Renewed Censure of Gov’t Role in the Stock Market

EghtesadOnline: Head of the Tehran Chamber of Commerce, Industries, Mines and Agriculture Masoud Khansari on Saturday criticized the government for its intervention in the stock market.

News ID: ۷۸۷۳۷۳

05 December 2021

Khansari singled out the government’s apparently unwanted interference in a meeting with Majid Eshqi, the managing director of the Securities and Exchange Organization.

“Despite the fact that the bourse is a non-government organization, it is heavily influenced by the government” Khansari was quoted as saying by the IRIB news website.

“Under this influence it [the government] suggests when to sell or not to sell shares,” the senior official said, implying in so many words that the stock market is indeed controlled by giant listed companies and cartels in which the government is the major shareholder.

The unhelpful role of the government is determining stock market trends came under the spotlight last year when shares made historic gains in a short period only to plunge to unprecedented lows.

Market observers accused listed companies affiliated to or owned by the government of “hoarding shares”, i.e. deliberately refusing to supply enough shares in a timely manner to use huge amounts of fresh liquidity from millions of retail investors, encouraged by the government then to put their savings in the lucrative stock market.

Share prices in majority of large caps more than tripled between mid-March to mid-August 2020, before the big companies starting dumping their shares and triggering a downturn that has lasted to date.

Government influence in the stock market is obviously not related only to supply and demand.  It can, and does, set the market trend by also intervening in the price of raw material and goods made by listed companies.

Investors, for example, often complain about the rather obscure way the government supplies feedstock to refineries and petrochemical companies.

In addition, mandatory prices imposed by the Industry Ministry has undermined the profitability of many listed companies, including mineral, steel, food, tier producers.

Performance Harmed

Likewise, the parity exchange rate the Central Bank of Iran dictates is always lower than the rates in the market. Thus, forcing listed banks to report their financial statements based on the arbitrary rates normally impacts their performance in the bourse.

Official parity rates of the CBI are normally less than half in the open market. One dollar was worth 300,000 rials in the open currency market on Satruday. However, the CBI says the greenback at 110,000 rials must be the benchmark when banks convert their forex assets into rials.

The discrepancy is huge and a major cause of concern in the business community not to mention the strong opposition to such two-tier rates by economists and manufactures.

Addressing the private sector representatives in the Saturday meeting, Eshqi said the government’s narrow approach to the bourse in the past had undermined trust of millions of retail investors.

“We hope to restore the trust of investors,” the new chief of the SEO said, adding that procedures are being revised and flawed structures will be reformed in coordination with  relevant bodies, namely the CBI and the industries and economy ministries.

Reservations About Price Spread

Regarding the SEO’s stance on the highly controversial issue of daily price spread of shares, Eshqi said the regulator has reservations about changing the allowed price range in the near future

“Eliminating or increasing daily price spread under the present conditions will only add to the volatility in the stock market”.

He argued that increasing the price range should occur when systemic risks threatening the market, like mandatory pricing, are eliminated or minimized.

However, he did not dismiss the possibility of increasing the price spread for “companies with relatively better financial stability” and those controlled by “big players” in the near future.  It was not clear tow which “players” he was referring to.

At present, share prices can go down -5% and rise +5% in each trading session. This price range has been place for years. However, the regulator at times has made changes in the highly volatile market in the recent past.

Apparently in bid to help save the stock market from further collapse, the SEO decided to increase the limit up price and decrease the limit down.

As per the decision enforced in February, share prices can fluctuate between -2% to +6% a day.  As anticipated, this decision failed to prop up the stock market. It only delayed the market correction and prolonged the downturn. The  poor market conditions exacerbated as the ill-advised move also undermined the liquidity of shares.