MRC Calls for Higher Public Float of Stocks

EghtesadOnline: With stock market indicators heading upward at a regular pace and fresh money pouring in the bourse from an ever-increasing number of investors, the Majlis Research Center stressed the need to take appropriate measures to balance the market by boosting the supply side.

News ID: ۷۵۰۲۰۹

12 June 2020

The parliamentary thinks tank welcomed the expansion  of the stock market “as it helps in funding economic development plans,” saying that stocks now constitute a bigger share of the assets of Iranians while that of real estate, gold and forex is shrinking on households’ basket of assets

“This is a welcome sign on the condition that some considerations are upheld,” the MRC said on its website.

To balance the market, the MRC said listed companies and capital market authorities need to take steps to address the supply crunch in the market and restrain the unreasonable surge in share prices due to high demand.

It asked the stock market regulatory body to oblige listed companies to abide by “floating stocks” requirements.

Floating stocks represent the total number of shares that are open to public for investment. It is a measure that excludes closely-held shares. Closely-held shares are stock shares that are held by company insiders or controlling investors, according to Investopedia.  In short, floating shares indicate the number of shares available for trading.

MRC said many listed companies fail to observe regulations on floating stocks, criticizing the Securities and Exchange Organization for lacking sufficient clout to force companies to play by the rules.

Given the significance of floating stocks in strengthening the supply of shares, the stock market regulator has offered incentives to listed companies.

For example, it offers tax cut to companies that have more than 20% of their stakes in floating stocks.

The think tank proposes tax penalties for companies that fail to comply.

Unique Opportunity

As another way to expand the market and maintain the demand and supply balance, the MRC called on the relevant authorities to ease rules for companies wanting to be listed at the stock market.

The government has been recommended to fully tap the capacity of the stock market to divest its assets.  MRC says the current condition of stock market offers a unique opportunity to the government to shed its shares and reduce its role in the bloated economy.

The think tank, however, again criticized the government’s moves to divest its shares via exchange-traded funds, suggesting that, instead, it could do so by offering shares “on a gradual basis”.

It is of the opinion that a “Gradual offering of shares in stock market could be one of the transparent divestiture methods… that not only increases the offer of shares but also helps the government to compensate portions of  its budget deficits”.

The government recently started selling its shares in major companies and banks via ETFs with the declared aim to reduce its footprint in the economy.

The divestiture scheme started on May 3 when the government called on the public to subscribe for units of an ETFs that hold government stakes in three banks and two insurance companies.

In an earlier report appraising the divestiture scheme, the MRC chastised the plan, saying “it will still allow the government to exercise control over the companies”, saying that “this is not privatization per se, but financing by another name.”

The colossal liquidity in Iran has become a perennial concern among market pundits, government officials and economic experts. Their concern is that if the unbridled liquidity is not kept in check by directing it into manufactures, the end result would be hyperinflation.

The government has pinned much hope on the stock market to absorb a portion of the rampant liquidity and prevent its flow into other markets, such as gold, currency, and real estate.

An unprecedented 50 trillion rials ($2.7 billion) in new liquidity poured into the stock market since the beginning of the fiscal year (March 20) up to mid-May,  the managing director of Securities and Exchange Organization Hassan Qalibaf-Asl said.

The amount appears overwhelming compared to money pumped into the market in the past. “This is equivalent to 50% of the total liquidity in the market in the last fiscal year,” the SEO chief has been quoted as saying.