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Foreign investment in Iranian capital market

According to Iranian laws, foreign person refers to these individuals: natural person who does not have Iranian citizenship and/or a legal person who is registered in country except than Iran or any registered legal person whose total shares in the capital is more than 50%.
Foreign investment process has five steps: (1) filling the investment form based on the law on encouraging and supporting foreign investment and stock exchange organization; (2) agreement and issuing investment permission by foreign investment board and stock exchange organization; (3) opening foreign currency account; (4) applying for transaction code from stock exchange organization; and (5) selecting the agent.
Noteworthy, trading securities by foreign nationals in Iran is facing with some limitations which is different based on investment type. For non-strategic foreign investors, maximum 10% (and totally 20% for all foreign nationals in a company) and for strategic foreign investors purchasing from 10% to 100% of shares of companies are legal in which the latter group has no right to sell its origin shares within 2 years otherwise by the permission of SEO.
Importantly, above limitations are only for the stocks of companies listed in SEO or outside it and concerning other securities such as participation certificates, Sukuk, etc. foreign investors are facing with no limitation and they are treated as same as Iranian nationals.
Initially, it is necessary to define foreigner in Iranian legal system.
According to article 1(6) of The Regulations Governing the Foreign Investment in the Exchanges and OTC Markets (2010), foreigner is defines as below:

(1) Natural person without Iranian citizenship
(2) Legal person registered in a country except than Iran.
(3) Any legal person whose registered total shares are over 50%. In the case that mutual fund is considered as foreigner by unfixed capital, he will be still considered as foreigner whenever his share is not decrease to less than 40%.
Now, we should know how a foreigner can invest in Stock Exchange and such investment steps.

Foreign investment in Exchanges and OTC Markets

1.Foreign investor should fill investment application form based on FOREIGN INVESTMENT PROMOTION AND PROTECTION ACT and send it along with other documents mentioned in the same form to Iranian Technical and Economic Aids and Investment Organization (No. 4, Davar Street, Tehran, POB: 11365/4618 and telefax: 33112917).
2.Iranian Technical and Economic Aids and Investment Organization would provide this application to Foreign Investment Board. If agreed, relevant permission will be issued by Iranian Finance Ministry. Issuing the permission means that foreign investment is covered by Foreign Investment Promotion and Protection Act. Foreign investment permission issuance steps are conducted in maximum 45 days upon finalizing the documents.

The important point is that based on article 5 of Promotion Law, Foreign Investment Organization is the relevant authority to issue such promotion while according to article 1(8) and article 4 of Foreign Investment Manual in Stock Exchange is SEO and issuing the permission by investment organization is replaced by permission of SEO. To obtain the permission of trading securities in Exchanges and OTC Markets, foreigners should provide needed documents along with their application based on relevant forms in both English and Persian and based on the procedure determined by the Organization, these documents should be confirmed by competent authorities. The Organization is obliged to issue trading license and communicate to applicant or representative within seven business days upon receiving the information and complete documents under article 4. According to article 6, the person who receives trading license is obliged to provide the needed documents and information requested by the Organization to Exchanges and OTS Markets. If he does not submit relevant docs and information on time, the organizational can suspend or revoke foreign investment trading license on purchasing securities. Under such circumstances, foreign investor would have only the right to sell securities purchased by his/her own name during suspension period or after revoking trading license. Anyhow, if the investor acquires the license of Investment Organization along with SEO permission, it can enjoy the benefit and facilities of Foreign Investment Promotion and Protection Act. Statistics indicate that most investors receive both licenses.
2. If foreign investor can achieve investment license in TSE, it would open a banking account in Iranian bank. The regulations on opening banking accounts and other necessary explanations are provided in the section on foreign currency accounts.
Upon opening the account by paragraph 2 and to acquire transaction code to trade securities in Tehran Stock Exchange (TSE), foreign investor should fill the application form on granting transaction code to foreign investor and provide SEO with relevant documents. These documents include the letter by accounting opening branch which shows that such account is opened by letter No. 5878/a/10 dated 27 December 2005 by the Central Bank for foreign investment in TSE. If all documents are complete, SEO would allocate a transaction code for foreign investor and would inform the foreign investor.
3. Trading securities in TSE is only possible through member agents. Therefore, foreign investor should select its considered agent(s).
4. Afterwards, foreign investor can trade securities in TSE. In this regard, foreign investor should consider below points:

How to trade securities
In the case of request by foreigner investor, the agent is obliged to pay the sum (after deducting relevant commissions and taxes) of selling foreign investor’s securities within four business days into foreign investor’s bank account in TSE. To the same reason, foreign investor should provide the agent with the specifications of this banking account in written.
Drawing from foreign investors’ banking accounts in SEO is allowed only for drawing into the account of an agent to purchase listed securities in TSE. The sums form securities sale should either remain in agent’s bank account or transferred to mentioned account.  
Received interests from companies should be drawn directly into banking account mentioned in paragraph 2. According to article 12(c) of the manual and article 15 of the 4th Economic, Social and Cultural Development of the Islamic Republic of Iran, it is allowed to transfer annual interest by foreign investor to outside. Interest tax should be deducted by the company and the net interest should be paid to foreign investor. Therefore, paid interest would be subjected to no other taxes.

Regulations to open foreign currency banking accounts
•    In the case that applicant does not draw sums into opened account within 1 year or does not invest in stock exchange, obtaining reconfirmation from investment organization is necessary.
•    Account resources: drawn sums by applicant by using common banking tools.
•    Account consumptions: buying foreign currency by daily rates and drawing equivalent domestic currency into the account of TSE or selected agent via obtaining the confirmation of TSE.
•    If all or part of sums are not changed to Rials for buying stocks, transferring foreign currency is allowed.
•    The precondition of not paying interest to foreign currency accounts should be considered.

The limitation of foreign investors to possess the stocks of listed companies in TSE or OTS markets
The relevant recipe has divided foreign investors into two strategic and nonstrategic categories and has considered certain limitations for each.
Strategic foreign investor
A foreign investor who intends to possess over ten percent of the stocks of a listed company in Exchanges or OTS markets or an investor who acquires a chair in board of directors upon possessing the stocks of a listed company in Exchanges or OTS markets.
Therefore, an investor is seen as strategic in two ways: (1) possession over 10% of a company’s stocks (it has no limitation and is possible to 100%); (2) possessing a chair in board of directors (even possession less than 10%).
Another limitation in article 8 of the same recipe is only for this kind of investment by which the investor has no right to sell origin stocks within two years.
Nonstrategic foreign investor
(1)    The number of stocks possessed by foreign investor should not be more than 20% of total stocks of listed companies in Exchanges or OTS markets or 20% of stocks of each listed company in Exchanges or OTS markets.
(2)    The number of possessed stock by each foreign investor in each listed company in Exchanges or OTS markets cannot be more than 10% of that company’s stocks (article 7 of the same recipe).
We concluded that nonstrategic foreign investment limit is 10% and their total shares are overall 20%.
In the case of not respecting such limits in both strategic and nonstrategic investment, each nonstrategic foreign investor is seen as strategic one and vice versa by the discretionary of SEO.

The limitations of foreign investors to possess other securities
According to article 12 of the recipe, possession of other securities including participation certificates is allowed for foreign investor based on determined limits by Securities and tock Exchange Higher 2011, the Council approved executive recipe on foreign investment in Exchanges and OTS markets. Its article 8 reads: “possession and transaction of other securities issued by Iranian issuers including participation certificates, Sukuks, banking deposit certification and funds investment units by foreigners are executable upon obtaining transaction permission without any limitation under the same laws applicable for Iranian Nationals.
As a result, foreign investors have no limitation in possession and they are as same as Iranian nationals.
Exclusions on possessing and selling stocks
According to article 9, trading the stocks of listed companies in Exchanges or OTS markets by financial institution considered as foreign investor is not subjected to limitations of this recipe and it is subjected to the same limitations of similar Iranian financial institutions, provided that:
1. The financial institution has acquired the permission of establishment or operation by relevant laws and regulation from the Organization.
2. Mentioned transaction are conducted by the discretion of the company in order to provide specialized services including stocks purchase commitment.
Financial institutes are shaped as private or public stock companies and provide specialized services and are financial middlemen between security issuers and investor and act to facilitate processes among them.
Another exclusion is in article 11: below items are not subjected to articles (7) and (8) and relevant regulation on them are approved by Council based on article 4(13)(14)(15) if Islamic Republic of Iranian Stock Exchange Law:
1. The stocks of Iranian issuers listed in Exchanges or OTS markets admired simultaneously in Exchanges or OTS markets of other countries.
2. That part of the stocks of Iranian issuers listed in Exchanges or OTS markets allocated anyway for trading by foreigners in other countries.
3. Issued securities by foreign issuer accepted in Iranian Exchanges or OTS markets.
4. That part of the stocks of Iranian issuer listed in Exchanges or OTS markets for foreign currency transactions.
However, the council has not yet decided in this regard and it has remained open.
Another exclusion is mentioned in article 7(3): “posed limitation to own the stocks of banks, institutions and financial intermediaries subjected to article 5 of the law on modifying parts of I. R. of Iran Economic, Social and Cultural Development and executing the general policies related to principle 44 of the Iranian Constitution Law (2008) are due diligence in this manual.”

Facilities for foreign investors
By obtaining trading permission, foreigners or Iranian nationals are allowed to open accounts in Rials and foreign exchanges, to transfer it inside the country and to convert it to Rials and vice versa in Iranian banks for their banking and investment operations. Transferring original capital, capital gains and cash dividends received by persons with trading permission to out of Iran is allowed by respecting domestic foreign currency laws and other regulations. Iranian Central Bank is obliged to provide authorized Iranian or foreign investor with equal transferable foreign currency sums computed and announced by note (1) if there is sing exchange price in national formal network or, otherwise, by black market rates. In certain circumstances determined by Iranian Central Bank, this sum can be paid in one year by equal instalments in four month intervals.
In note (1), transferrable sums are computed by the Organization and announced to Central Bank through the request of foreign investment. Rules on how to compute transferrable sums in article 5 of executive manual are as below:
“Transferrable sums subjected to article 10(1) of foreign investment recipe is computed as below by SEO through the request of foreign or Iranian investor along with a written confirmation with the validity of 60 days upon issuance”:

   Transferrable sums
B = the value of securities owned by foreign or Iranian investor with trading license in 365 days prior to application date in final prices in application submission date;
 = days between i type securities buying date and application submission date;
  = the number of sold i type securities by Iranian or foreign investor with trading license in 365 days ended to application date in sale prices;
 = days between i type securities sale date and application submission date;
Pi = final price of i type securities in application submission date;
n = the number of purchased i type securities by Iranian or foreign investor with trading license in 365 days ended to application date in sale prices;
DIV = received cash dividend by Iranian or foreign investor with trading license in 365 days ended to application date in sale prices;
  = plural sign

Note (2): any prohibition on transferring foreign currency to outside in regulations does not cover transferrable sums.
Note (3): in the case that an Iranian investor with foreign origin capita or a foreign investor have acquired foreign investment license subjected to law on Foreign Investment Promotion and Support (2002), in addition to predicted advantages and facilities, they can enjoy other forecasted facilities to transfer their capital to inside/outside the country.
Ultimately, it should be noted that other laws and regulations dominating transactions and operation by foreigners in the Exchanges and OTS Markets are the same laws dominating Iranian nationals.