Foreign Investment in Iranian Securities Made Easy

Foreign direct investment in Iran has been made easier, as Bank Mellat, one of Iran's largest lenders, has signed a contract with the Central Securities Depository of Iran to facilitate FDI in Iranian securities.

The chief executives of CSDI and Mellat, Mohammad Reza Mohseni and Hadi Akhlaghi Feizasar respectively, signed the contract on November 27 in the Securities and Exchange Organization that has approved the deal, IRNA reported.

CSDI handles the transfer and ownership of securities.

The deal is a pilot scheme to help ease foreign investment. Currently, foreign investors can get trading codes and trade Iranian securities after registering with SEO and CSDI. However, opening bank accounts and dealing with brokers to buy securities are not straightforward. These have posed problems for foreigners.

Foreign exchange is another problem. Though sanctions against Iran's banking system were removed a year ago, few foreign banks have established links with Iranian lenders who are far behind on regulatory issues, technology and expertise.

Now, Mellat has secured a contract to handle both securities trading and currency exchange for foreign investors with CSDI's assistance. 

Based on the contract, foreigners, who choose to do business with the Tehran-based lender, can open bank accounts in its branches across the world.

When investors decide to buy securities, Mellat will exchange their money to rials at open market rates within a day. The bank will apply the average daily exchange rate provided by the Association of Bureaux de Change Operators of Iran. 

Following which, Mellat will wire the money to CSDI's account with the bank and buy the ordered securities. CSDI will then issue ownership certificates for the securities in the foreign investor's name, as it does with Iranian traders.

According to the CSDI chief, the foreign exchange risk will be borne by foreigners and the bank will only act as broker.

Iranian officials are working hard to streamline investment regulations and increase market transparency to attract foreign investment to Tehran's securities markets. Increased foreign investment would grease the wheels of Tehran Stock Exchange and the over-the-counter market Iran Fara Bourse and provide the much-needed liquidity.

The deal between Mellat and CSDI is part of that push. The regulatory ground for the deal was paved in September, when SEO came up with a new securities clearing model, unpretentiously dubbed the "blue model", to address concerns of foreign investors about settlement risk in Iran's financial markets.

"CSDI is cooperating with banks, brokerages, SEO and other relevant organizations providing legal and technical assistance, to execute this model in the shortest possible time," said Mohseni in September. 

Mellat seems to have been the first to get a solid deal out of the new regulations, which may or may not be the last.

Mellat and CSDI appear to be marketing this deal primarily with an eye on South Korean investors. Both chief executives specifically mentioned South Korean investors and exchanging South Korean won for rials during the ceremony. 

South Korean investors certainly need a bank to handle their foreign exchange affairs, as trade volume for the Korean won is minimal in Tehran.