You might think that foreigners are being scared away by the political situation. The chart tells a different story, however. The current drama in Parliament only really started in December. That was almost six months after the foreign net buying peak in early June.

The foreign pullback actually corresponds more closely to the drop in world markets occasioned by the start of the European crisis last summer. It is also noteworthy that the record IQD 17.2 billion in net foreign selling during the week of October 21 occurred just two weeks after the S&P 500 hit its low for the year.

Perhaps all that really matters for foreign inflows is the likelihood of another global financial meltdown. Too bad that scenario is still not really “off the table.”

The first is the introduction of a “national switch” for processing credit card and ATM transactions. The switch—essentially a router and some specialized software—will connect all of Iraq’s ATM machines and credit card point-of-sale scanners to a common platform. At present, each card-issuing bank operates its own system. Because not every point of sale is connected to every system, no one card will work everywhere. Little wonder that almost everything is paid for in cash.

The second is the establishment of the Iraq Interoperable Mobile Payments System (IIMPS). This system will reach out to people who do not have a bank account by making it possible to bank by mobile phone. Users will open accounts by calling a number and speaking with a representative. They may then make cash deposits and withdrawals either at branches or at venues such as retail shops that the banks will designate as their agents. Making a payment will require nothing more than a phone call to transfer funds to the payee’s account. There will no longer be any need to pay for anything with “blocks” of hundred dollar bills.

Both systems are supposed to begin operations in 2013. Of the two, the mobile system seems particularly promising. Even with the national switch in place, merchants may be reluctant to accept credit cards because of the associated fees and the paper trail they leave for the tax authorities. The IIMPS, however, should be readily adopted by anyone with a mobile phone. That’s a lot of potential new customers for the banks. By an interesting coincidence, it turns out that mobile phone users and people without bank accounts both account for about 80% of the Iraqi population.

The timing of these declines might be due to chance. After all, four years of data isn’t much to go on. On the other hand, however, there may be a real phenomenon here resulting from the way that Iraqi capital increases are done.

Typically, capital increases seem to be more common in the first half of the year, occurring around the time that full-year financials for the preceding year become available. Generally the shares will be suspended before there is enough time for holders of large positions to sell, which means that they will be stuck with whatever new share issues are announced at the shareholders meetings.

Investors are thus likely to end up with bigger positions than they would ideally like and will be unable to get out of them until the suspension periods end. Since suspensions go on for a quite a few months, the first chance they will get to rebalance their portfolios is bound to be some time in the second half.

Could the year-end jinx just be a matter of investors dumping unwanted new shares as suspended companies resume trading?

The good news is that the bank will be getting an IQD 100 bn loan from the Central Bank of Iraq (CBI). This will make it possible for the Registrar and the Securities Commission to allow BWAI to resume trading.

The Registrar’s approval is necessary because it has a lien on the shares. As long as this is in place, transfer of ownership is blocked. The existence of this lien was made public in a recent communication from the CBI posted on the Iraq Stock Exchange (ISX) website. The central bank, in response to a question from the ISX regarding Warka’s status, stated that the Registrar had blocked trading in the shares but did not say why.

Normally a lien might be put on someone’s property if title was in question or if the property had been posted as collateral. It’s hard to see what the rationale could be in this case. Why freeze the assets of all the minority shareholders?

The bad news is the same as the good news: Warka will be getting IQD 100 bn from the CBI. Evidently the potential deal with Standard Chartered, which would presumably have seen the British bank taking up almost IQD 150 bn in rights issue shares, is not going to be finalized in the near future. (There’s more on the Standard Chartered story here.)

My earlier expectation of a big jump in BWAI’s share price on the resumption of trading now seems likely to be disappointed.

These will be enormous offerings for a market as small as the ISX. Each company is required by the conditions of its license to list 25% of its shares. Asiacell alone will have to list 67.5 bn shares. (See this post.) At par (IQD 1), that would be about US$ 58 mn and they will certainly be looking for a higher price than that. With ISX daily volume now averaging only around US$ 2 mn, the total for the three IPOs could easily be the equivalent of a year’s worth of trading.

You might think the ISX would be overwhelmed. In fact, shouldn’t the market be falling already, as people raise cash for the new issues?

Actually there’s no cause for alarm. The companies clearly will not be trying to raise hundreds of millions of US dollars from local investors. The involvement of Citi and BNP makes it obvious that the main focus will be on foreign institutions, most of which are not yet in Iraq at all.

For these investors, the key obstacle to investing in Iraqi shares is the lack of a custodian bank. (See this post for more on the custody problem.) But this will be easy to fix. According to the Word Bank’s Republic of Iraq Financial Sector Review (p. 54), “a major international bank” [i.e. HSBC] has already made the necessary preparations to provide custody services and is just “waiting for the necessary licenses to be granted.” (There’s a link to the World Bank report here.)

The real significance of the IPOs is that they can provide the stimulus necessary to get those licenses issued. That, in turn, will allow a host of new foreign investors, potentially commanding far greater amounts of capital than the telcos will be raising, to get into the market. This portends not so much a flood of new shares as a deluge of new money.

Image by Angela See. Used by permission.

Obviously this is not the long awaited IPO called for by the conditions of the company’s operating license. That would require the sale of a 25% stake. With share capital of 270 bn, Asiacell would have to be selling 67.5 bn shares.

The current micro-offering is merely a preliminary step to convert the company to joint-stock status. I don’t know why this couldn’t be taken care of as part of the actual IPO. My guess, for whatever it’s worth, is that the existing shareholders might otherwise have to do the entire offering at par (IQD 1).

As I understand it, the Company Law (Article 154), requires new shares to be issued when a company converts to joint stock form but does not allow for these to be sold for more than their IQD 1 par value. Once the conversion has happened, however, Article 55/4 says that new shares “may be offered at a price equal to or greater than their nominal value…and priced in light of the company’s performance.”

If I’m right, two separate offerings would make sense. In the first, you try to set the record for world’s smallest IPO, selling only a tiny number of shares at par. Then you do the real IPO, selling the shares for what they are actually worth.

This new schedule is a big improvement. Previously, stocks were suspended after general assembly meetings for as long as three weeks even when no particularly market-moving news was announced. Post-rights issue suspensions have typically lasted anywhere from four to eight months. Warka Bank is still not trading over a year and a half after its failed rights issue early last year.

The one-week pre-general assembly period isn’t really news, however. This appears to have been in place since some time in the second half of last year. Formerly, there had generally been two weeks between the suspension and GA meeting dates.

It’s unclear why any of these suspensions were necessary in the first place or what has changed to make them less necessary now. I suspect that they were never really necessary and that nothing has changed. I think the ISC is simply trying to improve the trading environment ahead of the telecom IPOs that were supposed to have taken place last month.

If that is the goal, however, the new rules obviously do not go far enough. Unnecessary trading halts are just as unacceptable whether they last for four months or for eight.

If the ISC really wants to get an ‘A’ from foreign institutional investors it will have to eliminate pre-GA and post-rights issue suspensions altogether.

It’s said that the opera isn’t over until the fat lady sings. While she hasn’t come out yet, it looks like she has already begun warming up backstage.

If the deal goes through, Standard Chartered will presumably be taking up the approximately 145 mn rights issue shares left over from Warka’s failed capital increase in early 2010. At IQD 1 per share, this would add IQD 145 mn to June 30, 2011 net equity of IQD 138 mn, bringing the total to IQD 283 mn. Share capital would increase to 250 mn, with the British bank holding a 58% stake.

In this scenario, book value per share would come to 283/250 = IQD 1.13.

Among the ISX-listed banks, Warka would become only the second to have a major international financial institution as a controlling shareholder. The first was Dar Es Salaam Bank, which is controlled by HSBC.

Dar Es Salaam trades at 7.0 times book value. The same rating for BWAI post-merger would mean the shares would reopen at 7 x 1.13 = IQD 7.92. Anyone who had bought at BWAI’s last traded price of IQD 1.26, got the 33.33% bonus, and taken up the 150% rights issue would be looking at a return of 710%. (Both original and bonus shares were eligible for the rights.)

The final act of this drama may turn out to have been well worth the price of admission.

Photo by: http://www.flickr.com/photos/aliens_ufo_proof_evidence/