The Securities and Exchange Organization is starting the regulation of its handful of venture capital companies by listing them on the Iran Fara Bourse over-the-counter market. The listed VC companies will manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential.
The new regulations and procedures have been designed to garner more support for Iran’s small base of start-ups. It is part of a government objective to expand the ‘knowledge-based economy’ with the ultimate goal of diversifying the economy away from oil.
“Expanding listed knowledge-based companies reduces the effect of fluctuations in commodity prices, like basic metals along with mining and petrochemical products, on the Iranian economy and the capital markets,” Amir Hamouni, IFB’s chief executive was quoted as saying by SENA. “Many of Iran’s active industries are commodity driven and lose profits when commodity prices fall.”
Of course these are long-term aspirations for the IFB and those in charge if economic affairs. Shaking the role and domination of oil is a difficult enterprise, if not impossible. Petroleum related stocks—including refineries, petrochemical producers and oil industry investment companies—make up nearly half of the market capital of Iran’s two equity markets (Tehran Stock Exchange and Iran Fara Bourse).
This dominance has a natural propensity for expansion due to Iran’s wealth of oil and gas reserves. Iran has the fourth largest proven oil reserves in the world making up 10% of the world’s total. It is second to Russia with 15.8% of world’s total natural gas reserves.
The so-called knowledge economy is a system of consumption and production based on intellectual capital. Production and services based on knowledge-intensive activities that contribute to an accelerated pace of technical and scientific advance are at the core of such an economy.
In a knowledge economy, a significant part of a company’s value may consist of intangible assets, such as the value of its workers’ knowledge (intellectual capital). However, generally accepted accounting principles do not allow companies to include these assets on balance sheets. The key component of a knowledge economy is a greater reliance on intellectual capabilities than on physical inputs or natural resources. The knowledge economy commonly makes up a large share of all economic activity in developed countries.
“Loans are not a good method for funding newly formed knowledge-based companies and a considerable part of their capital should come from venture capital funds [as equity],” says Sorena Sattari, the President Hassan Rouhani’s top technology deputy.
VC Committee
Hamouni added that the procedures for regulating VCs have been finalized. Based on them a group of four called the “venture capital review committee” will be formed. The committee will be in charge of reviewing applications for setting up VCs.
The group will have three voting members. The head of the committee will be appointed by the SEO. The IFB board will appoint the second member and will also pick a venture capital specialist as the third member, who has to be approved by the SEO. An IFB executive will be chosen as the fourth member of the committee, and will act as the committee’s secretary.
As is evident by the makeup of the committee, the SEO intends to keep it under its full control just like it treats TSE and IFB.
The new platform for VCs varies from how venture capital and private equity firms are organized. The SEO has to approve the funds and their managers. VCs require 100 billion rials in equity to set up, 10% of which has to be put up initially. However these will not be open ended funds. VCs must be disbanded in less than seven years.
The five existing VCs—Arzesh Afarin Sarava, Parthian, Salamat Rouyan, Tose’e Armani and Yekom Arman Aati—which already operate in fintech, nanotechnology, health and pharmaceuticals will need to apply for getting listed on the IFB. They manage 1.4 trillion rials ($39.6 million) combined.
