Iran, 1979: Shah Pahlavi is overthrown by the Iranian Revolution and the Grand Ayatollah Ruhollah Khomeini commandeers the launch of the Islamic Republic that exists today.
At the time, the Shah’s assets were held in the Pahlavi Foundation, a charitable trust set up in 1958 and estimated to have held $3bn at its peak.
When he fled the country on January 16 that year, the foundation was renamed the Bonyad-e Mostazafan (translated as the Foundation of the Oppressed), to be invested in a range of economic sectors with a proportion of profits set aside for disabled, poverty-stricken and other vulnerable people in Iran.
Today, the Mostazafan Foundation is made up of about 200 individual companies split across 20 holding firms or institutes, according to its website. They are involved in numerous sectors, including shipping, construction, petrochemicals, hotels, transport, farming and textiles. The foundation’s total value is not made public, but it has been estimated to be worth as much as $20bn.
One of the holding companies it contains is Sina Financial and Investment Holding (SFI), which was established in 2004 and comprises five subsidiaries. These are Sina Bank, first set up in 1986 as Bonyad Finance and Credit Company (which remains the majority shareholder with 63 percent of the bank), and listed on the Tehran Stock Exchange with a market capitalisation of $507m as of June 2016; Sina Insurance; Behgozin Brokerage; Sina Leasing; and Sina Brokerage.
With total assets under management close to $7bn, according to SFI’s CEO and board member Behzad Golkar, SFI is one of the largest financial institutions in Iran, with 3,950 employees and 2015 turnover estimated at $1.5bn, up from around $1.25bn in 2014. Additional financial information about SFI and its subsidiaries is not made publicly available as they are private, with the exception of Sina Bank, which reported total assets of $4.39m in 2015, up from $4.06m in 2014.
Golkar has been in the post since 2008. Now, as Iran declares itself open for business following the lifting of restrictive sanctions imposed by the European Union (EU) and US over the past 12 years, he is playing an important role in helping to gear the country’s capital markets for increased foreign investment.
In an interview with Arabian Business, Golkar wastes no time in setting out his promotional case for investing in Iran. “At the moment, the Iranian capital market looks like a neighbour that you have had for 10 years but never seen,” he says.
“Now, after 10 years, you meet him and say to yourself, ‘Wow, I have this neighbour – fantastic. A very kind, generous person and bella, bella, bella!
“Iranian capital markets need fresh blood to connect to international markets. And, in the same way, I think foreign investors are looking to Iranian capital markets.
Iran’s economy is entrenched in hydrocarbons, and therefore remains volatile.
“Why? Because the Iranian economy as a whole is strong, it has a good [investment] infrastructure and can be considered an emerging economy with plenty of opportunities.”
The removal of sanctions could trigger at least $50bn a year in foreign investment, according to Central Bank of Iran governor Valiollah Seif. He told Bloomberg in January that GDP growth could accelerate to between 5 and 6 percent, from 3 percent, in the year to March 2017.
Seif was also adamant that Iranian banks would reconnect to the world within days of sanctions being lifted. This has yet to happen, though there have been indications of foreign companies starting to enter Iran, particularly in the hospitality and aviation sectors with UAE’s Rotana Group and US aviation manufacturer Boeing among those to have finalised deals since January.
The last decade has created a “very tough situation” for Iran, Golkar says. “We will not bounce back in weeks or months. It could take two or three years, but in time I believe everything will be set up to open the market for foreign investors.
“The pioneer, in my opinion, will be capital markets. This is because investing in financial instruments is so much simpler than investing in fiscal assets.” The Tehran Stock Exchange (TSE) is among the five biggest markets in the Middle East, with more than 300 listed companies and a market cap of around $100bn.
Before joining SFI, Golkar held various management roles in the Mostazafan Foundation and its subsidiaries, including as strategic and investment director for the foundation and CEO and board member of Kaveh Pars Mining Industries from 2007 to 2008.
He was also a non-executive board member in Irancell, the second largest telecoms operator in Iran and 49 percent owned by South Africa’s MTN Group. He holds an MBA from the University of Wurzburg in Germany and an MA in economics from Tehran’s Allameh Tabataba’i University.
He is confident in the potential strength of the Iranian markets, but concedes the system poses regulatory challenges and risks for foreign investors, which he is working with the government to resolve.
“There are a lot of lacks, a lot of unadjusted systems, especially in banking, which exist as a result of Iran having been closed off to the world for so long,” he says.
“It could take another year for banks and financial institutions to close these gaps so they can connect directly to international markets.”
There are a number of policies and regulations with which Iranian institutions must comply if they wish to do international business. One of these is Basel III, a package of reforms designed to strengthen the global banking system through tighter assessment of liquidity and other risks. Golkar says that before sanctions were imposed, Iran operated in accordance with Basel I, which is now hugely out of date.
Within Basel III are requirements such as ‘Know Your Customer’, which requires tougher due diligence on corporate ownership, and other measures intended to prevent money laundering. These all require Iranian banks, which have been cut off from international markets for a decade, to set up new systems and procedures – no simple task, says Golkar.
In the meantime, foreign investors could find Iran’s bureaucratic hurdles and legislative pitfalls complex and arduous. Experts report that foreign institutional investors have to grapple with excessive red tape when seeking shareholder licences from Iran’s capital market regulator, the Securities and Exchange Organization (SEO), while data published by listed companies is often opaque and inconsistent, making due diligence difficult.
Other barriers to foreign investment include TSE rules preventing foreign ownership of more than 10 percent of any listed company, the lack of online English-language trading platforms, and the fact that no global custodian bank operates in Iran to securitise shares. At present, the Central Securities Depository of Iran (CSDI) acts as the sole local custodian bank, but it is not acknowledged by large foreign institutional investors and some experts claim this could be a deal-breaker for professionally managed funds.
“When you have a plan to work in international markets you have to meet international standards,” says Golkar. “At the moment, companies inside Iran, particularly in capital markets, are trying to upgrade themselves. But they do not have sufficient knowledge of how to do that, so it’s taking time but they are trying to do it as quickly as they can.”
He says SFI has been working with contacts in London, Germany and elsewhere to expand expertise. It has implemented training schemes for its employees, which, among other things, aim to teach them business proficiency in spoken English.
“If you want to cooperate with foreign investors and attract more people from overseas it is crucial you speak the same language as them. This means the language of capital markets, of course, but it also means being able to speak in English, the international [lingua franca],” Golkar says.
One of the positive outcomes of talks with advisors in Europe are plans to launch two $55m equity funds targeting the UK and Germany. One is a fixed income fund and the other a liquidity fund, and both funds are open-ended and would launch under the Sina brand. Advisors in the UK and Germany are helping to raise the money and the company is targeting a 20 percent rate of return for each and an August launch date.
“I think there could be a lot of interest in equity funds, because of the rate of return nowadays – especially with fixed income funds and inside Iran. The Iranian rial is at around 20 percent now while inflation rates [at the time of interviewing] were less than 10 percent, this is fantastic.”
However, Golkar admits restrictions on custodian accounts in Iran could pose problems. “We are trying to solve this issue but it is a problem.” It also remains to see whether Iran faces challenges reaching out to Europe following the UK’s decision to exit the European Union.
Tehran is expecting massive change.
Another of the group’s objectives is to set up an investment bank. Golkar reveals that SFI has applied for permission from the government to open a new investment bank in Iran. The group has begun courting international banks in an attempt to find a shareholder based outside of Iran with whom to partner and access global investment markets.
Under the plan, the bank would be seeded with an initial $100m, with a target to grow to $500m within the five years to 2021. It would seek to invest in capital markets in Iran and beyond, and Golkar says the partner bank would help SFI to form “a bridge” into foreign markets.
The board has decided on a name for the new investment bank – it will fall under Sina Holding’s branding, but Golkar declines to reveal the exact name until the plans are approved by the Iranian government.
He is eyeing a launch this year, but admits the rules around financial custodianship in Iran need to be clarified before the bank can be incorporated.
One particular concern for prospective investors in Iran is the ‘snap-back’ provision contained in the JCPOA. The EU and US have reserved the right to re-impose sanctions in the event that Iran is found to have violated its obligations under the agreement. This could leave investments highly vulnerable in years to come, some experts warn.
However, many Iran-based financial and legal advisers argue that snap-back poses no substantial threat. For example, Dr Moshkan Mashkour, a lawyer and director of the Tehran Regional Arbitration Centre, told a conference in Oman in February: “Snapback is unlikely to happen because on both sides the ramifications are great and there is political will [for the agreement to work].
“If any concerns are raised that there has been a serious breach of terms, there would be serious and lengthy discussions, which, if not resolved, would be passed to authorities, which would seek to resolve the issue. So snap-back would not happen overnight.”
Golkar, too, says he is confident snap-back is unlikely to occur. “I think real investors know snap-back will not occur. I’m very positive about the future. Before sanctions, everything was working. The Iranian market worked well with the international market under the old system.
“But the sanctions put barriers on that system [for all parties]. Because of that, I think that there is no will, within Iran and also in the world, to snap-back the sanctions. It’s not just economic, it’s political too – there are lots of other interests at stake.
“Long term, I do not believe there will be any bad situation to do with snap-back. That’s my prediction, maybe I’ll be wrong.”
Like other financial institutions in Iran, Golkar hopes sincerely he is not wrong. In the meantime, he is doing what he can to grow tap up foreign business while policy makers sift through outdated rules and regulations and seek to minimise the risks for investors.
As Golkar says, “When you invest in something there is always a degree of risk and reward. If the return for the investor is more than the risk, he will still come, and this [risk and reward balance] is a feature of emerging markets and Iran is the same.”
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