Business And Markets

Capital Market Role Ebbs

Capital Market Role Ebbs
Capital Market Role Ebbs

With the capital market dominated by a prolonged bearish trend and incessant capital outflow, its role has been diminishing in the national economy.
Overall contribution of the capital market declined 43% in the first two months of the calendar year (March 21-May 20) to reach 404 trillion rials ($1.07 billion), down from 713 trillion rials ($3.3b) in the similar period last year.  
To raise capital for businesses, companies have two options, namely equity financing and debt financing.
Citing data released by the Securities and Exchange Organization (SEO), the Tehran Chamber of Commerce, Mines, Industries and Agriculture (TCCIM) said the setback was mainly due to decline in equity financing while debt financing rose.
Accordingly, equity financing fell from 631 trillion rials ($2.6b) in the first two months of the last fiscal year to 284 trillion rials ($1.2b) in the corresponding period this year, indicating a 55% decline.
Debt financing increased more than 31% to reach 120 trillion rials ($510m), rising from 82 trillion rials ($348m) in the first two months of the previous fiscal year.
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.
Equity financing has no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing on the other hand does not require giving up a portion of ownership.
As for the main financing methods, the TCCIM said listed companies met more than 70% of their financial needs via capital increase. Bonds contributed 29.7% while raising funds via IPOs was meager in the two months.

Bearish Trends

Dent in the capital market role in funding businesses in need  signifies investors’ aversion to the struggling market after the share market collapsed last August and liquidity fled to the disappointment of millions of investors who had joined the bourse last year.
Listed companies saw inflow of fresh liquidity by swarms of retail investors leading to historic gains particularly for large cap stocks, running the risk of a ruinous burst of price bubbles.  
The benchmark of Tehran Stock Exchange, TEDPIX, jumped 300% in less than five months before diving deep into the red and paring close to half the gains.
In the month-long period ending June 15, the TEDPIX lost close to 3% while in the same period last year it posted a staggering 32% growth followed by a mind-boggling 46% rise a month later.   
With bubbles beginning to burst in August, the market downturn has continued. However, the government has made known that it will revive the market and has offered investors a glimmer of hope in the past few weeks.
In May, the SEO announced a package of 10 measures to help shore up the struggling share market. The measures are seen as a serious government measure to try and restore the rapidly failing health if the stock market and were approved by the High Council of Economic Coordination, the top economic decision-making body, comprising the heads of the three branches of power.

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