TBY talks to Dr. Ali Salehabadi, President of the Securities and Exchange Organization.
TBY The current Iranian Capital Markets Law was passed in 2005. What reasons led to the new law? What is the structure of the Iranian capital markets after the new law?
DR. ALI SALEHABADI Iran’s capital markets have grown fast in the last decade. Before the new law, we had two mercantile exchanges: the Iran Agricultural Commodity Exchange for agricultural products and the Tehran Metal Exchange. Moreover, the Tehran Stock Exchange (TSE) and its supervisory body were not separated from each other; they were the same company. Based on the new law, the Securities and Exchange Organization (SEO) was established as a public non-governmental organization, while the two exchanges have been demutualized. The SEO became the sole body supervising these exchanges. The two commodity exchanges were merged based on this law and they formed the Iran Mercantile Exchange. The TSE has been reorganized as a publicly owned joint-stock company. It is also required by the law that no person or legal entity can own more than a 2.5% share of the TSE Company. The same is true for the Mercantile Exchange, as well. In the Mercantile Exchange, agricultural products, metals, gold, petrochemicals and oil by-products can be traded. In the near future, we will also have a futures market for crude oil. In addition, an over-the-counter (OTC) exchange (Farabourse Company) has been established where the shares of companies that do not comply with TSE requirements can be traded, while the Central Securities Depository of Iran (CSDI) provides clearing and settlement functions. There are two associations in the capital market, the Brokerage Association and the Financial Investment Institutions’ Association. All brokerage firms are members of the former and all investment institutions are the members of the latter. This is the structure of the Iranian capital market. The SEO is the body that supervises all of these institutions.
As the supervisory body for Iran’s capital markets, what tools do you use to make the markets safer for investors?
We supervise all these entities and also the issuers in the capital market. Before the new law, there was no supervision over the primary market. However, according to the new law, we also supervise issuers in the primary market. If the public interest is on the table, the SEO is the supervisory body for that. We supervise public issuers on disclosure issues and the transparent flow of information from issuers, so that enough information is made available to investors.
We also monitor the transactions in all these exchanges, as transparency is very important in the new law. Under the law, the manipulation and dissemination of incorrect information can be prosecuted by the courts. We also have a special court in the judiciary for the capital market, and so far, in around one-third of cases, the court has convicted those charged.
Under the new law, we can inspect all the companies under our supervision. They must provide the information the SEO requires for its inspection purposes. The managerial bodies (boards of directors and the managerial directors) of the financial institutions we supervise should also be approved by the SEO. They are selected only on the basis of educational background and experience.
At the beginning of 2010, another act was passed by Parliament that is complementary to the law of 2005. With this we received useful tax exemptions for new financial instruments like sukuks and any other financial instruments approved by the SEO. Before 2005, we had no mutual funds in the Iranian capital markets, but we now have mutual funds, and we also granted tax exemptions for them with a new regulation in 2010. Mutual funds will increase our capacity to absorb funds in the capital markets, as many people want to invest but do not know how.
Given this regulated and safe environment as a result of the new law, do you foresee growth in the Iranian capital markets in the upcoming years?
According to the figures we have, last year, which is 1388 in the Iranian solar calendar, we had around $20 billion in total transactions on the TSE and around $10 billion on the Iran Mercantile Exchange. An OTC exchange has only recently been established. This was the biggest volume of transactions we reached since the establishment of the exchange in Iran. In the first four months of 1389 (2010/2011), the volume of transactions on the TSE reached $8 billion and on the Mercantile Exchange $4 billion. We expect the figure will increase more and more this year. Market capitalization was almost $80 billion for the TSE. The rate of return for the TSE was 58% last year, and it has been 34% so far this year.
What is the level of foreign investment in the Iranian capital markets?
There are Iranians all around the world investing in the Iranian capital market. So far, the role of other foreign investors has been limited, because there used to be some regulations that restricted foreign investment. For instance, foreign investors could not take their initial capital from the TSE for three years. This was a restriction on foreign investment. But in June 2010, the Cabinet of Ministers ratified a new regulation for the TSE that omitted this restriction for foreign investment. Now foreign investors can take their money out—even in one day. Moreover, there are also new central bank currency guarantees. If in the future there are some restrictions regarding the exchange of currencies, the Central Bank of Iran will provide the currency to foreign investors at market rates. This has been recently published and we expect to absorb more foreign investment in the TSE thanks to it.
Do you also have growth plans for Islamic financial instruments, such as sukuks?
Last year, we only had mushareke sukuk and it recorded $800 million in transaction volumes. This year we will also provide ijareh sukuk. We have jurisprudence over Islamic financial instruments, and have a Sharia Board of five Islamic scholars who oversee whether the new instruments are in line with Islamic law. We have good relationships with other countries’ supervisory boards that also have sharia boards like ours. We provide the opportunity to exchange the Iranian experience on Islamic financial instruments with other countries and each year we hold an international seminar on Islamic capital market issues in Tehran. The Iranian capital market fully complies with the sharia, as a result of the Iranian Constitution, and therefore Iran gained much experience in Islamic financial instruments. This is also one of the reasons behind the fact that Iran was less affected by the global economic downturn of 2008-2009.
The SEO is part of the ongoing privatization program as the regulatory body of the TSE. How do you see the current status and future of the privatization program?
According to Article 44 of Iranian Constitutional Law, many large corporations will be privatized through the TSE. We have around 40 industries in the TSE, meaning that we have a uniquely diversified market in the region. The market’s diversification minimizes the risk for investors, because they can create a portfolio of different sectors. So far, privatization has been very fruitful for the Iranian capital markets, especially through the large companies that have been privatized, because we have had new profitable investment areas that could attract investment from the public. We have been successful in absorbing the money coming from the society to buy shares.
A futures market has been established on the TSE recently. What are the growth plans for the futures market?
We have recently established the single stock futures market in the TSE. Currently, there are only two firms listed on the futures market. We hope to increase the number of listed firms and to design an Islamic index.
What role will the capital markets play in achieving the country’s macroeconomic goals in the upcoming 10 years?
I think, in recent years, we have been successful in the privatization program. At present, 3.5 million people have invested in the TSE, which creates a better distribution of wealth throughout society. Also, being listed on the stock exchange makes a company accountable to its investors, thus the company has to reduce costs, increase its income and become more efficient. We expect the Iranian capital market to absorb a considerable amount of foreign investment, for market capitalization to reach $1,000 billion, and for the Iranian market to become among the top 10 stock exchanges in the world.
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