Can SEO Resolve Uncertain Fate of Frozen Shares?

EghtesadOnline: Investing in stocks is an inherently risky business and it is the promise of sweet returns that attracts capital. In Iran, however, the risks are on a different plane of existence. They are neither foreseeable, nor avoidable–the market itself might turn against you.

News ID: ۷۷۹۰۱۹

05 September 2017

And what does that mean? Imagine you put your money in a hot, promising new stock. Word around the market suggests that the company has cut some high-profile deals with major players and is seriously set to expand its share of the sector. Its shares keep rising, its financial situation looks fine and market regulators seem content with its growth.

During its apparent growth, the company suddenly delays publishing new financial reports. Market regulators appear, give it a deadline or two, and eventually freeze its symbol as it fails to come up with anything.

A few weeks go by and the shares are still locked, while allegations of fraud surface and fingers are pointed in every direction. New reports show that regulators had taken previous reports at face value and the company’s hyped deal had been called off a while ago, Financial Tribune reported.

That’s how things happened for shareholders of Electricity Meter Manufacturing Company, also known as SKI, who staged a protest at Tehran Stock Exchange for the second time on Saturday. The frustrated investors’ money is locked for well over a year now.

SKI is one of the many companies listed in Iranian exchanges whose fate is in the air, while 90 companies’ trading symbols are currently frozen at TSE and Iran Fara Bourse.

Most of the companies are barred from trading because of diluted earnings per share or classified under “other cases”, which basically means there is something missing or wrong with their balance sheets.

The possibility of stocks being frozen out of the blue has the potential to seriously undermine investors’ confidence in the market, if it hasn’t already.

Officials have recognized the issue and are reportedly working on measures to address it. The effectiveness of the measures, however, is in question.

SEO Vows to Unfreeze Shares in Two Months

During the inauguration ceremony of the new Economy Minister Masoud Karbasian two weeks ago, the head of Securities and Exchange Organization, Shapour Mohammadi, announced that a new set of regulations will be implemented so that stocks will remain frozen for no more than 90 minutes.

The SEO chief vowed to introduce the new measures in two weeks and unfreeze all blocked shares in two months.

“The regulations will be publicized on SEO’s website in two weeks and, accordingly, no share will be frozen unless it has a legal issue outside of the organization’s jurisdiction,” Mohammadi was quoted as saying by Bourse24.

The official noted that “transparency” will be the first priority and the cause of freezing each stock will be publicized as well.

Companies with “legal issues” refer to the likes of SKI, whose convoluted saga has dragged it to court and put its managing director behind bars, according to a source at SEO who asked not to be named.

“Those [listed firms with legal issues] are not SEO’s priority. But any other symbol that can be reopened through new information and transparency will be reopened,” he said.

The source emphasized that this reform is a tough but highly necessary undertaking.

“If the symbols are not reopened soon, the market’s indices will be misleading; derivative trading will go wrong and basically whatever financial instrument that is based on share prices will go wrong,” he said.

Mohammadi still has up to Wednesday to deliver on his promise, but some in the market already doubt the initiative to work.

Doable, But Not Here

A market analyst believes that most of the SEO’s promises of reforms in the capital market are in the right direction, but the problem is that SEO is not the only decision-maker.

“Yes, [what the SEO has proposed] is doable. But is it doable here [in Iran]?” said Ali Nikoogoftar, a senior market analyst at Bazar Saham Brokerage in a telephone conversation with Financial Tribune.

“First thing we got to ask is: Does Dr. Mohammadi even have the authority to implement such a reform by himself? Some banks’ shares are closed and a host of organizations such as the audit organization, the central bank and the Economy Ministry are also involved in the process. Or, if a petrochemical firm’s balance sheets are vague due to the yet undetermined feedstock price, all the SEO can do is to freeze the shares.”

The analyst was referring to the 17 banks barred from trading at TSE and IFB due to their failure to update their balance sheets based on CBI’s directives.

TSE-listed petrochemical producers also had the same issue a few years ago, as they could not update their cost and earnings forecast due to undetermined feedstock prices.

Nikoogoftar emphasized that a clear, unanimous push is required by all sectors of the economy to make such an undertaking possible.

And it seems unlikely to happen anytime soon, as governmental entities have found it difficult before to approach issues regarding the stock market in harmony.

SEO’s promises, despite a lack of unanimous push in all sectors of the economy, could also have something to do with the market speculation that SEO’s leadership may change in the new administration.