Growing Influence of Iran’s Capital Market
Approximately 1,045.4 trillion rials ($4.75 billion) were made available to companies via Iran’s capital market in the first quarter of the current fiscal year (March 20-June 20).
Market contribution to fund listed companies grew 4.6 times, or 360%, compared to Q1 last year when the share of capital market finance was 228 trillion rials, the Tehran Chamber of Commerce, Industries and Mines reported.
It said there were two types of financing, namely equity financing and debt financing with the former in dominant position.
The share of equity financing rose from 90 trillion rials ($409 million) in the first quarter of fiscal 2019-20 to 851.9 trillion rials ($3.87b), up 846% year-on-year.
Likewise, debt financing amounted to 193.5 trillion rials ($880m) in the Q1, rising from 138 trillion rials in the corresponding period a year earlier to register 40% growth.
Equity financing is the method of raising capital by selling company stocks while debt financing occurs when a firm raises money by selling debt instruments to individuals and institutional investors.
Islamic bonds issued by the government contributed to the largest share of debt financing with 93% compared with 7% in corporate financing.
The government sold 70 trillion rials in treasury bonds and 109 trillion rials in Murabaha bonds. Private companies sold 14 trillion rials in bonds.
Companies listed with the Tehran Stock Exchange and the junior equity market (Iran Fara Bourse) generated 108 trillion rials ($490m) through IPOs this year.
That was higher than the 9.3 trillion rials generated through IPOs in the same period last year. The share of IPOs in equity financing rose from 10.3% in Q1 of last year to 12.7% in the current Q1.
The figure is expected to surge in the present fiscal year (ends March 2021) as the government has announced that more companies will join the bourse.
In one of the biggest listing recently, the Social Security Investment Company, Iran’s largest holding company sold 10% of its shares. The company, known by its Persian acronym Shasta, made 69 trillion rials ($313m) via its first IPO.
Increasing contribution of the capital market to the economy comes amid the government’s support for the market and inflow of fresh liquidity by the ever-increasing number of investors.
The head of Securities and Exchange Organization, Hassan Qalibaf Asl, noted earlier in the week that various business sectors are increasingly turning to share market for funds and the role of funding by banks has declined further.
In recent years banks across the board have come under mounting condemnation for their inability and unwillingness to lend to businesses struggling to survive, especially when Covid-19 is taking a heavy toll on the economy, job market and livelihoods of millions of people.
With the government struggling to fund the budget and the money supply near explosion, the share market has gained traction as never before as the best possible venue to absorb rampant liquidity while helping the government raise funds by selling its shares in giant listed companies.
The above factors plus higher inflation expectations emanating from the body blow to the rial against major currencies put gains from the Tehran Stock Exchange at 270% since the beginning of the current fiscal year, driven largely by gains in blue chips.
The market price-to-earning (P/E) ratio based on the last 12-month earnings report has soared to 32, an all-time high where the long-term average has been around 6, according to data from Turquoise Partners, an asset management firm based in Tehran.
Informed observers and stakeholders have seriously questioned the unprecedented returns, saying that this is in stark contradiction to the economic ground realities.
At current exchange rates, the market cap of some blue chips of TSE has exceeded their international peers. According to Turquoise Partners, the market cap of Mobarakeh Steel Manufacturing soared more than $20 billion compared to Antofagasta PLC with a market cap of less than $12 billion.
In response to investors’ embracing the share market, the government has embarked on contractionary measures to collect excess liquidity.
It has considerably increased the yields on bonds to attract institutions and retail investors. The highest bond yield now stands at 19.9 mating in September 2023.
Moreover, the CBI recently decided to raise deposit rates for one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits is 18%.
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