Central Bank of Iran Restricts Ownership of Banks’ Shares

EghtesadOnline: In line with efforts to help promote corporate governance and protect the rights of bank depositors and shareholders, the Central Bank of Iran has announced restrictions on ownership of banks’ shares.

News ID: ۷۴۸۶۱۴

05 October 2019

Pointing to a bylaw sent to banks and credit institutions, the CBI governor Abdolnasser Hemmati said ownership of more than 33% of a bank’s shares by one person is prohibited and owning 10-33% of a bank’s shares is subject to approval from the CBI.

As per rules ratified by the Majlis in April, owning shares of banks up to 10% of the total stake does not CBI permission.

In an Instagram post on Friday, Hemmati warned major shareholders to decide the fate of their shares above the set limit and get rid of the surplus by the time the current fiscal year is out (March 19, 2020), Financial Tribune reported.

“If ownership of shares crosses the legal ceiling, the dividend on surplus shares and rights issues will be subject to 100% tax,” Hemmati noted.

A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

According to Hemmati, owners of excess shares will be denied voting rights above the set limit in general meetings and their voting right will be transferred to the Ministry of Economy.

Voting right is the right of shareholders to vote on matters of corporate policy, including decisions on the makeup of the board of directors, issuing securities, initiating corporate actions and making substantial changes in the corporation's activities.

The CBI chief also referred to the regulator’s jurisdiction to annul the ownership of banks’ shares above 10%.

Extended Agenda

Hemmati said the move would help improve transparency and the financial health of banks while implementing corporate governance in the key sector.

The plan is seen as part of broader government attempts to restructure the lethargic and dysfunctional banking sector. To make banks more efficient and their structure more transparent, the regulator has taken several initiatives in recent weeks.

The CBI’s agenda to reform banks includes rating lenders based on corporate governance, correcting banking fee regimes, starting open market operation to control inflation, regulating the inter-bank market and scrapping overnight interest rates.

A CBI official last week spoke of a CBI plan to rate lenders based on their performance in corporate governance.

In general terms, corporate governance is the system of rules, practices and processes by which a company is directed and controlled.

Based on a CBI roadmap, there is no universal procedure for ranking banks and the regulator decides the health of a lender on a case-by-case basis, the unnamed official told Mehr News Agency.

As for another initiative, Hemmati called on the new vice governor for innovative technologies, Mehran Moharamian last month to reform the long-delayed bank fee regime.

As per banking rules, lenders are allowed to charge a fee to customers proportionate to the cost of the services they offer. But banks have largely waived the fee over the past decades.

The move is expected to cut expenses of lenders. According to unofficial news, lenders pad 80 trillion rials ($700 million) in banking fees in the previous Iranian year.

Launching the monetary policy of OMO is yet another CBI measure to help curb inflation and restructure the mechanism governing lenders’ borrowing from the CBI.

In late September, Hemmati set up a five-member committee to handle the OMO’s executive affairs.

OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.

In the OMO framework, central banks also buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces the base money and raises interbank rates.