The origins of the stock exchange in Iran go back to 1936 when Bank Melli of Iran issued a report, detailing a plan for an operational stock exchange in Iran with help of Belgian experts. The Tehran Stock Exchange, abbreviated as “TSE”, was inaugurated in 1967, and dealt only in bonds issued by government and companies. After the Islamic Revolution in 1979 the circumstances completely changed and the banking system underwent major restructuring. Some laws were passed in banning financial institutions from paying interest on deposit accounts in compliance with sharia law and thus an Islamic banking system was introduced.
The eight- year war with Iraq put an enormous strain on Iran’s resources but after it ended the Tehran Stock Exchange took on a new lease of life with the Budget Act in 1988 and in consequence the number of listed companies rose to 249 thereafter. A new automated system of trading came to existence over a four- year period between 1996 to 2000 and it culminated in the establishment of new methods of regulating transactions in the stock market.
In December 2006, Parliament passed the “Capital Market Law” to enable the establishment of a modern securities underwriting system in the market. The restructuring of the capital markets was carried out to meet its new needs and establish the Securities and Exchange Organization (SEO) as a separate entity to supervise and regulate the TSE and the other exchanges forming part of Iran’s capital markets. The TSE also underwent legal changes and reorganized as a public joint stock company with over 6,000 shareholders at the time.
A major innovation was the establishment of new institutions in the capital markets such as investment banks, advisory companies and mutual funds. All these now play a vital role in financing projects and supporting entrepreneurs.
Since 1995, the TSE has been a full member of the World Federation of Exchanges (the former Federation International des Bourses de Valeurs or FIBV), and is a founding member of Federation of Euro- Asian Stock Exchanges (FEAS). Since July 2010, the TSE has also been a member of the International Options Market Association.
The Securities & Exchange Council is the capital markets highest authority and is responsible for all policy making, market strategies, and the supervision of the capital markets in Iran. The Chairman of the Council is the Minister of Economic Affairs and Finance; other members are:
– Minister of Commerce
– Governor of the Central Bank of I.R.I
– Heads of the Iranian Chamber of Commerce, Industries and Mines and the Chamber of Cooperatives
– Chairman of the Securities and Exchange Organization
– Attorney General and his deputy
– One representative on behalf of the Associations
– Three financial experts solely from the private sector in consultation with the professional bodies in the securities market as recommended by the Minister of Economic Affairs and Finance and approved by the Council of Ministers.
– One expert solely from the private sector as recommended by the responsible minister and approved by the Council of Ministers of each commodity exchange.
Iran’s Capital Market Structure
Tehran Stock Exchange
– Equity share
– Right offering
– Derivatives (Futures, embedded put options)
Iran Mercantile Exchange
– Oil and petrochemical
– Futures on commodities
Iran Fara Bourse
– Equity share
– Right offering
– Housing mortgage right
– Intellectual property
Iran Energy Exchange
– Oil and gas
– Other energy carriers
List of Indices
TEPIX: TSE All- Share Price Index; the main index of Tehran Stock Exchange
TEDPIX: TSE Dividend & Price “total return” Index
Main Board Index: All companies listed on the main board of the main market
Secondary Index: All companies listed on the secondary market
Financial Index: All companies listed in the financial sector (Banks & Investment companies)
Industry Index: All companies listed in other sectors than the financial sector
TEFIX: TSE All- Share Free Float Adjusted
TSE 50: 50 top companies listed on the basis of market capitalization and liquidity criteria
TSE 30: 30 top companies listed on the basis of market capitalization and liquidity criteria
Each Sector Index: based on industry classification
IFX: The main index of Iran Fara- Bourse
Base volume means the number of securities of the same type, which are to be traded daily so that the total percentage of spread during the day can serve as a base to determine the price for the following day. This was ratified by the regulatory body of the capital markets, SEO, to control unreasonable fluctuations in equity prices. Nevertheless, we should stress here that base volume differs for various companies in diverse industries in the market and is only applicable to companies listed on TSE. The O.T.C. Market is not restricted to base volume and it is presumed to be the digit “1” for all companies listed in this market.
Authorized Spread Range
Authorized Spread (Fluctuation) Range means the maximum authorized price changes in a security each day in proportion to the closing price of the previous trading day. The daily spread range is restricted to typically 5% positive or negative at both the TSE and the IFB. However, this range changes when we speak of the rights offerings and the number is doubled to 10% spread. It is noteworthy to mention that the TSE Board at times of unusual price movements changes the prescribed rules, resulting from extremely high or low P/E ratio announcements.
Taxes on both TSE and OTC transactions are as follows:
Cash dividend: No tax (22.5% at source from company)
Share transfers: The Tax Amendment has changed the regulations regarding the calculation of tax on the transfer of shares and their rights in Iranian corporate entities. In case of shares listed on the TSE the tax on transfer of such shares and other rights is 0.5% of the sales price. In case of the transfer of shares and their rights to other corporate entities (i.e. those not listed on the TSE) a 4% flat rate of shares’ value and rights transferred applies. No other taxes will be charged. The Amendment has removed the requirement to value the shares in this category.
Central Securities Depository of Iran
The Central Securities Depository of Iran (CSDI) was established to register, collateralize, and transfer the ownership of securities thus allowing for the clearing and settlement of transactions in securities between different parties in the capital markets. Shareholders consist of the SEO, TSE, IFB, IME, brokers, financial institutions, banks, and individuals. The purpose behind the establishment of the CSDI was to segregate post trade from trading activities against the background of a huge surge in the volume of transactions of companies in the market. The supervisory body that monitors the CSDI is High Council of SEO.
The CSDI provides a variety of services such as:
1. Central Depository & Registry; the registration of securities and the rights attaching to them are registered electronically in a book- entry form, in order to ensure the reliable and efficient performance of stock exchange transactions. Any changes to transactions on the TSE will be recorded in the system a day after the transaction.
2. Clearing & Settlement; The clearing and settlement system finalizes the financial position of stock broking companies resulting from buying and selling transactions executed on the stock exchange. Generally the main objectives of the clearing and settlement system is to mitigate the potential risks emanating from the receipt and delivery of securities and to carry out the clearing and settlement of transactions and transfer of securities ownership within a defined time frame.
3. Clients’ Balance of Portfolio; the owner of securities, whether natural or legal, may obtain a statement of information on their trade activities for any period of time and also the balance of their portfolio. This report applies to all listed companies’ trade activities and clients’ positions on any of the listed companies. Clients can get this report totally for free from CSDI.
4. Futures contracts; the clearing house, a division of CSDI, handles the clearing and settlement of futures contracts. The post trade activities for futures contracts are based on a broker- oriented system. However, unfortunately the volume and value of transaction are not substantial due to some structural inefficiencies in the market.
5. Margin Trading; margin trading means the purchase of securities by the crediting broker for the customer based on the mutual agreement between the parties and upon signature of a contract and the relevant forms, before the remittance of the purchase price. If the customer wishes to purchase securities on demand through a broker, he/she should submit his/her request to the crediting broker on special application forms and sign a contract to that effect.
6. Net Clear; A new clearing, settlement and reporting system of the CSDI, Net Clear has been created to provide electronic and dematerialized reports derived from the post trade systems in the capital markets and to present these to the beneficiaries. This system encompasses an electronic reporting system which includes a daily clearing report, commissions report, statements and certificates of share transfers for brokers’ use.
7. Pledging Securities; The pledging of securities is generally recorded through a book- entry by the client or pledger for the pledgee (creditor) in the central securities depository system. The release of a pledge is made at the pledgee’s (creditor) request or bank as a result of the repayment of the debt or for any reason specified legally. If for any reason the pledger is not able to meet the demand of the creditor, the creditor will be able to sell the securities under the terms of the agreement.
8. Settlement Guarantee Fund (SGF); The CSDI, as the clearing house of TSE and the Iranian OTC exchanges, has recently designed and launched a new service, the Settlement Guarantee Fund (SGF), as the first step towards guaranteeing the full settlement of the stock market transactions. Taking advantage of this newly established service, the traders can by and large extent be assured of the fact that in case a party fails to honor his trade settlement obligations within the set time, the clearing house will be able to fulfill the obligations of the defaulting member within the set time.
Tehran Securities Exchange Technology Management Company
Tehran Securities Exchange Technology Management Company as a privately-held company was founded in May 1994. Considered a subsidiary of the SEO, the TSETMC is under direct supervision of the SEO and is responsible for providing a comprehensive spectrum of electronic trading services to all the market participants.
Technical and consultancy services in the field of economic and financial data processing, and application of computer technology including software, hardware and networks for institutions as well as implementing and optimizing mechanisms for investors to trade different securities are among the wide range of TSETMC’s functions.
Every imaginable real-time data of the entire markets is aggregated on TSETMC’s comprehensive website. Developing and implementing systems like Business Intelligence with state-of-the-art modules to detect and deter fraud and manipulation in the markets (provided to the SEO) are also among the achievements of this company in 2014.
SEO Information Dissemination and Services Company (SIDSCO)
Information Dissemination and Services Company as a privately-held company owned by the SEO was established in 2004 to fulfill the task of capital market news broadcasting and providing educational programs for market participants. Today the most important functions of SIDS are as follows:
- Implement mechanism to best broadcast market-related news;
- Execute educational programs to familiarize the society with the capital market;
- Publish educational materials in terms of books and multimedia;
- Hold examination for professional licenses of the capital market; and
- Set up capital market exhibitions, seminars and conferences.
The news website of Securities and Exchange News Agency was set up by SIDS as the official source of capital market news. The breaking news of all financial and economic sectors is constantly covered by SENA.
SIDS also established an educational website called Iran Virtual Exchange at IRVEX.ir to give potential investors the opportunity to get acquainted with the capital market by learning how to invest in a completely risk-free environment with virtual money.
SEO oversees all market segments according to the Act but has always taken pertinent steps to grant authority to subsidiaries and other market participants. To organize and supervise all financial entities in the capital market, article 53 of the Act stipulates establishment of active financial associations. Securities and Exchange Brokers Association of Iran (SEBA) and The Iranian Institutional Investors Association (IIIA) are the two main associations in Iran capital market whose existence like every other industry is essential for the ongoing progress of financial subsidiaries. These two associations are adequately represented in capital market bodies to ensure members’ rights and interest to be continually fulfilled.
Securities and Exchange Brokers Association of Iran was established in line with the emphasis placed on formation and registration of active financial associations in the Act. Brokers’ selected committee proposed the establishment of SEBA to SEO which was subsequently approved as an NGO, non-commercial, non-profit institute and a self-regulatory entity. All active brokerage firms in Iran capital market have to register for SEBA membership and pay the required fees to enjoy its benefits.
The following are the main activities of SEBA:
· Supervise and assess SEBA members and evaluate their staff’s performance within the framework of the law;
· Supervise members’ promotional programs to prevent transmission of inaccurate or misleading information to clients;
· Strive to handle disputes between brokers, traders, affiliated staff and clients;
· revise market developments and provided services by members continuously to help them progress; and
· Communicate and cooperate with other institutions and counterparts.
The Iranian Institutional Investors Association was founded as a self-regulatory, non-governmental, non-trading and non-profit organization.
Members of IIIA are financial institutions registered with SEO including investment companies, holding companies, investment banks, investment funds (including pension funds) and other investment institutions except for brokerage firms.
Unlike SEBA membership, which is compulsory for brokerage firms, other financial institutions are not obliged to join IIIA. The number of IIIA’s members rose to 104 institutions by the end of 2014.
Aside from the aforementioned duties of IIIA, the supervision on the new analytical website TEDAN was granted to this association at the end of 2014 to verify authenticity and accuracy of provided analyses by financial advisers.
Although not very advanced, the capital markets of Iran provides for the trading of a number of instruments available to investors which are summarized in the following paragraphs.
The particular features which come naturally with this kind of instrument are voting rights in general meetings plus the selection of companies’ board members.
This tradeable instrument is the by- product of a listed company’s capital increase, and represents the shareholders rights to subscribe for new shares on a pre- emptive basis and at an
Housing Mortgage Rights (HMR)
These instruments are issued monthly on the TSE and each right expires in two years. By having seventy rights one can apply for housing loans from Bank Maskan of Iran.
The debt market principally trades government bonds, which are risk- free in Iran as the government guarantees to redeem the principal with accrued interest. Other types of bonds transacted in the market are corporate, municipal and mortgage- backed or asset- backed securities. Two kinds of particular bond traded on TSE that are Sharia law compliant are as follows.
I. Participatory Certificate (Islamic Bond)
The first participatory certificate was issued for Iran- Khodro Company in 2005 and it was authorized by the SEO rather than under the Central Bank of Iran’s statutory license. This was a move that reflected the inherent financing capacities of the capital market, which was neglected for a long time.
As it is clear from its name, it is an Islamic financial instrument that bears the name of the bondholder. What is important is that the issuer of this type of instrument is entitled to cover 100% of the redemption amount and periodically to pay the distribution amount it is subjected to, no matter how the underlying asset might perform. Mahan Airline was the first company to employ this kind of Sukuk in Iran’s Fara- Bourse for the first time to finance its projects in the capital market
Derivatives are securities whose price is dependent upon or derived from one or more underlying assets. The most common underlying assets in Iranian exchanges are stocks and commodities. The latter are traded in large volumes on Iran’s Mercantile Exchange in contrast to stocks where trade is only on a limited basis and as yet do not constitute an effective means of hedging risk.
The trading of this financial instrument began on 25th July 2010, with 1 to 10 leverage for futures contracts, and with the CSDI qualified to clear the contracts on due dates.
The TSE intends to introduce this practical risk- controlling derivative to hedge against fluctuations in stocks and commodities prices, with the approval of the Sharia committee of the SEO.
Unfortunately, neither the futures nor the options markets have been active so far and they do not appear to be getting active in the near future
It is an investment vehicle that is made up of a pool of funds to be invested in portfolios of stocks or commodities or other sorts of similar assets, providing access to the professional management of securities to small investors, who may not have access to this expertise given their limited amount of capital and knowledge of the markets. At the present time investors can invest in 157 active mutual funds.
In Iran funds can be classified by their size (small or large cap), primary underlying assets (stocks, fixed income securities, blended), kind of activity (securities, Gold, commodities and etc.), liquidity (guaranteed liquidity and non- guaranteed liquidity) or by their return (guaranteed minimum return, non- guaranteed minimum return and funds with expected return).
For small cap funds minimum capital of 5 bn IRR is required and 50 bn IRR is needed to set up a large cap fund. The fund manager, settlement, custodian, trustee, auditor should be authorized by the SEO individually.
An exchange- traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock- like features. In September 2013 the very first ETF was listed in the TSE.
Tehran Stock Exchange
Tehran Stock Exchange is Iran’s first and largest equity market. Initially launched in February 1967, TSE listed six companies which were later accompanied by other financial instruments such as treasury bonds and certain state- backed certificates.
TSE is located in Tehran and is a founding member of the Federation of Euro- Asian Stock Exchanges (FEAS).
The Act, ratified in November 2005, restructured Iran capital market resulting in the establishment of SEO as the supervisory body and TSE as an equity market. TSE previously known as “Brokers Organization”,
used to be a non- governmental public organization whose board members were mainly appointed from brokerages firms but since 2006, it has turned into a self- regulatory public joint- stock corporation.
The TSE is open for trading five days a week from Saturday to Wednesday, excluding public holidays. Trading takes place through the Automated Trade Execution System from 9:00 am. to 12:30 pm, which is integrated with a clearing, settlement, depository and registry system. Settlement is T+3. In financial markets T+3 is a shorthand for trade date plus three days indicating when securities transactions must be settled.
TSE has two markets, the primary market and the secondary market. The primary market has two Boards, the main board and the second board. Ordinary shares are listed on only one of the boards in the primary market or in the secondary market. Applicants must file and submit their listing application for the main or the second board of the primary or the secondary market to the Admission Board. The prerequisites for the companies applying to list on the Tehran Stock Exchange are summarized in the following Table.
Securities market activities indicators
Commission & Fees
TSE trading fees include:
TSE stock and rights commissions, fees and tax (% of trade value)
TSE commissions, fees and tax for future contracts (% of trade value)
Iran Mercantile Exchange
Due to Iran’s high capacities and relative advantages in production of some commodities including oil by- products and petrochemicals producers have long been craving for Iran to play an effective role to become price maker of petroleum products in the international market.
Industrial Products and Commodities:
The ferrous and non- ferrous metals such as Steel, Copper, Aluminum, Zinc and Lead in various form, dimension and sizes, different types of Cement, Coke, Precious Metals Concentrate, and other basic products are traded in the industrial trading session from 10:30 to 12:00 (+3.5 GMT), at the trading floor through semi electronic open outcry.
Gold : Gold bullions having different fineness from 999.9 to 900, are traded from 12:00 to 12:30 in the trading floor
Oil Products and Petrochemicals : Oil related products range from Bitumen, Base oil, Crude Oil, Fuel Oil, RPO, Carbon black, Chemical products and Petrochemicals like PP, PE, LDPE, LLDPE, Aromatics, SBR, PS, MS, and many others. The trades in this group are carried out from 13:30 to 16:00
Agricultural : The agricultural products traded in IME range from cereals to oilseeds to oilcakes and other grains and products like wheat, feed wheat, feed barley, yellow corn, maize, raisin, lentil, chick peas, sugar, meat, eggs, saffron, pistachio, traded in the fully electronic multi- commodity trading system.
Multi- Commodity : All agriculture products and some oil products like Bitumen, VB and Lubcuts are traded in the multi- commodity system from 12:30 to 12:50.
Gold Coin Futures : Traded as one of the most active and successful underlying assets in the futures contracts in IME. Trading hour ranges from 10:00 to 18:00.
Offerings and Orders
Offerings are the commodities in the spot market, which are announced and notified 24 hours, before trading takes place, through the exchange website “www.ime.co.ir/offerings” so the sellers and clients would be able to place their orders with the brokers and rest assured for trading to be matched and cleared.
In the derivatives market the clients order their trades as per specifications of the futures contract and in accordance to the order
types specified in terms of order validity and the price. Around 55 brokerage firms are licensed to trade futures for their clients. At the same time 4 consecutive contract months issued for the investors.
Spot Trading Resulting in Physical Delivery :
Based on the settlement and clearing terms and conditions mentioned in the offering notice, the industrial, petroleum and agricultural products and commodities are traded in following mechanisms:
– Cash trades : It is defined as prompt cash payment against taking prompt delivery. After matching the trade, the buyer shall pay the full amount of the contract value. The clearing house issues the warehouse warrant (receipt) and the customer takes the delivery of the commodity within 72 hours or more but limited to 10 days as per- offering notice delivery information.
– Forward : It is prompt payment against forward date delivery. The client pays in advance the contract value effective after matching the trade and receives the commodity by virtue of the warrant issued by the clearing house within the period specified in the offering notice on delivery information. The seller receives the contract value within 72 hours or within the time specified in the offering notice but not later than 10 days. The offering details and delivery date is also announced to the brokers by the trading floor supervisor before the trade.
– Credit : It functions as deferred payment against prompt delivery. In this type of transaction, the buyer pays in different payment according to the terms stated in the notice of offering and receives the commodity in advance after matching the trade and based on the warrant issued by the clearing house. The seller shall receive money from the clearing house within the period specified in the notice of offering.
General Trading Data
Trading Fees in the IME Spot Market – Except Agricultural Products
Trading Fees for IME Agricultural Products
According to the trading rules of the futures market, futures trading is broker- based so the clients must place their orders as per contract specification with one of the brokers licensed for futures trading. The initial margins are paid by the clients to their own specific account code named in the name of the clients but the clearing house is the sole authority for transferring the margins or other charges and fees among the client accounts. The bid and orders are placed electronically in quos waiting for their identical price to be matched. During the course of trading the clients are in contact with their brokers adjusting their bid or price based on the price information, volatility factors and the news in the national or international markets. Trading commences dynamically from 10:00 to 18:00 and by matching of the prices of bids and asks open positions or open interests are formed which may remain up to the end of the trading session or are offset and closed by the broker in the client’s request. At the end of the trading hour a daily settlement price is calculated and announced by the clearing house
for the settlement of the contracts and clearing the risky accounts. The C/H issues margin calls for the lower- than- the- maintenance amount client accounts to bring the amount of their account to the initial margin level. At the end of the contract month those clients who are interested in physical delivery of the underlying asset may take or make delivery of the commodity subject of the
contract. To become a customer of the futures market, one shall follow the below process:
– Opening account with IME clearing house via a broker
– Initial margin payment/ placing orders /confirming the price or validity of the order and matching the orders based on the price and the time of order placed and registered in the order book of the client and exchange
– Delivery of the underlying asset at sellers- buyers option
The Built- in Clearing House
the clearing house is the counter- party of the trade partners, which is assigned to clear the contracts and ensuring the settlement and delivery where applied.
Derivatives Market Trading Fees
Iran Fara Bourse Company
Iran Fara Bourse Company as a Public Joint- Stock company is located in Tehran which commenced its operation in November 2008. IFB is Iran’s second equity market and functions in some way analogous to conventional OTC markets with a handful of more features. The market is a self- regulatory entity but under direct supervision of SEO.
IFB is a market for both listed and unlisted securities and also other financial instruments. As of today, IFB comprises’ different markets each of which serves a unique role in the capital market. Designing innovative financial instruments in the capital market which helps directing capital towards development plans and economic prosperity is best served by IFB. IFB is a member of the Federation of Euro- Asian Stock Exchanges (FEAS) and Organization of Islamic Cooperation (OIC) Stock Exchanges Forum. According to listing, offering and transfer rules of securities, there are 5 separate markets at IFB as follows:
The requirements for offering and listing in IFB are indicated in the following Table 7-3 Initial offerings and secondary transactions of securities are executed in the primary and secondary markets of Iran Fara Bourse Company. Block offerings, retail offerings and subscriptions are executed in the third market of Iran Fara Bourse Company. Transaction of some securities, including certificates of deposits (C.D.), Sukuk, Mortgaged- Backed Securities (MBS) and other instruments are also conducted at this specified market of Iran Fara Bourse company.
The stock listing conditions in Iran Fara Bourse markets
Commission & Fees
IFB trading fees include:
IFB stock and rights commissions, fees and tax (% of trade value)
IFB Commissions, Fees and Tax for Bonds and Sukuks (% of trade value)