Securities and Exchange Organization of

ACRONYMS

The Council Securities and Exchange High Council SEO Securities and Exchange Organization of Iran TSE Exchange IFB Iran Fara Bourse IME IRENEX Iran Energy Exchange CSDI Central Securities Depository of Iran TSETMC Tehran Securities Exchange Technology Management Co. SIDS SEO Information Dissemination and Services SEBA Securities and Exchange Brokerages Association IIIA Iranian Institutional Association Foreign By-Law The By-Law Governing Foreign Investment in the Exchanges and OTC Markets The Act New Securities Act of Islamic Republic of Iran ratified in 2005 The Development Act The Law for Development of New Financial Instruments and Institutions ratified in 2009 CORE VALUES

Justice Accountability Dynamism

serving justice for accountability to all flexibility and adaptation investors and market market beneficiaries toward ongoing participants including investors, changes financial entities, and other national policy- making authorities

Independence Excellence Meritocracy

autonomy in decision commitment to highest hire, retain and train making levels of excellence in skilled and diverse work accordance with the force agency’s mission VISION SEO strives to be a dynamic, vigorous and effective organization to supervise and regulate the with the aim of achieving a fair, just, efficient, orderly and regularized market through benefiting from advanced instruments, entities and financial markets.

MISSION • Protect and safeguard investors’ rights • Organize, maintain and develop fair, transparent, and efficient securities markets • Supervise the performance of local markets

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2——Message from the Chair 4——Introduction 6——History Message from the Chair

This is a moment of important transition for our country as well as our financial markets. As the regulatory and supervisory body of the Iranian capital market, the SEO keenly feels the impact and possibilities of this transition.

We have witnessed a triumph of Certain factors are most often diplomacy and good sense recently, mentioned when analysts explain the as the and complex negotiations drivers of opportunity in Iran. Iran’s between the P5+1 and Iran have demographic situation is very attractive. culminated in a win-win accord Our population is large with 80 million grounded in mutual respect and a desire people. It is young, with two-thirds below for peace. This accord has opened age 30. It is educated, with 25% having the way to Iran broadly engaging and connecting with the world again and we anticipate its full implementation in the near future. This new engagement is well under way at the governmental level. Over the course of the last few months, our country has hosted many ministerial and presidential delegations from across the globe. This new engagement is also under way at the private commercial level. We have some very good evidence for this: it’s difficult to get a hotel room in Tehran these days! But if you are coming to visit on capital markets business, please call on the SEO, as other visitors do almost daily, and we will help with your reservations! Iran’s commercial engagement with the world is nothing new. Many of you will know that we have a history as a center of commercial interaction and engagement. Two thousand years ago a university degrees. Our GDP is among network of transportation infrastructure the top twenty worldwide by PPP, even that was quite advanced for its time after decades of economic sanctions. allowed traders coming from to Under the sanctions, Iran managed to follow the Silk Road across hundreds follow the guidelines of “economy of of kilometers of empty desert in central resistance”, proposed by the Supreme Iran to get to . And surely there Leader of the Islamic Republic of were times in ancient history when it Iran, establishing a knowledge-based was difficult to secure a room in one of economy relying on domestic capacities our Silk Road caravanserai! and cutting dependence on oil . But let me return from the interesting We are a very stable country in a chaotic past to the exciting present. region. We have a very strong diaspora. We have abundant natural resources

2 IRAN CAPITAL MARKET ANNUAL REPORT well beyond oil and gas. And we have on foreign nationals forming and owning who are willing to engage and work with diverse manufacturing and exporting companies in Iran up to 100%. us through the challenges will do best. industries. All this led a Let me address some of the major My last message to you is a message of few years ago to include Iran among the priorities and projects as our market welcome. We welcome you as partners “Next 11” fastest-growing economies opens up to greater international in our capital market, as advisors to after BRICS. participation. our institutions, and as intermediaries for connecting Iran further to global Our is the oldest in the Our local market is currently grappling markets. We particularly welcome , founded about 50 years with a domestic shortage of credit and institutions that have a long-term ago. It is also one of the largest in the high funding costs of up to 30%. In horizon, are open to sharing their region, with a of order to help address these, we wish to knowledge, see the value of a local around $104 billion. In addition to the develop the market, introduce new presence, and want to add something to TSE, we have three other exchanges: instruments such as new types of sukuk our local market. We welcome your visit Iran Fara Bourse for sukuk, derivatives, funds and derivatives, and broaden to learn the opportunities and meet the ETFs; Iran Energy Exchange for oil, gas, and sharpen the range of investment players for yourself. electricity and other energy carriers; options available to our investors. and Iran Mercantile Exchange for Because we expect our market players On a personal note, I’d like to ask you to agricultural and industrial . and issuers to now deepen their foreign do leave some time to enjoy the ancient Our capital market financial institutions interactions, the SEO will also take steps Iranian culture when you visit. I’m will be familiar ones. We have 8 domestic to internationalize and enhance the confident that if you travel in Iran, you investment banks, 107 brokerages, over capabilities of our local players. will find that the message of welcome is 130 registered mutual funds, ETFs, extended to you by everyone you meet. portfolio managers, and investment Of course, we want our initiatives and advisory firms. enhancements to be sustainable, so As Iran demonstrates its long tradition they must be well-considered and of commercial openness, engagement Throughout Iran there is a wide range of obviously change will be gradual. Thus, and cooperation with its neighbors and investment opportunities across many Iran will be in a period of developing its friends, may I have the opportunity to industries. Some of these will be through soft infrastructure as it assumes a higher welcome you to Tehr an soon? government privatization plans. In international profile. During this period addition to capital investment needs and there will be emphasis on improving opportunities in our industries, we have policies and regulations, building needs and opportunities for investment relationships, and strengthening of management expertise. This should local players. Therefore, -term be of interest to our foreign partners expectations should take account of this who are able to create value and drive soft infrastructure development. Mohammad Fetanat growth by bringing in their operational and managerial skills. In this initial period, there are important roles for our foreign friends to play. Let Our Foreign Investment Promotion and me mention some of them. Protection Act (FIPPA) was introduced in 2002 to enhance the legal framework We wish to improve policy and soft and operational environment for foreign infrastructures with consultation, and we investors. A license under this law welcome the views, opinions and ideas protects imported capital from political of international experts on improving risk. In addition, foreign investors may our economic climate. In particular, we readily hold securities on the Tehran welcome studying and learning from the Stock Exchange or Iran Fara Bourse. experience of other countries. We will of Furthermore, there are no restrictions course have challenges ahead but those

MESSAGE FROM THE CHAIR 3 Introduction

SEO has been committed to foster development of a securities market in terms of protecting investors, promoting fair, orderly and efficient markets and facilitating capital formation. SEO has been striving to bolster an environment so that investors could make better decisions and prevent any kind of fraud and abuse in the markets. SEO as a publicly owned, non- new technologies and interaction governmental entity is the main with investors and experts to take regulatory body of Iran securities into its daily regulatory operation. market pursuant to Securities SEO regulates stock exchanges Market Act of 2005. It is governed as they come into existence and by a non-partisan five-member develops toward evolution and board of directors and the CEO also supervises financial entities is appointed by the Minister of as key factors in the capital market. Economic Affairs and Finance. Iran capital market with more than To ensure the duty to be half a century of experience still is continually fulfilled, SEO is always and will be in pursuit cooperation engaged to enhance a regulatory of all market participants and structure through incorporating elites to provide local and foreign

4 IRAN CAPITAL MARKET ANNUAL REPORT investors with promising investing opportunities and familiarize them with Iran’s untapped and potent markets. Therefore, this report, while gauging SEO’s performance and progress, endeavors to catch a glimpse of different sectors of Iran capital market to show how developed the markets are, yet continuously thriving toward prosperity.

INTRODUCTION 5 History

The first Treasury issued in 1951 Th first trading session after establishment of TSE

1966 Following economic and social developments and industrial boom in 1960s, raising capital for businesses turned into a necessity. Therefore, initiating capital market with diverse financial instruments became high on the government’s agenda, hence Securities 1940 Market Act was ratified by the Iranian parliament in May 1966. Tehran Stock Exchange (TSE) officially commenced The concept of launching a capital operations in April 1967 to encourage market in Iran dates back to 1936 when private sector’s participation in bolstering authorities, in an attempt to accelerate Iran’s already booming economy. industrialization process, engaged experts from exchanges all around the world to conduct researches about the possibility of establishing a stock market in Iran. The result was a report outlining recommendations with respect to necessary legal and business frameworks as a proper foundation for a capital market in Iran. However, global economic and political developments such as outbreak of WWII postponed introduction of a formal capital market.

6 IRAN CAPITAL MARKET ANNUAL REPORT 1980

Economic developments following the Islamic Revolution of Iran in 1979 required control of the economy to be transferred to the public sector. This led to lack of adequate attention being paid by the private sector. Simultaneously, the 1970 introduction of Islamic banking laws led to abolition of interest rates and the end of bond trading on the capital market. During the 1970s, rapid economic Moreover, eight years of the imposed expansion led to more listings on TSE war caused the equity market to enter a and accordingly the number of listed sluggish phase. companies rose to 105 in 1975.

HISTORY 7 1990 Trading on the TSE entered a growth phase following the first post-war Budget Act, enacted in March 1989, which substantially promoted the private sector’s role in revival of the economy. TSE, dormant for almost ten years, was then entrusted as an efficient, dependable and equitable vehicle with privatization of 2005 state-owned entities and for channeling capital into the appropriate sectors of the economy. New Securities Market Act (the Act) of the Islamic Republic of Iran, 40 years after the establishment of TSE, was ratified by the Iranian Parliament in November 2005 to respond to new financial environment and provide a more advanced capital market. Based on this new law, the supervision and administration function was assigned to two separate bodies, i.e. SEO and TSE.

8 IRAN CAPITAL MARKET ANNUAL REPORT 2009

The Law for Development of New Financial Instruments and Institutions (The Development Act) was ratified in 2009 to facilitate implementation of Article 44 which paved the way for new entities (e.g. investment banks and different funds), new instruments (e.g. Islamic securities) and new markets (e.g. Iran Fara Bourse and Iran Energy Exchange) to practically 2006 commence operation. Ever since, SEO has been the regulatory and supervisory body of Iran capital market with four The Supreme Leader of the Islamic main exchanges and other corroborative Republic of Iran announced the general bodies. policies of Article 44 of the Constitution of Islamic Republic of Iran (Article 44) in 2006. Based on the state-owned privatization plan stated in Article 44, the government was assigned with the task to gradually issue shares of many state- owned companies through initial public offerings. This led to giant companies from diverse industries to be listed on one of the exchanges.

HISTORY 9

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12——Regulatory Environment 16——Capital Market Authority 1 7——Securities and Exchange High Council 1 8——Securities and Exchange Organization of Iran 19——Organizational Stru‍cture and Function 20——Board of Directors 20——Key People 2 1——Deputy for Supervision on Exchanges and Issuers 23——Deputy for Supervision on Financial Institutions 25——Deputy for Legal Affairs 26——Deputy for Executive Affairs 27——Department of Research, Development and Islamic Studies 27——Department of Public Relations and International Affairs 28——Markets 29——TSE 32——IFB 35——IME 37——IRENEX 39——SEO’s Corroborative Bodies 39——TSETMC 40——CSDI 43——SIDS 44——Associations Regulatory Environment

The most important rules and regulations governing Iran capital market are outlined below:

Law Legislator Date of Approval Commercial Code Parliament March 1969 Securities Market Act of the I.R.I Parliament November 2005 Law for Development of New Financial Instruments and Institutions Parliament December 2009 Foreign Investment Promotion and Parliament March 2002 Protection Act (FIPPA) By-Law Governing Foreign Investment in Council of April 2010 the Exchanges and OTC Markets ministers Anti-Money Laundering Act Parliament January 2008

SECURITIES MARKET ACT OF THE I.R.I The Securities Market Act of articles provides in detail, besides the Islamic Republic of Iran was the definitions of the terms and ratified by the Iranian Parliament phrases, the general and legal in 2005 and subsequently framework of the activities of replaced the former one called the all financial institutions and Establishment Act of the Stock instruments within issuance and Exchange approved in 1966. trading markets of securities as The Securities Market Act follows: comprising 6 chapters and 61 DDSecurities market bodies; DDPrimary market; DDSecondary market; DDInformation dissemination in the primary and secondary markets; and DDOffenses and punishments.

12 IRAN CAPITAL MARKET ANNUAL REPORT Among the main characteristics of the Act are:

DDDemutualization which led to separation of regulative bodies of the capital market (Securities and Exchange High Council and Securities and Exchange Organization) from the executive bodies (regulated entities, including self-regulatory organizations, financial institutions and issuers); DDEnhancement of regulation on the ; DDProvision of requirements for designing and applying different financial instruments and institutions; DDEffective confrontation and compliance system including inspection, investigation, surveillance and enforcement power to ensure that regulated entities comply with relevant securities laws and regulations; DDComprehensive regulatory framework for capital markets violations such as manipulation, , misrepresentations of material information, fraud, unfair practices and failure of compliance with regulatory requirements; and DDEffective mechanism in dispute settlement and compromise in arbitration board;

REGULATORY ENVIRONMENT 13 LAW FOR DEVELOPMENT OF NEW FINANCIAL INSTRUMENTS AND INSTITUTIONS This law was ratified by the Parliament in order to facilitate the enforcement of the overall policies of principle 44 of the Constitution in December 2009 and includes the following:

DDThe rules and requirements of the establishment, registration, operation, dissolution and liquidation of the mutual funds; DDModifications and amendments to the Direct Taxation Act and the Value-added Tax Act in order to provide exemptions for Iranian and foreign natural and legal entities investing in the local capital market; DDTrading in commodities and securities on the commodities exchanges and all activities carried out by individual entities in such exchanges shall be subject to the rules provided in chapter six of the Act; DDThe managers of financial institutions, issuers of securities and self-regulatory organizations inclusive of the board members and the managing directors shall hold the required professional qualifications; DDThe issuers of securities, financial institutions and self-regulatory organizations and also the persons who are appointed as their directors shall be deemed to be violators in the case of infringing the laws and regulations relating to the activity of each of them and the organizations shall have the authority to receive cash penalty from the violators in addition to the disciplinary actions prescribed in the Securities Market Act; DDIf the security listed on the stock exchange or on the OTC markets and/or the - based securities which are listed on the commodity exchange carries the profit approved, matured or guaranteed, it shall be distributed and paid in a timely manner within the framework of prevailing rules; and DDUpon the request made by SEO, all regulated entities such as issuers, financial institutions and self-regulatory organizations shall have to submit records, documents, information and reports requisite for the exercise of the functions and responsibilities legally vested in the organization.

14 IRAN CAPITAL MARKET ANNUAL REPORT BY-LAW GOVERNING FOREIGN INVESTMENT IN THE EXCHANGES AND OTC MARKETS The subject of foreign investment is stated in the Act which stipulates that supervising the investment of foreign personal and corporate entities in the exchanges is among the duties and authorities of SEO. In this regard, the By-Law Governing Foreign Investment in the Exchanges and OTC Markets and its enforcement regulations were drafted. The law states the following criteria regarding foreign investors:

DDA foreigner who owns more than 10 percent of a listed company cumulatively is considered a strategic and shall use the block trading mechanism in case of selling the shares; DDThere are no restrictions regarding the ownership of securities up to 100 percent (equity, sukuk, ETF, etc.) for foreigners; DDThere are no restrictions regarding establishing or purchasing shares of a financial institution in Iran for foreigners; and DDSEO is responsible to facilitate the registration processes to make sure the applicant is able to start trading within a week;

Moreover, the latest resolution by the High Council implies that there are no distinction between Iranian and foreign investors in terms of the capital market transactions.

ANTI-MONEY LAUNDERING ACT Anti-money laundering measures are being constantly reviewed and getting stricter across the globe. The Anti-Money Laundering Act and its enforcement regulations were ratified in 2008 and 2010 respectively in accordance with international standards to lay the groundwork for detecting and deterring money generated by illegal activities or money to finance terrorist activities. Full authentication of clients and market participants’ identities and backgrounds, reporting and investigating traders with suspicious trading patterns, keeping records of various transactions and developing systems to discover trading relations are being carried out meticulously. To ensure the best anti-money laundering measures to be taken a committee was also established in 2007.

REGULATORY ENVIRONMENT 15 Capital Market Authority

As of today, Iran capital market has many entities today, Iran capital market has many entities playing playing their unique roles while working closely their unique roles while working closely with other with other sectors to form a comprehensive sectors to form a comprehensive system. The system. The structure of the capital market in Iran structure of the capital market in Iran and each and each entities status, based on the present entities status, based on the present definition definition in the Act and common norms are in the Act and common norms are shown in the shown in the figures of the following diagram. As of figures of the following diagram.

Securities and Exchange High Council Policy Maker

Securities and Exchange Supervisory Body Organization of Iran

Tehran Stock Iran Fara Iran Energy Iran Merchantile Exchanges Exchange (TSE) Bourse (IFB) Exchange (IRENEX) Exchange (IME)

Tehran Securities Exchange Central Securities Information Associations Corroborative Bodies Depository of Iran Technology Management Co. Dissemination and (IIIA, SEBA) (CSDI) (TSETMC) Services (SIDS)

Financial Listed Registrants entities companies

Investment Financial Financial data Brokerages Portfolio processing banks advisers managers companies

16 IRAN CAPITAL MARKET ANNUAL REPORT Securities and Exchange High Council Policy Maker SECURITIES AND EXCHANGE HIGH COUNCIL Securities and Exchange Supervisory Body According to the new Securities Market Act of 2005, two Organization of Iran supervisory bodies of the capital market are Securities and Exchange High Council and Securities and Exchange Organization.

Tehran Stock Iran Fara Iran Energy Iran Merchantile Exchanges In accordance with article 3 The council also oversees the Exchange (TSE) Bourse (IFB) Exchange (IRENEX) Exchange (IME) of the Act, high council is the implementation of laws and highest authority in the capital policies, while giving directions to market, establishing policies and the capital market. Members of market strategies for managing the council are as follows: Tehran Securities Exchange Central Securities Information Associations Corroborative Bodies and expanding the markets. Depository of Iran Technology Management Co. Dissemination and (IIIA, SEBA) (CSDI) (TSETMC) Services (SIDS) DDMinister of Economic Affairs and Finance, Council President; DDChair of the Securities and Exchange Organization, Speaker; Financial Listed Registrants DDMinister of Industry, Mine and Trade; entities companies DDPresident of Central Bank of the Islamic Republic of Iran; DDPresident of Chamber of Commerce, Industry and Mines; DD Investment Financial Financial data President of Chamber of Cooperatives; Brokerages Portfolio processing banks advisers managers companies DDAttorney General or Deputy Attorney General; DDA representative from market associations, IIIA, SEBA; DDA representative from each of the exchanges; and DDThree financial experts from the private sector.

CAPITAL MARKET AUTHORITY 17 Securities and Exchange Organization www.seo.ir

SECURITIES AND EXCHANGE ORGANIZATION OF IRAN According to article 5 of the Act, SEO is a publicly owned non-governmental organization, established as an independent legal and financial entity. This organization is funded by transaction commissions, listing fees of companies and securities on exchanges, and other sources of . Board of directors consists of 5 non-partisan members elected upon Chairman of SEO recommendation and the Council’s approval. These members are trusted and renowned financial professionals from non- governmental sectors. SEO is responsible for enforcing capital market laws and direct supervision and regulation on financial entities, exchanges and other corroborative bodies. SEO employs over 270 people.

18 IRAN CAPITAL MARKET ANNUAL REPORT Organizational Stru‍cture and Function

Board of Directors

Board of Directors Dept. of Research, Dept. of International Development and Islamic Affairs & Public Relation Studies

Deputy for Executive Deputy for Supervision on Deputy for Supervision on Deputy for Legal Affairs Chair Vice Chairman Affairs Financial Institutions Exchanges and Issuers International and Foreign Chairman Office Investment Affairs

Dept. of Supervision on Dept. of Supervision on Debt. of Supervision on Dept. of Criminal and Dept. of Financial Affairs Financial Institutions Issuers Exchanges Judicial Affairs

Dept. of International Dept. of Research Affairs and Public Development and Dept. of Human Dept. of Supervision on Board of Cooperation with Dept. of Supervision on Dept. of Offence Relations Islamic Studies Resources and Logistics Auditors and Accountants Primary Markets Prosecution

Dept. of Information Secretariat of Arbitration Technology Board Deputy for Executive Deputy for Supervision Deputy for Supervision on Deputy for Legal Affairs Affairs on Financial Institutions Exchanges and Issuers

Dept. of Supervision on Dept. of Supervision on Dept. of Supervision Financial Institutions Exchanges on Issuers

Dept. of Supervision on Dept. of Supervision on Board of Cooperation with Brokers Primary Markets Auditors and Accountants

Dept. of Financial Dept. of Criminal and Affairs Judicial Affairs

Dept. of Human Dept. of Offence Resources and Logistics Prosecution

Dept. of Information Secretariat of Technology Arbitration Board

ORGANIZATIONAL STRUCTURE AND FUNCTION 19 BOARD OF DIRECTORS

Ali Saeedi Hassan Amiri Mohammad Fetanat Ghasem Mohseni Hosein Fahimi Vice Chairman Board Member Chairman Board Member Board Member

20 IRAN CAPITAL MARKET ANNUAL REPORT KEY PEOPLE

Mohammad Fetanat Bahador Bijani Ali Saeedi Hosein Fahimi Chairman Vice Chairman, International and Deputy for Supervision on Board Member Foreign Investment Affairs Financial Institutions

Mohammadreza Sheikholmoloki Jafar Jamali Ghasem Mohseni Hassan Amiri Deputy for Executive Affairs Deputy for Legal Affairs Board Member Deputy for Supervision on Exchanges and Issuers

ORGANIZATIONAL STRUCTURE AND FUNCTION 21 DEPUTY FOR SUPERVISION ON EXCHANGES AND ISSUERS This deputy aims to regulate and monitor the exchanges, markets and issuers’ activities in both primary and secondary markets to foster and enforce compliance with securities market instructions, provide investors with information to make informed investment decisions and prevent any kind of fraud and abuse in the markets by retail or institutional investors. The deputy is focused on supervising the equity market, commodities exchange, over-the-counter markets, listed companies, registered but non-listed companies, listing process, trusted auditors and other registrants. This deputy is comprised of three departments.

Department of Supervision on Exchanges This department consists of two offices whose main duty is to detect and deter violations and abuse (e.g. price manipulation, insider trading and misuse of clients’ confidential information and trades) by individual and institutional investors to make orderly and fraud-free markets. Monitoring exchanges and even approving their managers’ competence are also carried out by this department. Department of Supervision on Issuers This department consists of three offices with duties to enforce listed and registered issuer’s disclosure of sensitive financial information promptly and to periodically monitor financial statements to comply with national and international generally accepted accounting policies and auditing standards. The department also investigates any biased and misleading information to help provide orderly markets. Department of Supervision on Primary Market This department consists of two offices which are responsible for registering, listing process and initial of companies. The companies have to get the department’s approval for their capital raise in form of secondary offering or asset revaluation. Companies interested in financing their projects by issuing sukuk have to submit their prospectus to be approved by this department. Board of Cooperation with Auditors and Accountants This board maintains close ties with professional auditors and accountants to stay ahead of the latest developments and help improve financial reporting and transparency of listed companies in the capital market. Other duties are to help market participants through improving the quality of financial reporting, transparency of listed companies, performance of financial intermediaries and instruments, auditing financial statements. Anti-Money Laundering Committee This committee was formed pursuant to Anti-Money Laundering Law of 2007 and strives to hold close ties in cooperation with other national and international agencies to combat activities such as churning, money laundering, and financing terrorism in the capital market. Any kind of suspicious activity or trading pattern goes under the radar expeditiously and will be constantly scrutinized by the committee.

22 IRAN CAPITAL MARKET ANNUAL REPORT Mount Damavand; the highest peak in Iran and the Middle East as well as the highest volcano in Asia

DEPUTY FOR SUPERVISION ON FINANCIAL INSTITUTIONS This deputy supervises financial intermediaries in the capital market in order to organize and improve their activities. According to the Act, scope of the deputy’s activities ranges from issuance, suspension or nullification of financial institutions’ licenses to supervision on their activities and performances. Scrutinizing and determining required abilities of entities’ experts and granting certificates to applicants based on regulations are among other functions of this deputy. The deputy can also propose amendments about intermediaries- related regulations to authorities. This deputy comprises two departments whose tasks are as follows. Department of Supervision 12 different kinds of licenses were issued for brokerage operations on Brokers and the number of active brokers This department consists of approved by SEO reached 101 two offices and issues permits on TSE, 100 on IFB, 107 on IME for brokers, /dealers and and 42 on IRENEX. Some brokers market makers. Proposing new are licensed for more than one regulations and amendments exchange. regarding relevant entities is another duty of this department. Department of Supervision One of the main specialties of on Financial Institutions this department is to evaluate This department consists of three brokerage firms’ performance on offices and main duties include a regular basis and provide rating organizing affairs of financial reports which help SEO better institutions except for brokers. grant them activity licenses. At Such duties include granting the end of 2014 a total number of permits to such institutions,

ORGANIZATIONAL STRUCTURE AND FUNCTION 23 supervising and inspecting them receive their licenses from this and issuing, suspending, extending department and their article of or canceling professional association needs to be approved certificates in compliance by this department. The number with rules and regulations. All of active financial institutions at financial institutions except for the end of 2014 compared to 2013 brokerage firms intend to operate is demonstrated in the following in the capital market or extend table. their scope of activities have to

Financial institutions 2013 2014 Investment banks 8 8 Financial advisers 9 11 Portfolio managers 15 21 Data processing companies 4 5 Investment fund and holding companies 108 121 Total No. of active institutions 144 166

In addition to the aforementioned institutions ,different funds are considered financial entities and have to be registered with this department .Following is the number of active funds in the Iranian capital market.

Capital market funds 2013 2014 Fixed-income 27 34 Stock 70 87 Hybrid 11 13 Total No. of mutual funds 108 134 Fixed-income 0 0 Stock 3 4 Hybrid 1 2 Total No. exchange traded funds (ETF) 4 6

24 IRAN CAPITAL MARKET ANNUAL REPORT DEPUTY FOR LEGAL AFFAIRS The main objectives of this deputy can be described as defining the organization’s main legal actions and its jurisdictional and punitive policies in dealing with offences and violations. Prosecuting fraud and violations within the whole securities market and briefing the related legal authorities as well as providing legal and judicial consultations to different deputies and departments of the organization are also among the duties of this deputy. Each year this deputy prosecutes violations of securities laws and holds violators accountable through appropriate sanctions and remedies. This deputy consists of two departments, one secretariat, and a group well-established of legal consultants. Department of Offence violations and reports to the Prosecution board of directors. The department provides SEO Legal Consultants Team with policies dealing with The duties of the team are offences, fraud or abuse providing legal consultancy occurred within the whole services and suggestions to capital market. Different directors, experts of the other deputies send documented deputies and legal entities such violations to this department to as mutual funds, be reviewed and just verdicts to companies and investment be issued. Overseeing offence banks in accordance with prosecution and investigating market instructions and SROs are also taken care by articles of association of this department. exchanges, associations and financial institutions. Department of Criminal and Judicial Affairs Secretariat of the This department prosecutes Arbitration Board culprits while in some major cases This secretariat is established to collects related documents handle review and resolution related to securities market disputes among brokers, violation and submits all market makers, broker/ criminal cases to judicial dealers, investments advisers, authorities. Moreover, it issuers, SROs and other market analyses securities market participants.

ORGANIZATIONAL STRUCTURE AND FUNCTION 25 %6 %3 %3

%69 %19 Doctorate Master's Degree Bachelor's Degree Associate's Degree High School Diploma or Less

DEPUTY FOR EXECUTIVE AFFAIRS The deputy is responsible for bodies in the capital market such securing financial and recruitment as data processing companies. needs of SEO as well as providing information technology services Department of Financial and infrastructures. The deputy Affairs is committed to recruiting and This department handles all employing elite, erudite and financial affairs of SEO and professional staff in parallel with prepares detailed financial reports. improving their skills in order to ensure the most important tasks Department of Human of SEO are in the safest hands. Resources and Logistics Department of Information Internal training and hiring programs are implemented by this Technology department to help SEO recruit and This department is responsible for develop diverse and qualified staff SEO’s internal technology needs with key proficiencies, knowledge such as running and maintaining and expertise to support SEO’s systems and databases as well mission. At the end of 2014 the as cooperating with other agents number of SEO’s employees was such as SEO’s corroborative 269 whose level of education is bodies including CSDI and demonstrated. TSETMC and other technological

26 IRAN CAPITAL MARKET ANNUAL REPORT DEPARTMENT OF PUBLIC RELATIONS AND INTERNATIONAL AFFAIRS This department is under direct supervision of SEO’s president and its duties are as follows:

1. Promote interaction with the capital market’s specialized media; 2. Enhance investors’ knowledge and perception of the capital market; 3. Develop cooperation with other beneficiaries such as governmental agencies and international organizations, institutions, counterparts and other market participants; and 4. Collect, publish and distribute precise and transparent market- related news promptly. DEPARTMENT OF RESEARCH, DEVELOPMENT AND ISLAMIC STUDIES This department is also under direct supervision of SEO’s president and its duties are as follows: 1. Carry out fundamental and pragmatic researches in the capital market; 2. Ensure compliance of securities market microstructure with laws; 3. Design and suggest sharia compliant financial instruments to authorities; 4. Contribute to enhancement of investing and shareholding culture in the markets; 5. Provide reliable data and high quality information market researchers and analysts; and 6. Improve drafting and amending markets’ rules and regulations. Latest researches, studies, This department also has two regulations and jurisprudence pivotal committees whose roles approvals by scholars and are described below. committees of this department can be found on an informative Sharia Committee website, www.rdis.ir. The committee secretariat is held in Department of Research, Development and Islamic Studies and its duties are:

1. Evaluating the application of newly proposed financial instruments in exchanges and over the counter markets from a jurisprudential perspective; 2. Resolving any doubts when employing financial instruments; 3. Proposing new Islamic financial instruments to be approved by board of directors and to be applied in the markets; 4. Cooperation with similar committees and councils in other local and foreign organizations; and 5. Solving jurisprudential ambiguities within the capital market. By-Laws Committee The committee secretariat is held in Department of Research, Development and Islamic Studies and its duties are:

1. Revision and codification of instructions, by-laws, articles of association and new bills submitted by deputies of SEO, exchanges and other self-regulated entities; 2. Enquiring professionals and experts’ viewpoints on drafting and amending capital market laws; and 3. Finalizing the draft of regulations and proposing them to the high council and other related authorities to be ratified.

ORGANIZATIONAL STRUCTURE AND FUNCTION 27 Markets

Tehran Stock Exchange Iran Fara Bourse Iran Mercantile Iran Energy Exchange Exchange

DDEquity share DDEquity share DDIndustrial DDElectricity DDRight offering DDRight offering DDOil and DDOil and gas Petrochemical DDSukuk DDSukuk DDOther energy D DDDerivatives DDDerivatives DAgricultural carriers D (Futures, DDHousing mortgage DFutures on Embedded put right commodities options) DDETF DDIntellectual property

28 IRAN CAPITAL MARKET ANNUAL REPORT Tehran Stock Exchange www.tse.ir

TSE 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. As of today TSE is the frontier market in Iran with more than 318 well- established companies from 41 different and diverse industries listed on this exchange. 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.

MARKETS 29 As a TSE with share is based on negotiation. ’ equity worth $40 TSE’s market microstructure in million at the end of 2014 is terms of trading model and listing registered in the base market of requirements is illustrated in the Iran Fara Bourse and trading its following tables:

Trading Model Legal Structure Public Corporation Status Self-regulatory (under SEO’s supervision) Trading Venue Tehran Trading Days Saturday to Wednesday Trading Hours 8:30 to 9:00 (Pre-opening) 9:00 (Opening based on Theoretical Opening Price[TOP]) 9:00 to 12:30 (Continuous ) Trading System Automatic Trading System (ATS), Order-Driven Trading Mechanism Opening auction, Continuous trading Securities Equity Shares and right offerings, sukuk, ETFs, Embedded Put , Futures on stock Order Priority Price, Time Market Making / Liquidity Providing ETFs, Sukuk (Mandatory) Other securities (Elective) Daily Price Fluctuation Limit Shares (±5%), Right offerings (±10%), Bonds (±1%) Available Real-Time Data Prices (open, close, high, low), three best bids and asks, indices, Companies’ data Close Price Calculation Weighted average based on reference volume

Taxation and Commissions and Tax Exempted Transactions Tax Approx. 0.5% by seller (Equity shares) Transactions Commission Approx. 0.55% by seller, 0.5% by buyer (Equity shares) 0.1% (Sukuk) Foreign Investment Available (Based on foreign investment rules and regulations)

30 IRAN CAPITAL MARKET ANNUAL REPORT Various rebates have been incentivizing companies and their commodities to be listed on exchanges. Tax relief regulations in regard to listed companies are as follows:

DDTSE’s listed companies are eligible to 10% tax relief (the rebate would be doubled if the amount of free-float shares exceeds 20%); DDIFB’s listed companies are eligible to 5% tax relief (the rebate would be doubled if the amount of free-float shares exceeds 10%); DDProceeds of selling commodities on IME and IRENEX are eligible to 10% tax relief.

Listing Requirements First Market Second Main Board Secondary Board Market Registration with SEO Public Joint-Stock Co. No Accumulated Loss Positivity of Last Two Years’ Accumulated Operational Cash Flow Profitability of the Last Fiscal Year Audited Financial Statements for Last Fiscal Year Minimum Market Capitalization1 (million USD) 28.5 14 6 Minimum No. of Shareholders 1000 750 250 Minimum Free-Float Shares (%) 20 15 10 Minimum Activity Record (Years) 3 3 3 Minimum Profitability Periods (Fiscal Years) 3 2 1 Equity to Asset Ratio (%) 30 20 15

1— Throughout the report: 1 USD=35,000 IRR (end of 2014), 1 USD=30,000 IRR (end of 2013)

MARKETS 31 IFB Markets

Listed Securities Unlisted Securities

Modern Financial First Market Second Market Base Market Instruments Market

Iran Fara Bourse SUKUK, Negotiation Private Placement Equity Equity CD, Private Plasement Stock Repurchase www.ifb.com HMR, Block Trading Underwriting ETF Intellectual Property

IFB Iran Fara Bourse Company as Designing innovative financial a Public Joint-Stock company instruments in the capital market is located in Tehran which which helps directing capital commenced operation in towards development plans November 2008. IFB is Iran’s and economic prosperity is best second equity market and served by IFB. functions in some way analogous IFB is a member of the Federation to conventional OTC markets with of Euro-Asian Stock Exchanges a handful of more features. The (FEAS) and Organization of market is a self-regulatory entity Islamic Cooperation (OIC) Stock but under direct supervision of Exchanges Forum. IFB as a public SEO. company is registered on its own IFB is a market for both listed and base market with shareholders’ unlisted securities and also other equity worth $26 million. financial instruments. As of today, IFB comprises different markets each of which serves a unique role in the capital market.

32 IRAN CAPITAL MARKET ANNUAL REPORT IFB Markets According to listing, offering and transfer rules of securities, there are 5 separate markets at IFB as follows:

IFB Markets

Listed Securities Unlisted Securities

Modern Financial First Market Second Market Base Market Third Market Instruments Market

SUKUK, Negotiation Private Placement Equity Equity CD, Private Plasement Stock Repurchase HMR, Block Trading Underwriting ETF Intellectual Property

First and Second Markets These two markets are main markets for trading equity shares and their right offerings are similar to TSE but with less requirements and restrictions on listing.

Requirements First Market Second Market

Registration with SEO Public Joint-Stock Co. No Accumulated Loss - Profitability of Last Fiscal Year - Minimum Market Capitalization (million USD) 3.3 0.3 Minimum No. of Shareholders 200 - Minimum Free-Float Shares (%) 10 5 Minimum Activity Record (Years) 2 1 Minimum Profitability Periods (Fiscal Years) 1 - Equity to Asset Ratio (%) 15 -

MARKETS 33 Base Market Third Market Shares of public limited This market is designed for special transactions. companies which are not listed on Four services are provided mainly to institutional any of the markets but, as all public entities in this market as follows: companies have to, are registered with SEO, and are eligible to be traded on this market with no DDPrivate Placement: A private/public limited company including state-owned and private which is not listed on restriction. Registered companies the capital market and also not registered with SEO can are in the following groups: request to sell a percentage of its share in this market. 1. Public companies which DDStock Repurchase: A company listed on the capital do not tend to be listed market may intend to buy back a specific amount of its but according to laws and outstanding shares. Companies which chose the exit regulations have been strategy or are delisted from TSE or IFB would opt for this registered; market. 2. Companies which are DDUnderwriting: The market acts as the primary destination registered but do not meet for underwriting various securities. listing requirements; and DDIntellectual Property: The most recent market in 3. Companies which are Iran capital market to promote and support patents, delisted from TSE or IFB. researches and new ideas and direct them to industrial investors and venture capitalists. Convenient private placement, transparent ownership transfer, shares fair pricing, and tax relief for companies are among the Modern Financial Instruments advantages of this market. Market All kinds of financial instruments especially Islamic securities approved by the Securities and Exchange High Council are eligible to be listed and traded on this market:

DDCertificate of Deposit (CD); DDSukuk (Murabahah, Ijarah, Musharakah); DDHousing Mortgage Right (HMR); and DDExchange Traded Fund (ETF).

34 IRAN CAPITAL MARKET ANNUAL REPORT Iran Mercantile Exchange www.ime.co.ir IME

Iran Mercantile Exchange, as of some commodities including oil a well-established commodity by-products and petrochemicals market in the Middle East region, producers have long been craving was launched in September 2007 for Iran to play an effective role to in accordance with Iran’s Fourth become price maker of petroleum Development Plan, and following products in the international the mergers of the agricultural and market. metal exchanges of Tehran. IME The bitumen prices in the as a public joint-stock company transactions of the IME trading is registered in the base market of floor was picked as a regional Iran Fara Bourse. reference for the market price in The merger marked a new chapter the international data vendors and in Iran capital market providing news websites in the end of 2014. trading opportunities for local Trading Floors and foreign merchants. One of Export trading floor of IME located the IME goals is to become the in has provided price reference for commodities unrestricted access for traders in petroleum, petrochemical, and international participants industrial and mineral asset to trade large amount of classes. commodities especially oil by- Due to Iran’s high capacities and products and petrochemicals. relative advantages in production

Trading Floor Local Export Venue Tehran Kish Island Commodities All listed Industrial commodities Oil by-products and petrochemicals Agricultural

MARKETS 35 Markets, Contracts and Products Spot Market Resulting in Physical Delivery: Various products and commodities are listed and traded in IME through semi-electronic , which are categorized in three classifications:

DDIndustrial: metals such as DDOil by-products and DDAgricultural: agricultural steel, copper, aluminum, iron petrochemicals: oil by- products traded in IME ore, zinc and lead, different products range from comprise cereals, oilseeds, types of cement, coke, and bitumen, base oil, crude oil, oil-cakes and other grains precious metals concentrate fuel oil, RPO, carbon black, and products like wheat, feed were the most commonly chemical products and wheat, feed barley, yellow traded commodities in the petrochemicals like PP, PE, corn, maize, raisin, lentil, industrial sector in 2014. LDPE, LLDPE, aromatics, chick peas, sugar, meat, SBR, PS, MS, etc. eggs, saffron, and pistachio.

All commodities listed in IME are eligible to be traded in form of the following contracts: DDCash trades: prompt cash DDSalam and Standard Salam DDCredit: deferred payment payment against taking (Forward): prompt payment against prompt delivery. prompt delivery. against forward date delivery. : gold coins, cumin seeds and most recently soybean meal are currently traded as futures in the market. Other products are to be introduced in the near. Peripheral market: occasional, non-standardized products that are not eligible to be listed on commodity markets and commodities that are temporarily dismissed from listed commodities are traded on peripheral market. A specific kind of iron, scrap metals and polymers were the most traded commodities on this market in 2014.

36 IRAN CAPITAL MARKET ANNUAL REPORT Iran Energy Exchange www.irenex.ir IRENEX Iran Energy Exchange was established in accordance with the Act in July 2012. The Geo-economic situation of Iran with the largest gas reserves on the earth and as one of the world’s largest oil producers plus its outstanding infrastructure in electrical power and energy resources necessitated the existence and expansion of the countries promising energy exchange. IRENEX as a public joint-stock company is registered in the base market of Iran Fara Bourse. The Statute of Iran Energy Exchange – as a self-regulatory commodity exchange- stipulates that all energy carriers and energy based derivatives shall be listed and traded on one of the IRENEX markets. The company’s mission is to develop a market in which trades are done under transparency, efficiency and liquidity. Creating a healthy and competitive atmosphere to discover the fair price of products and to solve some of the issues that matter most to the local and global energy markets are among other requisite objectives.

Market Physical Derivatives Boards Electricity Electricity Oil Oil Gas Gas Other energy carriers Other energy carriers Contracts Spot Standard Parallel Salam Credit Futures Salam Options Trading Floor Local Local Export

MARKETS 37 Azadi Tower.

38 IRAN CAPITAL MARKET ANNUAL REPORT SEO’s Corroborative Bodies

Tehran Securities Exchange Technology Management www.tsetmc.com

TSETMC Tehran Securities Exchange Technology Management Co. as a privately- held company was founded in May 1994. TSETMC is under direct supervision and considered a subsidiary of SEO and is responsible for providing a comprehensive spectrum of electronic trading services to all 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 functions. All imaginable real-time data of all markets is aggregated by TSETMC on their 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 SEO are also among the achievements of this company in 2014.

SEO’S CORROBORATIVE BODIES 39 Central Securities Depository of Iran www.csdiran.com

CSDI

Founded in 2005 as a public joint stock company, Central Securities Depository of Iran (CSDI) is the sole registry entity and custodian in the Iranian capital market using the hybrid registry system with a fully dematerialized book entry system. Enjoying a history of 45 years, the Iranian capital market was demutualized in 2005 and as a result, CSDI was legally segregated from the rest of the capital market and commenced to work as an independent and separate entity. It is the central registrar and house for all the exchanges in Iran including Tehran Stock Exchange (TSE), Iran Fara Bourse (IFB), Iran Mercantile Exchange (IME), and Iran Energy Exchange (IEE). It takes over the registry, clearing, and settlement issues related to equity, Islamic securities (Sukuk), derivatives, energy contracts, electricity, mercantile products by means of a full-fashioned registry system and multi-currency (USD, IRR, Euro) with a high netting efficiency of 85 percent. The prospects of CSDI are to prepare the infrastructures indispensable for the efficiency, continuity, and growth of the economy of the markets under its cover. CSDI provides thriving and secured financial investment infrastructures to contribute to the development of a fair and transparent capital market both nationwide and worldwide by guaranteeing security and efficiency in the capital market and safekeeping investors’ financial properties. Responsible for taking care of post-trade-related tasks, ranging from the deposit and registration of securities to the clearing and settlement of the transactions carried out in the , it plays a significant role in managing systemic risk. To this purpose, CSDI has designed and launched the service of Settlement Guarantee Fund (SGF), along

40 IRAN CAPITAL MARKET ANNUAL REPORT with other measures, towards managing the risks related to the clearing house.

Financial Asset Type Time of Settlement Equity T+3 Fixed- Income Securities and All Kinds of Sukuk T+1 ETFs T+2

Not only is IT a crucial element in CSDI roles, but also developing the capital market infrastructures in the pre- and post- trade functions is not achievable unless through IT solutions. CSDI enjoys various home-made software systems for variety of operational objectives as follow:

SEO’S CORROBORATIVE BODIES 41 Row System Sub-System System Objective Main Beneficiaries Rule-based clearing, settlement and reporting Clearing House and its NetClear system for TSE and OTC Trades participants, Pillars Multi Currency Clearing House and its Multi-currency Clearing and Settlement solution NetClear participants Net-Clear based clearing system with Rolling Clearing House and its NetClear IreMcNc Rolling 1 features for TSE,IFB and IRENEX trades participants Suite Net-Clear based clearing system that can settle Gross Net Rolling Clearing House and its settle DVP1 and DVP2 at the same time for TSE, IFB Clear participants and IRENEX Cert Reporter Electronic based certificate distributor Issuers Broker Reporter Online declaration and trades' certificate distributor Brokers Cert Distro Online certificate distributor Shareholders Settlement guaranty fund for estimating Clearing House and its 2 SGF - Participant's cooperation share and default participants penalties Issuers, Brokers and 3 ISS - A system for dividend payments Shareholders -based Information gathering system and 4 IGS, IPS - Shareholders information portfolio system Futures post-trade system and performing Clearing House and 5 FPTS - operations related to the delivery of single share transference Irenex Clearing House and its 6 Irenex Iran Energy Exchange (IRENEX) Family participants, Pillars, IGMC Specially designed registry for energy post-trade of Clearing House and its Regex energy exchange participants, Pillars, IGMC 7 IR2A - Incremental risk reduction and awareness system Shareholders 8 CSDIData - Online data disseminator Brokers Corporate data gateway as a tool for unifying 9 CDS - Issuers formats in communication with stakeholders

Mutual Fund registry system which will be synchronized with post- Shareholders, Investment 10 MFR - trade system through UUID (Universal Unique Identifier) companies, Pillars Brokers, Shareholders, 11 IRPT - Post-trade hybrid system Issuers, Pillars, CSDI Brokers, Shareholders, 12 iDMS - Smart document management system CSDI

42 IRAN CAPITAL MARKET ANNUAL REPORT Information Dissemination and Services www.sidsco.ir

SIDS Information Dissemination and broadcasting and providing Services Company as a privately- educational programs for market held company owned by SEO participants. Today the most was established in 2004 to fulfill important functions of SIDS are the task of capital market news as follows:

DDImplement mechanism to best broadcast market-related news; DDExecute educational programs to familiarize the society with the capital market; DDPublish educational materials in terms of books and multimedia; DDHold examination for professional licenses of the capital market; and DDSet up capital market exhibitions, seminars and conferences.

Securities and Exchange News Agency www.sena.ir

The informative website of news. The breaking news of all Securities and Exchange News financial and economic sectors is Agency was set up by SIDS as the constantly covered by SENA. official source of capital market

Iran Virtual Exchange www.irvex.ir

SIDS also established an through learning how to invest in a educational website called Iran completely risk-free environment Virtual Exchange to give would-be with virtual money. investors the opportunity to get familiar with the capital market

SEO’S CORROBORATIVE BODIES 43 ASSOCIATIONS 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. SEBA 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-

44 IRAN CAPITAL MARKET ANNUAL REPORT Securities and Exchange Brokers Iranian Institutional Investors Association Association www.seba.ir www.iiia.ir regulatory entity. All active brokerage IIIA firms in Iran capital market have to The Iranian Institutional Investors register for SEBA membership and pay Association was founded as a self- the required fees to enjoy its benefits. regulatory, non-governmental, non-trading The following are the main activities of and non-profit organization. SEBA: Members of IIIA are financial institutions DDSupervise and assess SEBA registered with SEO including investment members and evaluate their staff’s companies, holding companies, performance within the framework investment banks, investment funds of the law; (including pension funds) and other DDSupervise members’ promotional investment institutions except for programs to prevent transmission brokerage firms. of inaccurate or misleading information to clients; Unlike SEBA membership, which is compulsory for brokerage firms, other DDStrive to handle disputes between brokers, traders, affiliated staff and financial institutions are not obliged to join clients; IIIA. The number of IIIA’s members rose to DDrevise market developments and 104 institutions by the end of 2014. provided services by members Aside from the aforementioned duties of continuously to help them IIIA, the supervision on the new analytical progress; and website TEDAN was granted to this DDCommunicate and cooperate with other institutions and counterparts. association at the end of 2014 to verify authenticity and accuracy of provided analyses by financial advisers.

SEO’S CORROBORATIVE BODIES 45

Depth 48——Facts and Figures 48——Overall Outlook 51——Equity Markets in 2014 57——Mercantile and Energy Exchange in 2014 60——Major Developments 61——Financial Reporting (CODAL) 64—— 66——Islamic Securities 67——Online Trading Facts and Figures

OVERALL OUTLOOK Iran capital market, rushing toward economic outlook of the country to prosperity and maturity, experienced heal along with the ambiguities fading flourishing years with TSE and IFB away, resulting in performance of the indices touching their all-time highs in markets to be promising in the future. 2013. However, markets underwent Imposed for its fluctuations mainly due to the global peaceful nuclear program by Western slowdown and domestic economic countries will be lifted in the near issues. future, bringing tremendous amount The gloomy economic perspective, of liquidity to markets and profit to including US limping economy, companies affected by sanctions. Eurozone’s recession and China’s The economy also has shown strong economic woes resulted in signs of recovery over the past two commodities prices plunging years in terms of GDP growth, curbed and equity markets experiencing inflation and almost stable exchange downbeat performance worldwide. rate. Basic metals and oil prices sunk in 2014, putting a lot of pressure on oil and mine-rich countries including Iran which are heavily reliant on oil income. Iran’s political developments also marred the markets. Unjustified economic sanctions imposed USD-IRR against Iran for its peaceful nuclear Risk-free Rate program by western countries not only negatively impacted the pivotal 40,000 industries in Iran but also clouded %25 investors’ vision about the future of 35,000 the economy. %22.5 Domestic economy struggling with 30,000 %20 recession and inflation along with losing its value further 25,000 %17.5 pulled down the capital market. Altogether, these impediments led to 20,000 %15 equity and commodity markets facing less enthusiasm by investors. 15,000 %12.5 Notwithstanding the aforementioned problems, measures taken by 10,000 %10 authorities have caused political and 2010 2011 2012 2013 2014 2015

48 IRAN CAPITAL MARKET ANNUAL REPORT OVERALL OUTLOOK

Moreover, comparatively high risk-free rate of the Islamic securities in Iran- while inflation and currency fluctuation have been curbed- have

awarded investors unparalleled profit withR f of more than 20% which demonstrates Iran is a safe haven for investors with the highest returns accompanied by lowest risks as illustrated in the following figures:

USD-IRR Risk-free Rate

40,000 %25

35,000 %22.5

30,000 %20

25,000 %17.5

20,000 %15

15,000 %12.5

10,000 %10 2010 2011 2012 2013 2014 2015

FACTS AND FIGURES 49 In recent years, equity markets price to earnings almost 80% of their profits to shareholders as Change 2013 2014 (P/E) and price to book (P/B) ratios have been dividend which in turn encourages tendency as low as 5.8 and 2.1 on average respectively to shareholding. As a result, long-run approach %16 GDP in comparison to markets all around the in Iran equity market, which is believed to soon world. Moreover, listed companies distributed unleash its potential, is strongly deemed affective. % -21 Markets Value

% -14 Trades Value

% 2 Trades Volume (billion shares) P/E Retained Earning % 7 P/B DPS No. of Trades (million)

% 31 No. of Traders (million USD) (PE/PB) 25,000 9 % 73 No. of Online Traders 20,000 7 % -19 Price to Earning 15,000 5 % -44 DPS 10,000 3 % -43 EPS 5,000 1

0 0 No. of Trading Days Trade Value to

2009 2010 2011 2012 2013 2014 % 9 Market Value

50 IRAN CAPITAL MARKET ANNUAL REPORT EQUITY MARKETS IN 2014 Some key figures in 2014 compared to 2013 are demonstrated below:

Numbers in billion USD 2013 2014 Change (%) GDP2 293 322 16 Markets Value 165 112 -21 Trades Value 38 28 -14 Trades Volume (billion shares) 214 219 2 No. of Trades (million) 19 20 7 No. of Traders 618,500 812,500 31 No. of Online Traders 275,042 475,748 73 Price to Earning 7.6 6.2 -19

DPS 19.3 9.3 -44 EPS 24.3 11.8 -43

No. of Trading Days 242 241 - Trade Value to Market Value 0.23 0.25 9

Change 2013 2014

%16 GDP

% -21 Markets Value

% -14 Trades Value

% 2 Trades Volume (billion shares)

% 7 No. of Trades (million)

% 31 No. of Traders

% 73 No. of Online Traders

% -19 Price to Earning

% -44 DPS

% -43 EPS

No. of Trading Days Trade Value to % 9 Market Value

2—The changes in the table are calculated based on values in IRR to neutralize the impact of currency fluctuation.

FACTS AND FIGURES 51 px ١٣١٫٨١١

IFX TEDPIX TSE and IFB are the main stock exchanges whose shares in Iran capital market are demonstrated below. These figures include value of shares, right offerings and . (TSE) 867 (IFB)

90,000 800 776 87,410 Value of TSE and IFB 70,000 600 68,973 TSE 419 IFB 50,000 400 275 %25 190 37,860 30,000 200 %19 95 24,403 11,207 18,855 10,000 0 2009 2010 2011 2012 2013 2014

%81

%75

Inner Circule: End of 2013 = $165 billion Outer Circle : End of 2014 = $112 billion

TEDPIX and IFX are all-share total return of Tehran Stock Exchange and Iran Fara bourse respectively and are considered the most important benchmarks of Iran capital market. TEDPIX and IFX experienced 400 and %40 38 350 percent increase respectively in just 6 years, bringing unparalleled 33 31 profit to investors. IFX index include companies from first and second %30 26 markets as the base market companies are not listed and just registered. 25 24 Total trade value of the markets has significantly increased over the past couple of years and this ensures high liquidity in equity markets. %20 The following diagram depicts markets liquidity ratio, which is the total %10

%0 2009 2010 2011 2012 2013 2014

52 IRAN CAPITAL MARKET ANNUAL REPORT Capial market main indices IFX TEDPIX

(TSE) 867 (IFB)

90,000 800 776 87,410 70,000 600 68,973 419 50,000 400 275

190 37,860 30,000 200

95 24,403 11,207 18,855 10,000 0 2009 2010 2011 2012 2013 2014

trade value divided by average market value annually, emphasizing high liquidity of the markets. In fact 29 percent of the equity market value on average is traded on the floors each year which is relatively high. Markets were not in the best shape in 2014 but took a step backward to initiate a jump forward in the near future. Both retail and institutional investors had constant presence in the markets as illustrated below:

Markets liquidity ratio

%40 38 33 31 %30 26 25 24 %20

%10

%0 2009 2010 2011 2012 2013 2014

FACTS AND FIGURES 53 Participation of players in trades

Institutional Investors %7 Retail Investors

%7

%93

%93

Inner Circle: End of 2013 = $165 billion Outer Circle : End of 2014 = $112 billion

Active participation of retail and institutional investors demonstrates high level of financial literacy in Iran capital market. As figures of the following diagrams reveal the retail investors did not get cold feet as a result of markets downfall due to the general belief that markets would soon get back on track and the outlook would be flourishing.

Breakdown of the participation of players in buying and selling securities

Institutional Investors Retail Investors

%40 %40

%41 %38

%59 %62 %60

%60

Buy Value Sell Value Inner Circle 2013 Inner Circle 2013 Outer Circle 2014 Outer Circle 2014

54 IRAN CAPITAL MARKET ANNUAL REPORT Iran capital market has a diversified spectrum of industries from different sectors of the economy. Iran as the largest holder of gas reserves on the earth and as one of the world’s largest oil producers offers vast investing opportunities in different sectors for local and foreign investors. TSE and IFB comprise 318 and 60 companies respectively from 41 different industries.

Total market value by industry

Manufacture of 19% chemical products

Other industries 14% 26%

2% Manufacture of 2% 2% 27% pharmaceuticals 2% Investment 3% 7% Manufacture of 3% motor vehicles 6% 12% Institutional Investors Mining of 5% Retail Investors metal ores 6% 11% %40 11% 11% Banking %40 6% Multidiciplinary and financial industrial activities institutions 6% %41 %38 10% 9% Telecommunication Refinery Manufacture of basic metals

Inner circle: End of 2013 = $165 billion %59 %62 Outer circle: End of 2014 = $112 billion %60

%60

Buy Value Sell Value Inner Circle 2013 Inner Circle 2013 Outer Circle 2014 Outer Circle 2014

FACTS AND FIGURES 55 The trade value of Iranian capital market’s front runners over the last two years are demonstrated in the following diagram:

Total trade value by industry 2013: $38 billion 2014: $28 billion

%30

%20

%10

%0 Banking Refinery Basic metals Motor vehicles Other industries Chemcial products Minig of metal ores Real estate activities Monetary intermediation

56 IRAN CAPITAL MARKET ANNUAL REPORT (billion USD) 10 15 0 5

2009 depicts the trade value of the main groups and future contracts inIME. trade value of $500 million in the last two years. The following diagram recorded in 2014. Energy a decent performance exchange recorded with Chinaeconomyslowingdown.Nonetheless,thetwoexchanges duea downbeatto performance lingering global recession, principally commodities among which are oil, basic and precious metals experienced and energy exchanges have been moving toward their prime. Worldwide Despite the worldwide gloomy outlook for commodities, Iran mercantile EXCHANGE IN2014 MERCANTILE ANDENERGY

2010 Trade valueofIME'smaingroups

2011 6

2012 10

2013 8 Derivatives Oil andpetrochemicals Industrial Agricultural

2014 5 FACTS AND FIGURES 57 Tabiat Bridge is the largest pedestrian overpass built in Tehran.

58 FACTS AND FIGURES

Major Developments

Iran capital market as an has undergone tremendous evolution since the ratification of the Act in 2005. The establishment of new financial markets with vast practical instruments welcomed by market participants along with new financial institutions has pushed the capital market to a whole new level. The following are the most major developments of Iran capital market that clearly demonstrate the progressive trend of our markets.

Year Developments Description 2005 SEO established The Act paved the way for the establishment of SEO 2007 CODAL website Comprehensive Database of All Listed Companies launched was launched so that investors would have access to companies’ financial reports 2008 IFB commenced Iran Fara Bourse as the second equity market came operation into being to give a great opportunity to small and mid-cap companies 2009 Islamic securities The Development Act provided the legal framework issued for Islamic securities and financial institutions 2010 Online trading initiated The investors were given the possibility of trading online independently 2012 IRENEX instituted IRENEX has been an answer to benefit from geographical situation of Iran in terms of vast energy resources 2014 TEDAN initiated TEDAN as the little sister of CODAL was launched to embrace analyses on different companies

60 IRAN CAPITAL MARKET ANNUAL REPORT FINANCIAL REPORTING (CODAL) Market transparency is among CODAL is responsible to the critical requisites of all gather, validate, accept and financial markets and authorities publish financial reports. In fact across the globe are constantly aggregation and agglomeration endeavoring to reach higher of all financial related reports of levels in terms of disclosure. In listed and registered companies order to fulfill one of SEO’s major on a comprehensive website is missions, which is maintaining what is being accomplished. and developing a transparent, fair All listed companies are obliged to and efficient market, the electronic post all price sensitive information Comprehensive Database of All promptly on the website. Even Listed Companies was launched minuscule decisions made in in 2007. extraordinary and annual general meetings are reported. The most important reports are outlined below:

Report

Annual and half-yearly financial statements (first unaudited then audited) Interim financial statements (Quarterly) First annual projected (first unaudited then audited) Annual projected earnings per share adjusted based on interim financial statements (Quarterly) Portfolio statement Board of director’s annual report General meetings announcement General meetings resolutions Dividend distribution schedule Board of director’s proposal on capital raise to extraordinary general meeting Capital raise permit Deadline for exercising right offerings Capital raise registration Ranking of companies in terms of disclosure quality and promptness Ranking of companies in terms of free-float shares Companies’ board members replacement

MAJOR DEVELOPMENTS 61 The first financial report was year is depicted in the following posted on CODAL in October 2007 diagram and implies the fact that and ever since to the end of 2014, the number of listed companies total number of 67,124 reports has has increased markedly and SEO’s been uploaded on the website. The policy on mandatory reports has number of these reports for each become stricter.

Number of reports posted on CODAL annually 15,801 14,317 15,000 12,750 11,383 9,572 10,000

5,000 2,824

477 0 2008 2009 2010 2011 2012 2013 2014

Moreover, at the end of 2014 SEO introduced a brand-new procedure to publish financial statements. It was announced that publishers would be able to post their financial statements directly and without SEO’s interference on the so-called TEDAN as the publishers’ data analysis website which is considered a contemporary version of the CODAL with fancier visage and a handful of more features. The new procedure ensures more transparency in the market in terms of information symmetry and leakage prevention while reducing suspension periods for companies, all of which were long demanded by investors. Ever since various statements have been posted on TEDAN promptly and directly, and SEO is now only responsible for post-release inspections. Moreover, in accordance with the publishers’ regulations, trading on a company will be automatically halted if there is a substantial change in profits. With the new procedure in hand, suspensions will not take more than a week. The focal point of the new website is the ability of entities such as financial advisers licensed by SEO to provide fundamental analyses on companies.

62 IRAN CAPITAL MARKET ANNUAL REPORT Tehran Stock Exchange Headquarter

MAJOR DEVELOPMENTS 63 The analyses are abstract and linked to the providers’ websites for more detailed information. This has bolstered the analytical environment of the markets as investors will no longer act on rumors and are less reliant on unprofessional and incompetent advisers. Moreover, the financial advisers have been given the chance to prove their services worthwhile. The next important project of SEO in connection with market transparency is to apply accounting standards in form of Extensible Business Reporting Language. XBRL will be used to make the statements possible to be readily transferred and adapted to different financial reporting standards and languages. All of these notable projects are being administered by RayanBourse Co. as a private company owned by SEO.

64 IRAN CAPITAL MARKET ANNUAL REPORT CORPORATE GOVERNANCE Corporate governance as a key levels of corporate governance in factor for directing and controlling Iran. companies efficiently has got According to the current guidelines, a lot of attention in Iran capital the senior management has to market in recent years. Corporate define the control environment governance involves balancing of the company. The framework the interest of all stakeholders conditions for creation of an of a company and that is the effective control environment reason behind SEO’s taking all include: required measures to encourage companies to have high levels of DDIntegrity and ethical values; corporate governance. Ethical DDExercise of oversight behavior and sound corporate responsibilities by the board of directors; governance is essential to gain D investors trust. DPersonnel qualifications and human resource In line with the policy of supporting management; and the investors’ rights, preventing DDOrganization structure, the occurrence of violations power delegation and scope and managing and developing of responsibility. of a fair and transparent capital External auditors are required to market, the Guidelines for assess the level of internal control Internal Controls in the listed and include comments in a issuers were ratified in May 2012. separate part of their report about Moreover, a comprehensive by- companies’ annual for implementing corporate statements. As of today 70 governance in Iran capital market percent of listed companies fully is to be ratified by SEO’s board of comply with the guidelines. directors ensuring the highest

MAJOR DEVELOPMENTS 65 Sukuk value issued: Sum of 2005 to the end of 2014 =$1.6 billion

Ijarah+Murabahah Musharakah

%66 %34

ISLAMIC SECURITIES Ratification of the Act in 2005 The first Musharakah capital markets and provide the provided the opportunity to (participation certificate) sukuk required recommendations. design and employ creative was issued in August 2005 and Today along with common Islamic securities called sukuk to ever since the annual issuance sukuk traded on exchanges be traded in Iran capital market as of sukuk has experienced a as Musharakah (Partnership trading conventional bonds has promising upward trend. To put and joint-stock ownership), been banned since the Islamic this in perspective, sukuk Issuance Murabahah (cost-plus contract) Revolution of Iran. in IFB and TSE recorded the value and Ijarah (leasing), there are In recent years Iran has been of $500 million in 2014 alone. others designed by market experts among the front runners in the All of these instruments have to and ratified by Sharia committee Islamic securities. Previously be validated and verified by SEO’s to be used in the markets including these instruments were mostly Sharia Committee. In May 2007, Mudarabah (profit-and-loss traded into the banking system in the committee was established sharing), Manfa'ah (beneficial form of money market but as of in order to study and introduce ownership) and Istisna (order to today different kinds of sukuk in religious interpretations on manufacture). The total amount full compliance with Sharia laws financial instruments, markets, of the sukuk and their percentage are registered with SEO and traded and institutions within the national are illustrated in the diagram. in the capital market.

66 IRAN CAPITAL MARKET ANNUAL REPORT ONLINE TRADING Online trading platform was launched in July 2010 to provide market participants, in particular retail investors, to execute their orders on different securities directly and without brokerages’ interfere. Previously, all investors had to direct their orders through brokerage houses by filling out transaction forms or making phone calls. Initiation of online trading has not only saved investors’ and brokers’ time, money and energy and given them the chance to benefit from Iran’s productive markets, but also enhanced market transparency, helped prevention of information leakage and increased market liquidity tremendously. All advantages aside, some restrictions are applied to online trading in Iran among the most important of which is a maximum volume of hundred thousand shares per transaction which is regarded as block orders and need to be executed by brokers’ trade stations. As the following diagram delineates the number and contribution of online traders to the total non- block1 trades have skyrocketed in recent years.

Portion of online trade value in low value (non-block) trades

No. of Online Traders Online Trading Non-Online Trading

(billion USD) (Thousands)

25 500 475,748

20 400

15 300 275,042

10 200 140,677 5 78,926 100

0 0 2011 2012 2013 2014

1— Orders with volume of less than a hundred thousand shares

MAJOR DEVELOPMENTS 67 68 IRAN CAPITAL MARKET ANNUAL REPORT MAJOR DEVELOPMENTS 69 Art Direction and Design: Kian Ashrafi KianAshrafi.com [email protected]

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