Iraq’s stock market regulator asked to ease rules to attract foreign investors

Iraq’s stock market regulator has been asked to ease requirements for custodians to hold shares, amid investment interest from JPMorgan Chase and Citigroup.

Foreign investors have generally shied away from Iraqi equities not only because of the political risk, but also because of the third-party risk in the absence of custody services. Ahmad Al Rubaye / AShow more

Iraq’s stock market regulator has been asked to ease requirements for custodians to hold shares, amid interest from JPMorgan Chase and Citigroup.

In recent years, foreign investors have generally shied away from Iraqi equities not only because of the political risk, but also because of the third-party risk in the absence of custody services.

“Foreign investment banks want good terms that make it profitable for them to operate custody services in a place like Iraq,” said Ali Almukhtar, a stockbroker at Al Dijla brokerage in Baghdad. “At the same time, foreign investors won’t buy shares in Iraq without a custodian. It’s like the chicken before the egg issue or the egg before the chicken.”

The board of the Iraq Stock Exchange (ISX) recommended two weeks ago that the Iraq Securities Commission ease requirements such as the amount of capital required to operate and hold shares on behalf of investors and commissions.

Taha Abdulsalam, ISX’s chief executive, said JPMorgan and Citibank had expressed their interest over several discussions this year.

“They said they are interested in the Iraqi economy and the exchange. We are international custodians and happy to work with a local partner under an agreement,” Mr Abdulsalam said.

JPMorgan and Citi both declined to comment.

In 2003, the United States investment bank helped set up Trade Bank of Iraq (TBI), the biggest lender in the country and the first to receive lines of credit with international banks after the removal of Saddam Hussein from power.

In July, JPMorgan said it would expand its business in Iraq and signed a one-year agreement with TBI to help finance imports of goods and services through letters of credit.

Citigroup set up an Iraq desk operating out of Amman, Jordan, two years ago. The bank has said it plans to open a representative office in Baghdad as well as branches in Basra and Erbil to capitalise on Iraq’s oil boom. The branches would help “provide liaison functions for Citi’s clients globally and contribute to the development of Iraq’s banking and capital markets,” it said in June.

Last week, the ISX signed an agreement with Reuters to provide Iraqi financial data through its terminals. The deal followed an agreement earlier this year with Bloomberg. ISX data distribution through Reuters and Bloomberg terminals is expected to be available in June next year.

“What’s important about these agreements is that [they] provide [confidence to] Iraqi and non-Iraqi investors … that the bourse is moving in the right direction – better access to trading, access to financial statements and disclosures about listed companies,” Mr Abdulsalam said.

The bourse’s market capitalisation doubled to US$9.2 billion in March following the initial public offering of Asiacell (part owned by Qatar’s Ooredoo), the first of three telecoms operators expected to list on the ISX.

Twenty-two registered active institutional investors trade Iraqi equities.

Invest AD, a financial services firm that the Abu Dhabi Government owns, launched its US$21 million Iraq Opportunity Fund three years ago, and has amassed positions in Iraqi equities including Asiacell. The National Investor, an Abu Dhabi-based investment bank, also bought shares in Asiacell’s initial public offering.

The ISX currently operates under Order 74 (Interim Law on Securities Markets), introduced after the 2003 war by Paul Bremer, the then US administrator for Iraq.

A capital-markets draft law has been submitted to parliament. The bill’s regulations meet the benchmarks prevailing in the GCC. However, political wrangling and sectarian violence over the past two years have stalled the legislative passage of the bill. And the bill is not expected to be ratified before next year, when parliamentary elections are expected to be held.

The ISX, with 73 listed companies, has benefited from seven years of consistent gains as foreign investors and hedge funds bought shares in the expectation of an oil boom. Last year, however, Iraqi shares declined amid political volatility after the withdrawal of US troops in December 2011.

The ISX Price Index is down 8.1 per cent this year as companies issue new shares to increase their capital base by an average of 25 per cent and take on new projects for expansion, according to Mr Abdulsalam.

“There were $1bn worth of new shares for listed companies, particularly for the banking sector. That’s a lot of supply ... but it’s healthy,” he said.

“The general assemblies of a lot of these companies want to take on new projects, change resources, improve their technology. That requires liquidity.”