biggest oil and gas producing countries, possessing one of the biggest hydro-carbon reserves of the world.
From another aspect, considering the country’s 20-year prospect plan, the necessity for launching an organized market in order to price and trade oil as an strategic product in the region was understood to be the underlying reason backing Energy Exchange opening inside the country.
The Exchange High Council, in the meeting held on 20 June, 2011, ratified the Energy Exchange Company establishment proposal. Regarding this, Energy Exchange, as the fourth Exchange market of Iran, began operation so as to offer oil products and derivatives, electricity, natural gas, coal, contamination right, and other energy products.
Energy Exchange is made up of three markets, including: physical, peripheral and derivative. Each of these markets have both domestic and international rings.
Physical market has three boards which are related to electricity, oil and gas plus the board for other energy products. Derivative market contains three boards, namely standard parallel Salam contract, futures contract, option contract. However, various products from petrochemical and refining companies are also traded in this market.
Central Securities Depository of Iran (CSDI):
CSDI was founded as a public joint company in accordance with the rules and regulations Governing Iran Securities Market, in December 2006, for registry and exchange activity and post-trades.
As its name implies, the company’s role is very crucial, since it is directly safeguarding clients’ interest and facilitates financial markets transactions. CSDI as a trustworthy entity has the responsibility to deposit and transfer investors’ securities.
Different financial institutions are operating in Iran capital market. The number of active financial institutions at the end of 2014 compared to 2015 are demonstrated in the following table.
Article 5 – provision 1 of the rules and regulations governing Iran Securities Market states that the brokers association, traders association and other similar associations are self-regulatory organizations, registered as non-profit and non-governmental institutions. In other words, associations actually are professional communities, acting in securities market; providing professional services and respective supervisions. In this regard, three associations were founded in Iran’s capital market, including:
- Securities & Exchange Brokers Association:
This entity coordinates relations between different brokerage firms in Iran.
- Iran’s Investment Institutions Associations:
This association organizes interactions between investment companies and supervises holding companies, investment banks, and various types of investment funds such as: pension funds and other investment entities.
- Financial institutions:
There are diverse kinds of financial institutions in Iran’s capital market, each of which dedicated to act in a specific field. The institutions acting in the market are as comes below:
- Investment companies
- Investment Banks
- Brokerage companies
- Investment Advisory companies
- Asset management companies
- Mutual, pension, and ETF
- Holdings companies
- Financial data processing companies
- Credit rating companies
Mutual funds are among financial Intermediaries, collecting capital by continuous selling of their investment units to the public so as to invest pooled money in varied mix of securities, including shares, bonds, monetary market’s instruments, etc.
Article 20, provision 1 of the rules and regulations governing Iran Securities Market also states that investment fund is a financial entity whose major activity is in the investment of securities and owners of which share its profit or loss.
Mutual Funds vary vastly and are categorized on different features such as being pension funds, construction funds, exchange traded funds (ETF). That said, market of each serves different functions. Below, you can see some information in table and chart forms on mutual funds:
Iran’s capital market includes a wide variety of industries of which a considerable portion of the country’s GDP is comprised. Total market value by each sector is given below for 2014 and 2015:
The year 2015 was undoubtedly the year of Islamic securities. The value of newly issued Sukuk recorded unprecedented value. The Islamic Treasury Bills were issued for the first time while Standard Parallel Salam, introduced two years ago for the first time, was widely used as a suitable means of financing.
In the same vein, total market value and total trade value is for 2013 and 2014 are presented by each sector as you can see in the circle charts below:
*The charts and tables are taken from Securities and Exchange Organization’s brochure
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.
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