ISX enters period of suspended animation

Over the last three months, stocks accounting for over half the turnover on the Iraq Stock Exchange (ISX) in the first quarter of this year have been suspended from trading.  (See chart.  Trading values for the quarter were computed from statistics available in the Rabee Securities Weekly Bulletin, online at http://rabeesecurities.com)  Of the first quarter’s ten most actively traded bank stocks, only four (BBAY, BCOI, BGUC, and BMNS) are still trading.  Baghdad Soft Drinks, which contributed 27% of first quarter trading, was suspended on June 11.

These suspensions are in part an unintended consequence of the Central Bank of Iraq’s new capital requirements for the commercial banks.  (See my June 2 post for more on this.)  With the exception of North Bank, which has already met this year’s ID 100 billion requirement, all the other listed banks will need to issue new shares, generally through bonus issues (to the extent that they can capitalize existing retained earnings), rights issues (when retained earnings are insufficient), or some combination of the two.  And North Bank is increasing capital as well, in a bid to meet next year’s ID 150 billion capital requirement ahead of time.

The problem for investors is that the ISX generally suspends companies for several weeks prior to their shareholder meetings (e.g. those required to approve capital increases) and for periods ranging from weeks to months subsequently.  These suspensions seem to be motivated partly by a desire to control insider trading—if no one can trade at all, the insider’s informational advantage becomes moot.  But this is not an entirely convincing explanation.  After all, once a capital increase is approved, there isn’t anything left for the insider to trade on.  Why must the stocks remain in limbo for long periods after that?

So far, there has been no obvious decline in ISX volume, but a reduction in the sort of large block trades I described in my last post seems unavoidable.  The eight names that accounted for the biggest volume spikes in the first half of this year included the already suspended North Bank and Baghdad Soft Drinks as well as four other banks (Iraqi Islamic Bank, United Bank, Bank of Baghdad, and Gulf Commercial Bank) that must inevitably be halted as well.

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