Iranian Banks Allowed to Invest in the Stock Market

EghtesadOnline: As the stock market continues to plunge, the High Council of Securities and Exchange said banks too can invest in the bourse.

News ID: ۷۵۰۹۶۱

12 September 2020

This is in line with a variety of measures by the government to revive the share market and boost the morale of retail investors seeing share prices getting ever closer to junk territory.

Attended by top economic and banking officials, the bourse council met Thursday to address the persistent downturn in the stock market, the Securities and Exchange News Agency reported.

After historic gains since the beginning of the current fiscal year (March), the bourse went into a tailspin from early August.

The government has made concerted efforts but failed to prop up the market sporadically by requiring institutional buyers and investment funds to boost demand.

Speaking on the sidelines of the meeting, Hassan Qalibaf-Asl, managing director of the SEO, said the meeting agreed on new regulations, the gist of which underscores the need for active participation of main shareholders in depressed share market

Referring the previous rules that banned banks from non-bank financial activities, such as buying shares, Qalibaf-Asl said as per the new decisions, banks are exempt from penalties resulting from investment in stocks.

Provisions of the new regulations, known as Removing Obstacles to Competitive Production and Promoting the Financial System, stipulate that 28% of the profit of banks and credit institutions, which is acquired through investment in shares, would be taxable for fiscal 2016-17. The amount was supposed to increase by 3 percentage points a year until it reaches a maximum of 55%. In short,  40% of lenders’ profits from shares in the current fiscal years is taxable.

Earlier in week, the Governor of Central Bank of Iran Abdolnasser Hemmati said the bank is ready to help the government stabilize financial markets.

“The CBI, however, will make sure that [supportive] measures don’t harm the CBI’s balance sheet and impact monetary base,” he said.

Options Contracts and Treasury Shares

The bourse council also allowed issuers and listed companies to use financial instruments, such as treasury stocks and option contracts, which Qalibaf-Asl said “will insure investors’ shares”.

An option contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price. Options contracts are often used in securities, commodities, and real estate transactions.

Treasury stock, also known as treasury shares or reacquired stock, refers to previously outstanding stock that is bought back from stockholders by the issuing company.

The result is that the total number of outstanding shares in the open market decreases. These shares are issued but no longer outstanding and are not included in the distribution of dividends or the calculation of earnings per share (EPS).

Commenting on Thursday’s decisions of the bourse council, the CEO of Iran Fara Bourse, Amir Hamouni, said “buying treasury shares by listed companies sends a signal to the market that shares [of a particular company] carry value and can rise in the future”.

Hamouni noted that institutional traders who act as market makers will be exempt from paying trading fees as part of incentives.

Sovereign Wealth Fund

The bourse council tasked the SEO to enforce an earlier rule based on which, the National Development Fund of Iran, the sovereign wealth fund, should invest 1% of its annual revenue in the Capital Market Stabilization Fund.

The CMSF was created in 2017 to help resolve the credit crunch in the bourse. It has the task of supporting stock markets and safeguarding the interest of investors.

Government Spokesman Ali Rabiei said the fund will invest 1% of its revenue in CMSF from Saturday to restore a semblance of calm to the stock market.

There is no official statement about how much the NDFI would pump into the bourse. However, ISNA estimated that it is likely to be in the region of 100 trillion rials ($430 million).

NDFI, which is independent of the government, was founded in 2011 as a sovereign fund for future generations when government earnings are high, especially from oil and gas exports.