Monetary and Capital Market Exclusive, March 2004

Monetary and Capital Market in Iran

Securing the New Securities Bill

The financial markets in Iran have not been at par with the rest of the world. In 1963, the Stock Exchange Law was passed concentrating on the secondary market.

Dr. Heydar Pourian is the Cabinet-approved representative of the Minister of Economic Affairs and Finance to the Stock Exchange Council (SEC). He has held consulting positions in the government and worked in the private sector and is currently the Economic and International Affairs Deputy at the Tehran Metals Exchange and the Editor-in-Chief of “Iran Economics” Monthly. In addition during the last two years, he has served as the Manager of the “Securities Market Bill” which has been recently passed by the Cabinet, to be presented to the Majlis. Dr. Pourian holds a PhD in economics from University of Wisconsin and MA from Fletcher School of Law & Diplomacy and a BA from the National University of Iran.  What follows is an interview we had with him in his office.

What can you tell us about the new securities bill?

The financial markets in Iran have not been at par with the rest of the world. In 1963, during the previous regime, the Stock Exchange Law was passed concentrating on the secondary market. But the primary market, where the initial investment occurs, was forgotten. The new bill reorganizes and regulates both of these markets.

Why has the primary market not received enough attention during the previous regimes or even after the Revolution?

Two reasons can be cited for this neglect. Oil money provided enough funds for investment and a “market need” did not arise until recently. Second, experts from international institutions, such as the World Bank, during a good part of the past five decades held a narrow view of the capital market, concentrating on the stock exchange in developing countries which, by the way, was instrumental in privatization. But gradually the developing world realized it can organize its primary market to develop faster in terms of production and employment. During the last decade various countries passed new securities market legislation (China in 1998).

What deficiencies has the absence of this law caused in Iran?

On a practical level, the ratio of new investment to production (I/GDP) has dropped drastically in the post-revolution era, as the market never established its integrity in Iran.

More specifically, the no-law approach caused “adverse selection” by the investors, meaning the risk-return duality in an uninformed, unregulated investment could not be known. No credibility could be established in such a market. Second, “moral hazard” meaning discipline in the allocation of funds was not necessarily pursued according to securities contracts. So various market attempts—e.g., modarebeh ventures and some investment companies—failed.

Third, “expost verification” did not exist. Professional reporting of financial and other information was absent. In other words, comparable to “Truth in Lending” was not present in the capital market. The undeveloped capital market persisted, since the integrity and credibility of the system could not be established. These resulted in capital flight, low productivity and unsustainable development.

How did the legislative process work in Iran?

When Mr. Khatami was elected president, a group of experts were organized under the joint effort of the Ministry of Economic Affairs and Finance, the Stock Exchange’s Board of Directors, the Banking System, as well as several investment companies. A year and a half long study resulted in five research documents. Then a group of financial and legal experts turned these studies into a first draft of the bill. But due to the inertia present in our government, the bureaucracy forgot all about the bill as other domestic political and social issues were given priority. When Mr. Mazaheri was appointed as the Minister of Economic Affairs and Finance, I presented him with the draft for which I had severed as the manager. He immediately sent the draft to the Cabinet and with the approval of Dr. Aref; work began inside and outside the government. We worked and collected a large number of views and comments, which led to small revisions in the bill. Finally, it was passed after a year’s work in the specialized Economic Commission of the cabinet (with its eight deputy ministers as well as the Central Bank and the Management and Plan Organization). We had an uphill battle in many fronts. But it was eventually passed by the Economic Commission of the Cabinet and finally by the Cabinet chaired by President Khatami himself.

What’s inside the new bill?

The new bill is divided into the following sections:

• Definitions, including such concepts as Self Regulatory Organization (SROs), market makers and inside information.

• The oversight structure, including the establishment of new Stock Exchange & Securities Commission. This commission is composed of several ministers, the Governor of the Central Bank and representative of the Chamber of Commerce and professional groups, Chaired by the Minister of Economic Affairs and Finance. This commission is not unlike the current SEC in Iran, but its task is policymaking. In addition, a full time Executive Commission is formed which carries out the oversight of both primary and secondary markets. It has five non-political members.

• Primary market regulation and procedures for securities registration.

• Secondary market rules for SROs, which include stock exchanges and to-be-organized Brokers’ Associations.

• Information dissemination.

• Unlawful price setting, inside trading and the penalties.

Where is the bill now?

It is being reviewed by a Commission of the Judiciary, chaired by Mr. Shahroodi.

What are your hopes?

My hopes are that the new bill, once passed by the Majlis next year, will organize an efficient, fair, transparent securities market assisting Iran in its long-term path to production, employment and non-inflationary, sustainable development.