Enumerating flaws in the privatization scheme, the think tank advised the Rouhani administration “to avoid haste” and postpone the scheme before it negatively impacts the economy.
The government has launched a plan of action to cede its shares in 18 companies via exchange-traded funds with its declared aim to reduce its role in the economy.
The first phase of the divesture plan is due on Sunday with government stakes in three banks and two insurance companies to be offered in the first ETF of this kind, named “First Financial Intermediary”.
Elaborating on the mechanism and regulations guiding implementation of the plan, MRC said they are incongruent with basic rules governing privatization.
“It will disrupt the management of economic sectors”.
Highlighting one example of the first bank-based ETF, the MRC said in this case the fund will own 17% of the shares in each of the three banks, namely Bank Mellat, Tejarat Bank and Bank Sederat Iran.
This is while legal and natural entities are allowed to own maximum 10% of the shares as per existing rules and owning 10-20% of a bank’s shares is subject to approval from the Central Bank of Iran. The rules do not allow ownership of more than 33% of a bank’s shares by one person.
MRC said it is not clear whether the CBI has issued such permits or whether the ETF in question complies with shareholder qualifications demanded by the regulator.
In addition, the ETFs will be exclusively managed by the government at least by the end of Sixth Five-Year Economic Development Plan (2017-22).
This allows the government to still exercise control over its shares in the companies and “this is not privatization per se, but simply a method of financing.”
A per the Articles of Association of ETFs, the government can gradually vest management in the funds after the end of the development plan in 2022, the MRC said.
“There is still no guarantee that the government would delegate control over the funds in the short-term to the private sector”.
This will also breach provisions of Article 44 of the Islamic Republic Constitution, which explicitly states that the “government role should modify from manager and owner of enterprises to policymaker and supervisor”.
Violating Budgetary Rules
As per projections of the fiscal (March 2020-21) budget, the government is allowed to earn a maximum of 67 trillion rials ($420 million) from selling its stakes in the 18 companies.
This is while the value of the first government ETF is estimated at 160 trillion rials ($1 billion), way higher than the Majlis forecast.
The above figure is apart from the income the government plans to generate by divesting shares in the remaining companies on the divesture list.
The think tank highlighted the incompatibility and inherent nature of ETFs with the goals they are supposed to fulfill. The funds were initially designed with the aim of managing investors’ assets.
“As such, they neither are qualified for managerial and corporate intervention in companies nor do they have the technical skills to do so”.
“ETFs are mandated with a task they can fulfill,” MRC’s report said, adding that “this would create serious management problems in the future given their high stakes in the [divesting] companies.
The last, but not the least, is the reduced government income in the new method compared to other divestiture methods.
Pointing to raising funds for plugging budget deficit holes as the bottom-line of the scheme, MRC took stock of government plans to offer discounts to buyers of ETF units.
“Compared to other methods, such as block sale of shares, selling shares via ETF at discounted measn less income for the government.”
It merits mention that the government made several attempts in the past to sell its shares in assorted companies in blocks, but could not find buyers.
The reason was because prospective buyers couldn’t afford blocks of shares worth millions of dollars, which in many cases accounted for 20% of companies’ stakes.
The MRC, however, suggested that the government try smaller blocks of up to 5% to make them affordable to buyers.
As per the ETF-based divestiture framework, all Iranians can buy the ETF units using their ID numbers as trading codes.
The government has considered incentives for investment in state-controlled ETFs to encourage more people to get involved.
Incentives include up to 20% discount on prices. There is no age limit on applicants and those interested can buy maximum 20 million rials ($125) worth of ETFs.
Only natural entity investors with Iranian nationality can subscribe, and institutional and legal entities are barred.