Hand-in-hand with privatization and deregulation has been the strong growth of Iran's capital markets over the past decade.

One of the main vehicles behind the economic transformation that Iran has undergone over the past decade is that of the country's capital markets. Regulated by the Securities and Exchange Organization (SEO), the various main players in the capital markets include the Tehran Stock Exchange (TSE), the Iran Mercantile Exchange, the Central Securities Depositary, as well as a host of brokerage houses. The TSE alone has a market capitalization of more than $86.43 billion and had 338 registered companies as of end-3Q 2010, making it one of the region's top five players. The wave of privatizations unleashed by changes to Article 44 of the Constitution have seen the TSE become the focus of high-paced trading action, as investors both large and small look to take a stake in Iran's future.


The origins of the market stretch back to 1936, when initial studies on the formation of a capital market in Iran were performed for Bank Melli Iran. Although World War II interrupted plans at the time, the idea of forming an equity market in Iran was taken up again in 1966, with the Parliament of the time passing the necessary legislation. The TSE began trading in 1967 with just six companies, though growth over the next decade saw this number rise to 105. Following the Revolution and in the aftermath of the Imposed War on Iran, trading on the exchange was officially halted for a decade, while a wave of nationalizations saw the number of registered companies fall to 56.

The market came back to life in 1988 following the first post-war Budget Act, and by 1996 had 249 companies registered and trading on the TSE. Between 1996 and 2000 the TSE's regulatory mechanisms were improved, with company reporting procedures and automated trading systems developed. The period since 2000 saw an explosion in the use of the capital markets, with the Tehran Metal Exchange (now a part of the Iran Mercantile Exchange) opening its doors in 2003, followed quickly by the establishment of the Tehran Agricultural Commodities Exchange in 2004. This rapid growth in the Iranian capital markets saw the increasing need for a regulator to coordinate and better supervise the activities of all of the various exchanges and instruments that were being created. In 2005, Parliament passed legislation setting up the SEO, which opened its doors in 2006.


The Tehran Stock Exchange Corporation was established following demutualization in 2006 with an initial paid-in capital of IR150 billion. In October 2010, an extraordinary general meeting of the TSE's shareholders saw them agree to raise the level of paid-in capital to IR300 billion over two stages in order to cover the cost of building improved physical premises for the exchange. The TSE is owned by a mixture of registered brokers and dealers holding 40% of the company, other registered financial institutions (40%), and common shareholders (20%). There are 87 brokers registered to work on the TSE, representing a mix of bank-associated licensees and independent houses. Improved levels of automation mean that 29 of these brokerages can offer customers internet order booking.


The TSE holds five trading sessions per week from Saturday to Wednesday, with the pre-ordering window opening at 8.30 am before the market operates from 9.00 am until 12.00 pm. The automated trading system matches all buy and sell orders using a best price and time priority system, and there is no minimum lot size. A trading ceiling/floor of 4% for shares and 8% for rights is applicable for each trading session, although this can be changed by order of the regulator, the SEO. Short selling is not available.

No capital gains tax is payable on transactions, though a 0.5% levy is made on all sell orders. All other brokerage and transaction fees are determined by the SEO. The settlement of all trades is done on a T+3 basis through the Central Securities Depository of Iran.


The foreign participation rate in the TSE has risen considerably since April 2010, when new regulations allowed the full and free repatriation of foreign capital. Previously, foreign investors looking to buy shares in companies listed on the TSE were locked into a three-year wait to sell their shares, meaning foreign interest in the TSE was tepid. As the President of the SEO told TBY, “Foreign investors can now take their money out in even one day." In 2009, before the changes, just $140 million came into the market from foreign investors, while this proportion rose considerably since the regulations were amended, with some $250 million being brought in 2Q and 3Q of 2010 alone, a pace four times that previously recorded. Other rules to go were the 10% ownership cap on publicly listed companies for foreign investors, now raised to 20%. The rule changes are helping to encourage a higher flow of foreign capital into Iran, as well as acting as a positive influence on the TSE's liquidity levels.


The TSE has three forms of listing, covering both the main market and the secondary market. The main market is divided between a Main Board and a Secondary Board, while a Secondary Market for smaller companies also exists. The TEPIX index is the broad market indicator for the TSE, though indicators also exist for the First Market and the Second Market of the exchange. Other indices used to measure the performance of the market include the TSE 50, the Industrial Index, and the Financial Index. A new index, the TEFIX 30, was introduced in at the beginning of 4Q 2010 as a more accurate measure of blue chip company performance.


The TEPIX closed off 3Q 2010 at 18,671.30 points, up 3.99% on a month-on-month basis and up a more dramatic 66.60% since end-2009, according to data released by the TSE. Market capitalization for the TSE was measured at $86.43 billion, showing a gain of 47.18% on YE2009 figures. Some 7.63 million shares and rights were traded on the TSE over 9M2010, while trading volumes were estimated at $2.6 billion.

The top five companies by market capitalization in September 2010 were the Telecommunications Company of Iran at 12.13%, National Copper Industries (5.74%), Esfahan Mobarakeh Steel (4.87%), MAPNA (3.74%), and Parsian Bank (3.43%). The top five companies by value of trades were Saipa at 46.53%, Esfahan Mobarakeh Steel (5.88%), Islamic Republic of Iran Shipping Lines (4.15%), Ghadir Investment Company (4.08%), and Rena Industrial Group Investment (2.85%). One of the more interesting aspects of the TSE is the strong presence of commodity-linked companies on the exchange. Such a linkage may well see the Iranian market exhibit strong reactivity to commodity price shifts going forward.


In July 2010 the TSE introduced single stock futures for the two most widely traded stocks by volume (Karafarin Bank and Parsian Bank), while by September the number of single stock futures had risen to eight. Although volumes are still small, at only $1.16 million in September 2010, the beginning of a futures market bodes well. In August of 2010 the green light was also given for the development of regulations and mechanisms for the launching of a currency derivatives market in the near future.


Although a relatively new contributor to the Iranian capital markets landscape, the creation of a fund industry in Iran is beginning to gather pace. Regulations permitting the creation of fixed-income and equity funds were issued in early 2008. Since then, 37 equity funds and four fixed-income funds have been launched. The level of assets under management controlled by these 41 funds is around $230 million as of end-1H 2010, according to data compiled by Turquoise Partners.


The Iran Mercantile Exchange (IME) was established in 2007, and brought together the trading activities of the Tehran Metals Exchange and the Iran Agricultural Exchange. The market specializes in commodities trading in metal and minerals, agricultural products, and petrochemicals and oil products. The main tradable contracts on the IME include spot contracts, forward contracts, contracts on credit, futures contracts, and call and put options.

The trading system for the IME is based on an open outcry auction augmented by an electronic platform that matches and executes buy and sell trades from the 63 registered brokers in the trading pit. Applications from another nine brokers are pending. The exchange has 169 trading companies selling their products, with 125 local companies and another 54 foreign companies active. The Oil Exchange was established in 2008, and has a different venue for the trading of oil and petrochemical products, being located in the duty free zone of Kish Island.

Trading volumes on the Iran Mercantile Exchange have been strong, registering some $10 billion in the Iranian year 1388, roughly corresponding to the period from 2Q 2009 to 1Q 2010. For the period since then until August 2010 trading volumes were $4 billion over the four-month period according to IME data, indicating the effect of new commodity contracts being added to the trading floor.


With the heavy concentration of commodity-linked companies on the TSE, and the growing strength of the IME as an international link for the trading of commodities, the Iranian market is showing increasing parallel movement with the global marketplace. As Iran continues to privatize and open up to the global economy, it may potentially lose its more unique aspects of the last few decades: its lack of correlation with global economic trends. However, the return of Iran as an international trading power may be just the intention behind the reform process.