Amongst the widespread panic and brouhaha over the stumbling of the Chinese economy, the world somehow let a very crucial moment slip by - that of Iran announcing the issue of sovereign (short-term) debt bonds to foreign investors, most possibly by next year, subject to some terms of the nuclear agreement with the United States. Post this arrangement with the United States, the Iranian government set out to issue about 300 million worth of its Treasury Bills, in what it calls a "sharia-compliant version of sovereign debt for the first time".
Until July 2011, Iran had three exchanges supervised by the Securities and Exchange Organisation (SEO) - the Tehran Stock Exchange, Iran's first primary equities market, and two regulated markets: Farabourse Securities Market (OTC), serving as the market for bonds and small and medium-sized enterprises and the one doing the current bond issue; and the Iran Mercantile Exchange (IME), the principal commodity market.
In recent years, the SEO and the government have expended considerable effort in modernising the financial and investment climate in the country, notably the tax exemptions offered to foreign investors in Iran under the Direct Taxation Law, which equal those offered to Iranian investors, dispute resolution for investors by way of arbitration, new and ongoing transparency initiatives under the securities market law and regulations governing foreign investments in exchanges and OTC markets, signalling the changing mind-set and policies of the Iranian government.
Rise of a market leader
It is undeniable that Iran has suffered from years of economic sanctions, bad debts and recession. However, it has shown resilience in the past by opening an international oil bourse and providing attractive terms of business to foreign investors in its swanky Kish island. Adding to this is Iran's vast natural resources. According to the Oil and Natural Gas Journal, January 2015 issue, Iran was the largest proved reserve holder of natural gas in the region (about 1201 trillion cubic feet). It must be kept in mind that unlike corporate bonds, sovereign bonds are backed by national governments, and not by the Central Bank of Iran, as was in the case of participation notes. Considering the considerable assets of the government, default risk can be said to be low.
Traditional corporate finance theory suggests that since countries which face difficulties in meeting their financial obligations have the option of printing additional currency to pay their debts, thereby leading to high inflation, debt holders consider inflation expectations while determining the yield they are willing to accept. In that regard, the inflation rate in Iran has seen a sharp decline, particularly in the last quarter, according to analysts' reports based on the data supplied by the Central Bank of Iran, with a predictable rate of less than five per cent in the next five years. Further, the bonds are being issued at a steep discount, which means that general investor demand should be high.
Added to this is the fact that the Iran government undertook the help of three major (trusted) international banks in this issue - JP Morgan, Citibank and Deutsche Bank - while Capital Intelligence, an international credit rating agency, recently upgraded Iran's long-term foreign and local currency ratings to 'B', and its short-term foreign and local currency ratings of 'B'.
The bottom line
So far as India is concerned, there have been persistent efforts by both countries to maintain and foster commercial relations over the years. More recently, India has been in talks with Tehran to invest a significant amount of money to set up a gas-based urea manufacturing plant in the country. Being rich in natural gas, Iran has offered a rate which is less than half the rate at which India currently imports from the market. Another project of notable repute is the Iran-Pakistan-India gas pipeline project which has been resurrected after many years. Accordingly, an investment in the Iranian bonds could have spill-over effects, both on foreign policy and other commercial agreements and projects such as these that India could significantly benefit from. It would be good to remember that in spite of falling crude prices, India still owes Iran a significant amount of money (between $6.5 and $8.8 billion for oil purchases according to the Yale University's MacMillan Centre). So, investing in Iran could go a long way towards boosting India's energy security.
Also, for India to gain a foothold in this region, Iran has, in recent years, emerged as one of the strongest contenders, both geo-politically and geo-economically, with strong legal and technological frameworks, particularly relevant, as the World Bank reports, for manufacturing and financial services. Given the improved regulatory and legal regime, the trading history with the country, and the attractive economic benefits of this bond issue, not to mention the issue being backed by a government with significant assets in the region and no external debt, the risks are significantly mitigated in dealing with a country that is fast emerging as a unique bet in the region.
Of course, India needs to be aware of a couple of things - lack of an integrated debt market in Iran and low trading volumes at the Farabourse, among others, but given the vast multitude of advantages, India should begin to look at Iran with renewed expectation. After all, Iran has been an outlier before. As an author put it aptly, Iran is "an attractive market in a nervous financial world". It is hoped that India will look beyond the nervousness to analyse the issue with an open mind and on the back of sound policies.
The writer is Research Fellow (Corporate Law and Financial Regulation), Vidhi Centre for Legal Policy