Foreign Portfolio Investment (FPI), (Part Ι)
Foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets. Portfolio investments in Iran typically involve transactions in securities exchange in which various stocks are traded easily in accordance with the Iran’s stock market rules.
Iran’s Stock Exchange
Tehran Stock Exchange was established in 1968, and has been the primary equities market in Iran. In 2005, the new Capital Market Law of Iran approved by parliament and in 2006, according to this Act, TSE was demutualized and established as a joint stock company with over 6000 shareholders.
TSE has enjoyed a reputation for having maintained an orderly market and a cost-effective trading capability since its inception. The fully computerized trading system has helped boost the trading capacity and efficiency of the stock market. In 1994 electronic trading systems was launched. In 2007, TSE moved to the powerful trading system (powered by Atos Euronext) for meeting the high trading volume. TSE has been awarded quality system certificate of ISO9001; in 2009 and also planned to obtain ISO27001 certification for its IT Security Management System.
TSE has implemented many reform measures in the past few years in order to bring it in line with international practice, and to better reflect investors’ diversified needs. TSE is set to continue making progress towards liberalization and internationalization. The Tehran Stock Exchange, with its fully automated trading systems and book entry mechanisms, is known as one of the most active exchanges in the Middle East region.
At the end of June 201, the total market capitalization of the 342 companies listed on the Tehran Stock Exchange (TSE) amounted to US$105 billion. The ratio of total market capitalization to GDP was about 26 % in 2010. In this year, the total trading value was US$19 billion, representing a market turnover rate of 22.5%.
The market P/E ratio of the Tehran market was 6.7, lowest among primary WFE1 exchanges, making it an attractive marketplace for investors. In order to enhance the core competitiveness of the Tehran Stock Exchange and to make faster progress towards liberalization and internationalization, the authorities have also promoted the introduction of new financial products, new financial institutions and implemented many reform measures, such as the listing of Single Stock Futures (SSF), relaxing limitations on foreign investment, streamlining foreign registration procedures, and adjusting various trading system and mechanisms so that they are more in line with international standards.
Tehran Stock Exchange
As with several emerging stock markets, the Tehran Stock market historically set several limitations on foreign investment. With the growth of Iran’s stock market and development of the economy, the Stock Market Authorities have gradually relaxed these limitations on foreign investors.
Since April 2010, the process for investment by foreign investors in the stock markets has been changed from the ‘permit’ system to the ‘repatriation’ system. On 18th April 2010 Upon the recommendation of the Ministry of Economic Affairs and Finance, and by virtue of the paragraph 3 of article 4 of the Securities Market Law of I.R.I ratified in 2005, the Council of Ministers approved “The Regulations Governing the Foreign Investment in the Exchanges and OTC Markets”. This has consequently simplified the application procedures for foreign investment in the Tehran Stock Exchange.
According to Article 7 of this “Regulations” the restrictions imposed on the possession of shares by the non-strategic foreign investors on every exchange or OTC market are set forth as follows:
The number of shares owned by the total foreign investors shall not exceed twenty (20%) percent of the total shares number of the companies listed on the exchange or on the OTC market or twenty percent (20%) of the shares number of any company listed on the exchange or on the OTC market. The number of shares owned by each foreign investor in any companies listed on the exchange or on the OTC market shall not exceed ten percent (10%) of the shares number of such companies.
Based on Article 4 the foreigners/ foreign entities shall have to submit the required information and documents to the Organization along with an application based on the forms prescribed by the Organization so as to obtain a license for trading in securities on every exchange or OTC market.
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