The Central Bank of Iran announced regulations guiding the acquisition of stake in investment banks and market-making companies by banks and credit institutions.
The regulations allow banks to own shares in investment banks enabling them to play a bigger role in the struggling stock market, according to a rulebook published on the CBI’s website.
As per rules, banks are allowed to acquire shares in investment banks and market-making companies after receiving prior approval from the CBI.
The CBI’s permission is also needed in case banks and credit institutions transfer ownership of shares. Bank-affiliated investment banks are not allowed to acquire stocks of other institutional entities (other than those of banks and credit institutions) except for cases where the investment bank is responsible for meeting underwriting obligations.
In cases where an investment bank underwrites stocks of a company whose main business is non-banking activity, the rules stipulate that the investment banks divest the acquired stocks within three months. In addition, in such cases investment banks are not allowed to undertake underwriting obligations worth more than 15% of their capital.
Investment banks affiliated to banks are allowed to underwrite securities worth a maximum of 10% of the total securities a company offers at the subscription phase.
Investment banks whose shares are owned by banks and credit institutions, either in part or whole, are allowed to underwrite no more than 5% of stocks and bonds issued by their own affiliated banks and credit institutions.
Market Making Operation
With regard to rules governing market-making companies, banks and credit institutions can acquire investment units of market-maker funds.
Market-makers essentially act as wholesalers by buying and selling securities to balance the market. Their operations help improve the liquidity of shares.
The rules oblige banks and credit institutions owning units of market makers funds to “undertake market-making obligations pertaining to the shares of their own affiliated listed banks and non-bank credit institutions”.
Other than market-making activity, market maker funds are not allowed to acquire shares of other companies.
The sum of money that a bank invests in their affiliated market-making firms will be deducted from the regulatory capital (aka capital requirement or capital adequacy) of the lender.
Capital requirements are regulatory standards for banks that determine how much liquid capital (easily sold assets) they must keep on hand, concerning their overall holdings.
In line with efforts to direct fresh liquidity into the struggling share market, the new guidelines are expected to boost demand as banks are given more leeway to operate in the market.
Earlier the CBI annulled all previous regulations that banned giving loans by banks to brokerage firms, investment funds and investment holding companies to invest in shares.
In addition, banks and credit institutions are allowed to directly invest in the bourse. To do so they are exempted from penalties envisioned in the law. The rules oblige them to cede shares they own in companies engaged in non-banking activities otherwise they would face tax liability.
Tehran stock market is grappling with a bearish trend that began after the price bubbles burst last August and non-stop selloff has continued unabated.
The main index of the Tehran Stock Exchange, TEDPIX, shot up fourfold in less than five months of last fiscal year (March-August 2021) before losing half its value and plunging to 1.1 million points -- down from a record high of 2.1 million points.
Eighteen banks and credit institutions are listed with the stock exchange, the biggest being the privatized Bank Saderat Iran, Bank Mellat and Tejarat Bank. These banks have a market capitalization of 5,900 trillion rials ($24.5 billion), accounting for 6.7% of the total market cap of the TSE and the junior exchange Iran Fara Bourse.
Iran’s banking industry is among the top five players in the stock market placed after investment, steel and base metal, refineries and petrochemical companies.
