Preparing for foreign investments: glance at Iran’s largest stock exchange

Preparing for foreign investments: glance at Iran’s largest stock exchange
08:07 12 Dekabr 2015
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Baku, Azerbaijan, Dec. 11

By Farhad Daneshvar – Trend:

Contrary to the expectations, stock exchanges in Iran including the largest one, Tehran Stock Exchange (TCE), have been bearish over the past months. However the ongoing political process between Tehran and the world powers may create hope for international investors to reap fat profits.

Iran expects the international sanctions imposed by west on its financial and industrial sectors to be lifted in early 2016 as it is adhering to the terms of a milestone nuclear accord inked between Tehran and the world powers in July.

Meanwhile, lots of foreign investors hoping for big profits and Iran planning to renew its aging industry, ailing economic system have conducted meetings, in preparation for the lifting of international sanctions.

According to the latest monthly briefing released in November on its website, 318 companies as well as 37 factories were listed on Tehran Stock Exchange in 37 sectors.

Foreign Portfolio Investment:

All financial instruments and contracts have to be in compliance with the Islamic rules in Iran. Tehran Stock market had set several limitations on foreign investment. However to simplify the application procedures for foreign investment, the stock market gradually eased the limitations on foreign investors.

The number of shares owned by the total foreign investors shall not exceed twenty percent of the total shares number of the companies listed on the exchange or on the OTC market or twenty percent of the shares number of any company listed on the exchange. The number of shares owned by each foreign investor in any company listed on the exchange or on the OTC market shall not exceed ten percent of the shares number of such company. The foreigners have to submit the required information and documents to the Securities and Exchange Organization - which is the highest authority and is responsible for all related policies, market strategies, and supervision of the market - along with an application based on the forms prescribed by the Organization so as to obtain a license for trading in securities on every exchange or the OTC market.

Listing in TSE

Listing requirements at Tehran Stock Exchange is practically conformed to the global standards, and includes capitalization, continuous listing qualification, as well as comprehensive information dissemination. Admission and trading of securities in Tehran Stock Exchange is done in two markets and three boards.

Listed companies are provided with a 10% tax exemption. And, companies with 20% free float shares are provided with a 20% exemption.

Types of Markets

Cash and futures markets are the two main types of market in the TSE while the cash market, itself, divided into two markets of First market (including two boards) and second market. There is a separate market for a participation certificate (Islamic Bonds). The futures market was launched in the middle of 2010.

Commission, Fees and Tax

In addition to the usual participation bonds Commissions, Brokerage Fees, TSE Commission, SEO Commission and Clearing Fee, the sellers will have to pay 0.5 percent of the value of the transaction for taxes however there are no taxes on capital gain and there is no dividend tax on shareholders directly. The brokerage fees for shares and rights are 0.4% of the value of the transaction payable by both the seller and buyer.

Capital and Shareholders

The capital stock of the Company is equal to the sum of 900 billion Rials, which is divided into 900 million registered common shares of 1000 Rials each.

Currently no individual shareholder of any class can hold more than 2.5 percent of the Exchange's total number of shares.

The shareholders of the Company have been classified in three classes of individual brokers, financial institutions and others.

Class one: Persons who have received the license for brokerage activities in compliance with the Stock Exchange Establishment Law or those who shall receive the license for broker/dealer activities in compliance with the Securities Act 2005 and shall be accepted as the members of the TSE.

Class two: Financial institutions other than brokerage firms who shall receive the activity license from the SEO.

Class three: All persons other than class one or two.

TSE investment instruments:

Common Stock and Right are the tow type of investment instruments, related to the equity, traded in Tehran Stock Exchange

1) Common Stock: Only common stock is traded in the Tehran Stock Exchange. Each common stock has one voting right in assemblies and it's holders in addition to the choice of the board members, can confirm or reject the manager's actions by their vote. For the first time, common stock is offered to the market through primary market and issuer must register it in the Securities and Exchange organization (SEO) and get the permission before public sale. SEO confirms the adequacy and accuracy of information before the company's supply of securities. TSE's listed companies are required to not issue other type of shares such as preference share.

2) Right: The rights resulted from the capital raising belong to the current shareholders and is tradable on the exchange. Holders of these rights have priority in buying the new issued common stock. The purpose of granting priority, initially is maintaining the control of existing shareholders on the company. If a company gives priority right to its shareholders to buy stock, they can keep your ownership percentage in the company.

Type of bond based on Islam

Based on sharia'h, Participation Certificate and Sukuk are two types of bond traded in Tehran Stock Exchange.

1)Participation Certificate is a kind of Islamic bond that is issued with the specific statutory authorization or permit of the central bank to providing a part of financial resources needed to create or complete governmental construction and developmental projects.

Public corporations, municipalities, public institutions, NGOs, charity institutions and listed and cooperative companies can also issue partnership bond to create or complete the profitable manufacturing projects, preparing raw materials for producing and offering services.

A Fixed profit will be paid to the holder of partnership Certificate in accounts (prepaid) several times a year.

Definitive profit of partnership Certificate will be paid to the holders at maturity and the amount is determined according to the nominal price and investment time.

If the project results in a loss, or the profit is less than the prepaid amount, issuer is responsible and prepaid is not refundable.

In 2005, Iran Khodro's (an Iranian giant automaker) Participation Certificate was listed on TSE for the first time over the past three decades which was a milestone in the Iranian Capital Market.

2) Sukuk, which are often called Islamic bonds, cover Islamic investment instruments that are registered in the name of the bondholders.

Holding a sukuk certificate represents ownership in the underlying asset. Sukuks are generally treated as a guaranteed debt. Although similar in structure to asset-backed securities, Sukuk's issuer is obliged to pay the bondholder 100% of the redemption amount and a periodic distribution amount, regardless of how the underlying performs.

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