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Iran International
June 2000, No. 9
Summary: The main objective of the Third Economic Development Plan
(2000- 2005) is the privatization of government companies. The realization of this
objective needs an active stock market in which shares of those companies are offered to
the private sector. In the past year, many economic and political developments inside and
outside the country affected the whole economy including the Tehran Stock Exchange, the
main center for exchanging stocks in Iran. The following account focuses on recent
developments in TSE as well as the plans adopted for the future of Iranian stock market:
Text: Iran's most important economic event in 1999 was the compilation and approval of the Third Economic Development . A number of new measure have been envisioned in the Plan for activating the TSE. Selling government property started in the beginning of last year in line with the focus of the Third Plan, i.e. privatization of state-owned enterprises.
During the past year, the number of companies registered in TSE slightly decreased as compared to the preceding year, and people's participation (minor shareholders) reduced by 1.5% and reached 21.78%. However, the trend of changes in the indices of the deals made in TSE, resulted in the participation growth and a logical increase in the stock prices.
The 70% growth in the number of stock purchases and 20% increase in the number of issued statements show that a significant return to trading stocks by the people has taken place. Last year, more than 1.1 billion shares and priority rights of 254 companies, worth 5243.6 billion rials, were exchanged by 122,500 people at an average price of 4,433 rials. In the same period, the number of deals showed a growth of 65% and the number of shares was reduced by 2% comparing to the pervious year. The number of stock purchasers, the companies whose stocks were sold in TSE and average stock price increased by respectively 69%, 6.7% and 96.6% in the past year as compared to the preceding year.
On the other hand, the profitability of TSE deals distinguished the center from other stock markets: 70% of the companies whose stocks were traded in TSE had a positive yield, while 63% of them yielded 18% (annual banking interest) and 24.5% yielded over 100%. Only 13.8% of those companies had a negative yield, while this figure was 30.5% for the period between March 1998-March 1999.
The reduction of risk for the investment in TSE can be attributed to the strong performance of TSE officials which brought about the public trust in the stock market investments.
Past Performance; Future Programs: In recent years, the most significant prerequisite for a structural reform in the stock market was a "relative stability" which could be achieved through an effective supervision over market fluctuations. This stability has been created, to some extent, and the market is relatively healthy, while the price index, which can be used for evaluation of market performance, has started a growing trend.
Structural reforms in the stock market consist of two components: 1. Promotion of competition among companies 2. Transparency in dissemination of information within the market. The main condition for realizing these two objectives is an effective management, which should be able to prevent the prevalence of financial speculation.
A structural reform is not possible unless the whole TSE organization, including is regulations and executives, is reformed. Therefore, officials have been endeavoring to implement changes in the TSE in order to match with market trends. It should be remembered that these efforts should continue in the future if an efficient stock market is to be achieved.
Another reason for the current active stock market is the growth of oil prices and a stable exchange rate, more banking facilities granted to companies and recent political developments. A relatively active stock market can be effective in ending the economic depression and promotion of economic activities in the following year.
The main plan adopted by TSE officials is the continuation of the policies followed in the past couple of years which sought competition, transparency and efficient supervision and, finally, the expansion of Iranian capital market. Iran is a developing country and its capital market should be attuned with national economic policies in fulfilling the growing economic needs of the country.
The plan for the expansion of the stock market has four main pillars: geographical expansion and the expansion of activities, tools and structures. Geographical expansion means the Iranian stock market should not be limited to TSE only. Of main measures to be taken in this regard are setting up centers in the provinces for exchanging stocks and providing facilities for electronic trade.
In line with the expansion of activities, launching commodity exchange centers has been considered. Capital market in this country is only limited to exchanging securities, while commodity exchange centers have a background as old as stock exchange in the world. Creating harmony between the commodity market and the modern production network, reforming economic structure and controlling the unofficial and illegal economic activities, equipping financial sources in the manufacturing sector and promotion of the quality of products are some of the outcomes of commodity exchange centers.
For expansion of tools in the capital market, TSE officials make efforts to diversify the financial tools applied in the stock trade. For example , "participation bonds" , which is used for the companies admitted in TSE, are not allowed to be traded in a secondary market, while it would make these bonds more attractive and reduce the banking system work load. Moreover, studies are under way for creation of derivative financial tools in the stock market.
Regarding the structural expansion, efforts are focused on creation of " over the counter " stock trade. Many companies do not qualify for admission in the TSE. Another center should be set up in which the stocks of such companies can be traded. Establishment of the center becomes more important given the fact that the main objective of Third Development Plan is the privatization of government companies whose number is very high and their shares have to be offered in a free stock exchange.
TSE Polices Under the Third Plan: Articles 91 and 92 of the Plan focus on two dimensions of geographical and tools expansion. Article 91 also mentions the launching of a computerized network in the capital market through which the electronic trade of securities and bonds becomes possible. This is and urgent necessity for Iranian economy. Article 92 stipulates the creation of local stock exchanges all over the country and creation of new financial tools.
Participation Bonds: The strong point regarding participation bonds is their ability to transform to liquidity easily and this characteristic is reinforced when these bonds are traded in a secondary market. Participation bonds trade is a profitable business, or may be profitable in the future. Therefore, trading these bonds in the TSE would increase their ability of changing into liquidity and would add up to the variety of financial tools in the stock market.
Issuance of participation bonds has many advantages. A center should also be set up for trading these bonds, but, traditionally, participation bonds are traded in the stock exchange. In an active market, participation bonds can be changed into liquidity faster. This would lessen the burden which is currently on the banking system. Moreover, they can bring about an efficient supervision over the funds gained this way.
Attraction of Foreign Investments: Foreign investments can be supported in the TSE and such investments are made within the legal framework, but for direct and non-supported presence of foreign investors, the draft of a procedure has been prepared by TSE officials in which many facilities are considered for foreign investors.
Meanwhile, some limitations have been considered regarding the level of foreign participation and selling of shares to them. The reason for such limitations is the low price of stocks in Iran as compared to other countries and the ratio of "price to profit" which is very low here. Meanwhile, considering the exchange rate and market fluctuations seem to be necessary.
It is hoped that in the current year, new stock markets are launched in the provinces in which shares of state-owned industries can be offered to the public at a large scale, while the direct intervention of authorities in these markets should be reduced.
The attraction of investments, one of the objectives of TSE officials in the past year, the move toward more transparency and reduction of government intervention in the stock trade raise the hope for the expansion of stock market and the quick flow of liquidity. The realization of these objectives lies, to a large extent, with the Sixth Majlis.