As per Note 2 of the budget bill for the next fiscal year (March 2020-21) the government can divest its stake in state-run companies via ETFs. The bill obliges executive bodies to name the subsidiaries in which the government share is below 50%, according to Financial Tribune.
“Given the nature of ETFs, it seems state-controlled enterprises on the divesture list will still be managed by the government, at least in the short term,” the influential Majlis think tank said in a study delving into the pros and cons of the budgetary provisions related to state-owned and affiliated companies.
An exchange-traded fund is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.
An ETF can own hundreds or thousands of stocks across various industries, or be isolated to one particular industry or sector. They are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.
The government is pursuing two goals via this initiative: generating income by divesting ownership of its properties without losing control over it, the MRC said, adding that this is at odds with the principles of Article 44 of the Islamic Republic Constitution.
As per provisions of Article 44, the economy should downsize to be able to offer opportunities to private firms and curb the bloated bureaucracy.
Elaborating on the nature of ETFs, the think tank said the structure of such funds simply does not allow government control over them. “Such funds across the world are normally used for micro and highly marketable shares that can be quickly liquidated and are essentially designed for high profits”.
Therefore, ETFs in essence are not useful tools for enabling government control in managing divested companies.
At Odds With Market Realities
Pointing to the huge value of government properties that is to be divested via a monolithic ETF, the parliament’s research arm said the size of new ETFs is incompatible with the value of ETFs that are currently traded on capital markets.
The overall value of ETFs in Iran’s stock market reached 190 trillion rials ($1.4 billion) in the fiscal month to November 21, according to a recent report by the Central Securities Depository of Iran.
This is while the government asset that is to be divested is worth 200 trillion rials ($1.5 billion), according to the head of Securities and Exchange Organization, Shapour Mohammadi.
If such amounts in assets are to be sold via a single ETF, the figure would be higher than the value of a total of 42 active ETFs currently operating in the stock market.
According to Mohammadi, the government initiative to offer assets within an ETF provides investment opportunity to a large number of people with small savings.
Accordingly, all people with small savings can buy the ETF units using their national ID numbers as trading codes.
The head of Iranian Privatization Organization, Alireza Saleh, said last week that the initiative is forecast to attract an estimated five million people to the capital market.
The IPO has considered incentives for investment in ETFs in a bid to attract bigger investors. Incentives include up to 20% discount in prices of ETF units. Pricing will be based on the average final price of shares displayed on TSE and IFB bulletin boards during a calendar month on the day prior to the subscription date.
This includes 1.5% discount during the subscription phase and 5% discount when the fund purchases shares from the government.
There is also a 14% discount for real entity buyers who want to invest in the refinery ETF. As per a decision by the SEO High Council, each buyer can purchase ETF units worth 20 million rials ($148).
The government has plans to divest its remaining shares in 18 companies, including stakes in a number of oil refineries, 17% in Tejarat Bank and Bank Mellat each, 18.3% in Bank Saderat Iran, 17.34% Alborz Insurance Company and 11.44% in Amin Reinsurance Company.
The list includes 18.96% share in the Persian Gulf Petrochemical Industries Company, 12.05% in National Iranian Copper Industry Company, 17.2% in Mobarakeh Steel Company,14.04% in Iran Khodro (IKCO), 23% in SAIPA, 40% in Pars National Agro-Industry and Animal Husbandry Company and 13.02% in National Investment Company of Iran.