Shareholders of Frozen Stocks Lose Patience

EghtesadOnline: It might feel like summer, but a good number of stocks are chilled to the marrow.

News ID: ۷۷۷۳۴۵

03 July 2017

Up to 46 companies’ trading symbols are currently frozen on Tehran Stock Exchange and another 53 are barred from trading at Iran Fara Bourse.

Some of them might resume trading in about a month after their general meetings are held, but many others’ fate is up in the air.

Naturally, investors are not too happy with the fact that their money has long been locked down, according to Financial Tribune.

A group of shareholders of Electricity Meter Manufacturing Company (also known as SKI) staged a protest at TSE on Saturday and disrupted the exchange’s trading process, according to Securities and Exchange News Agency.

The SKI symbol has been frozen for eight months now.

About 48 trading symbols of TSE and IFB are awaiting their respective companies’ upcoming annual or extraordinary general meetings. They have not been trading for about a week at most, which is not unusual.

The rest of the firm, however, are either off the block due to diluted earnings per share or classified under “other cases”, which basically means there is something missing or wrong with their balance sheets.

SKI is one of those included in “other cases”. In fact, some of the symbols in this group have been frozen for well over two years.

Convoluted Saga of SKI

Hafez Street had never witnessed so many angry investors until Saturday. Official sources estimated the protestors’ numbers at about 80, while observers on social media counted up to 200.

According to Bourse24, investors gathered at the TSE building in the early hours of the day. Their chants and angry behavior, such as breaking windows and chairs, eventually brought trading to a halt at 12 p.m. They were finally forced to leave at around 5 p.m. after police intervention and the promises by the economy minister’s representative to see to their complaints in a week’s time.

The confusion surrounding SKI encapsulates worries in the stock market about frozen shares: There are allegations of fraud; no one is really sure who is responsible and no concrete action is taking place.

SKI controlled about 80% of the electricity meter market before international nuclear sanctions hit Iran. Difficulties in raw material procurement, coupled with the Energy Ministry’s inability to pay its dues to the company, forced it to delve deeper into debt to banks.

The company had to change course and it eventually announced its plans to produce machinery used in retail industry, such as cash registers.

The company won a tender held by Iran Chamber of Guilds to produce the machinery and its shares gained about 10,000 rials in a few months.

However, the chamber came under fire by producers for awarding the contract to SKI, an inexperienced manufacturer. It eventually caved under the pressure, announcing a new tender. This prompted SEO to freeze SKI’s shares due to its unclear condition.

SKI put its profit forecast for 2015-16 and 2016-17 fiscal years at 15,000 and 25,000 rials respectively. And contrary to common practice, TSE officials agreed to reopen SKI for trade in return for its board members’ pledge to absorb any possible losses.

Investors took this as a sign of TSE’s endorsement of SKI’s financial transparency and its share price rose up to 83,000 rials in early summer 2016.

The final fiasco came in September when it was discovered that the company that partnered SKI and was expected to buy the machinery and install them across the country did not have the required permits from government.

Strangely enough, the government had announced issuing permits for this company at least seven years ago.

Fast forward to date and things are still unsettled. SKI’s Managing Director Seyyed Ali Ameli is behind bars for his inability to pay a 5-trillion-rial ($133.3 million) bail and SKI’s case has been referred to the court, according to TSE’s deputy head, Ali Sahraei.

Plight of Banks

A mix of incompetence, mismanagement and unforeseen financial difficulties brought SKI to this sorry state of affairs.

Now, if the unfortunate fate of one not-so-large private company with a limited number of investors can incite such turmoil, what could a larger entity’s downturn, such as a major bank, lead to?

Incidentally, about 11 of the symbols frozen at both TSE and IFB are those of banks. This has had both officials and investors worried already. The government does not like sending out negative signals about the economy, as traders lose their money in a crash.

A controversy for banks began when it was discovered that Bank Saderat, one of the biggest banks privatized in recent years, had incurred huge losses in the first half of the last fiscal year (March-September 2016). However, Saderat was not alone in this plight. Many other lenders’ balance sheets had sunk in the sea of red ink, prompting the Securities and Exchange Organization to suspend their shares from trading.

The next scene had Central Bank of Iran mandating all Iranian banks to conform their financial statements to International Financial Reporting Standards–the latest international accounting procedures–and barring them from holding shareholder meetings. The banks had to update their balance sheets before trading could resume.

And so the long wait commenced. Bank Mellat, Saderat, Tejarat and Post Bank’s shares were frozen back in July 2016. Other banks such as Parsian, Pasargad, Tourism, Sarmayeh, Resalat Qard al-Hasanah and Shahr came next in the following months.

Bank Mellat and Tejarat returned to trading in early 2017 and shook the market, causing a massive drop in TSE’s main index, as well as a 37% and 33% drop in their own share values. The two banks had published their updated balance sheets, which signified the losses they had endured. This, combined with the investors’ frustration, led to a major selloff.

The other banks are now held from trading either due to official restrictions, or simply because of their own reluctance to get back to the floor.

As Amin Investment Bank’s senior analyst puts it, the penalty set for the unruly banks ends up only harming the investors.

“The banks simply do not care about being barred. In fact, they are happy about it. It is the investors’ capital locked with them, which is no penalty for the banks,” Ali Khosroshahi also told Financial Tribune in a telephone conversation.

“Such a practice never takes place in any reputable market around the world.”

Khosroshahi emphasized that anything wrong with a company’s balance sheets should be publicized and resolved in a matter of hours, not months and years.

Impediments to Adopting IFRS

The two main pillars of IFRS are based on establishing banking risk assessment and updating methods of banks’ asset evaluation, which have not yet been properly implemented, Gholamhossein Davani, a senior member of Iranian Institute of Certified Accountants, said.

“The first part is unlikely to happen any time soon. And the second is very hard to implement, considering that we do not have a reliable and transparent asset evaluation system in place,” he told Financial Tribune in an interview.

Davani stressed that the IFRS-based balance sheet templates released by CBI back in February follow only parts of IFRS and that “political factors” are the main obstacles to the full implementation of the standards.

The expert noted that the banking system is in need of a surgery, one that is not a stopgap measure.

“We need an at least five-year plan for IFRS. Before anything, an organization must be established to absorb the banks’ toxic assets so that things can be normalized,” he said.

Most banks invested heavily in troublesome assets such as real estate before the 2010 financial crisis and are now entangled in a quagmire of toxic assets.