According to a report from Reuters, with better regulation and the expected listing of the country’s three main mobile phone firms, foreign investors are increasingly choosing Iraq’s stock market as a lucrative investment.

Iraq’s bourse is still tiny in comparison with other regional or international stock markets, but a drop in violence since the peak of sectarian fighting in 2006-2007 and the scope for quick growth is lifting interest.

Taha Abdulsalam, chief executive of the Iraq Stock Exchange (ISX), recently announced that the volume of shares traded through Sept. 30 this year was $495 million compared with $337 million in full-year 2010.

The ISX, which started operating in 2004 and currently has 86 listed firms, is one outpost of private investment outside of the oil industry in a country still dominated by state firms.

The number of shares foreign investors bought through to end-Sept. this year was 66 billion, valued at $110 million, Abdulsalam said. Foreign trading was almost non-existent a few years ago.

Russian-based 55 North Company is a bold example of foreign appetite in the ISX.

The firm plans to establish an investment fund worth $25 million, its managing director Paul Collison said, the maximum it can invest right now due to the low level of liquidity in Iraq’s stock market.

“It is important to start early on… it is a fantastic opportunity for a small fund to get established,” he said.

Panu Saukkonen, a senior partner at Finnish Virtus Capital Oy Company which started investing in the Iraqi bourse three years ago, said Iraq was a great choice to invest in as there is no serious competition and market values are still low.

The three mobile phone operators, Asiacell, Korek Telecom, and Zain Iraq, are required by the terms to their licences to list shares on the local bourse, and this could see the ISX’s current market capitalisation of $4 billion double, Abdulsalam told Reuters last week. .

Oliver Emanuel, executive director of Middle East and North Africa sales and trading at Morgan Stanley, said the initial public offerings by Iraq’s mobile phone firms would give a great boost to the local market.

“The upcoming telecom IPOs will no doubt act as a catalyst for the Iraq stock market precipitating greater focus by international and regional investors, helping improve liquidity,” Emanuel said.

Investors said the implementation of some regulations such as custodian bank services and share trading settlement could further open the market for more foreign capital.

A share trading settlement would allow non-Iraqi investors up to two days to arrange their payment after making a trade, compared with currently having to pay before conducting a trade.

Saukkonen said having a custodian bank could boost its investment by at least 10 times within three years.

The head of the Iraqi Securities Commission (ISC), Abdulrazaq al-Saadi, said custodian regulation would be issued in November.

The ISX moved from manual to automated trading in 2009 and is open for trading for two hours a day, five days a week. Each trade takes around 8 seconds to process.

The banking sector is the largest on the bourse, which also lists industrial, insurance, hotel and agriculture firms.

Collison said he expected the ISX to grow quickly once an international bank takes on the custodian role but said the market would need to be closely monitored.

“The risk is you get a very quick bubble and it will lose 50 percent and that is exactly what happened in places like Russia,” said Collison.

(Source: Reuters)

At the end of last month, the Iraq Securities Commission (ISC) announced new rules on stock suspensions. Effective September 1, trading is to recommence no more than four months after general assembly meetings when rights issues are announced and immediately otherwise. Pre-general assembly suspensions are limited to one week.

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.

Winston Churchill once likened observing Soviet politics to “watching two dogs fighting under a carpet.” All you can say for sure is that something’s going on.

The latest news on Warka Bank has exactly this ‘subcarpet’ quality. The ISC has ordered Warka’s brokerage subsidiary to stop its operations in the market effective July 26 following the seizure of the bank’s equity in this company by the Ministry of Trade. (See the pdf file at the bottom of this link for the Arabic version of the announcement.)

The Ministry is also seizing shares held by the bank in nine other companies. Appended to the ISC’s announcement is a letter from the Ministry’s Office of Companies Registration to the Diyala Public Company for Electrical Industries dated July 11. This provides the following list:

1.) Al-Asyl for Horse Breeding and Marketing LLC / number of shares (1,020,000).
2.) Al-Iraqiyah for Bank Guarantees LLC / number of shares (400,000,000).
3.) Afaq al-Ghad for Trading Agencies and General Trade LLC / number of shares (200,000).
4.) Al-Mas for Security and General Protective Services LLC / number of shares (200,000).
5.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000).
6.) Warka Company for Mediation in Trading Securities LLC / number of shares (980,000,000).
7.) Dallat al-Jazeerah for General Transportation LLC / number of shares (680,000).
8.) Al-Ufuq al-’Alamiyah for General Trading LLC / number of shares (1,340,000).
9.) Al-Mass for Recording of the Holy Book Verses LLC / number of shares (60,000,000).
10.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000)

Note that none of these are ISX listed companies. (6) is the brokerage.

Apparently, there must be a dispute between the bank and the Company for Electrical Industries to whom the Ministry’s letter is addressed. But there’s no way to tell what this dispute might be, why these ten names were selected, how they will be disposed of, or when the brokerage will be allowed to resume its operations.

It would be nice if someone could pull back the carpet and let us see what this fight is about.

On August 8, the Iraq Securities Commission (ISC) announced that a total of 18 companies would be suspended for failing to submit their 2009 financials. Of these, 6 had already been suspended for never having submitted 2008 financials. (See the table for a complete list of the companies.) As of August 25, only four of the eighteen—HSBC subsidiary Dar Es Salaam Bank (BDSI), Gulf Commercial Bank (BGUC), Al Kindi for Veterinary Medicines (IKLV), and Al Qum’a for Financial Investment (VQUF)—had resumed trading.

There was more bad news for minority shareholders on August 18, when three of the companies that failed to submit 2008 financials—Iraqi for Bottling and Canning (IIBC), Messan Food Industries (IMFI), and Amusement Town (SAMT)—were delisted for not renewing their registration with the Iraqi Depository Center and failing to submit shareholders lists. A fourth company, National for Food Industries (INFF), was also delisted. In addition to the two violations cited for the other three companies, the reasons for INFF’s delisting also included an “inadequate” board of directors report that “does not support the continuance of the company’s business,” “continued losses, even after an infusion of additional capital,” and “cumulative losses exceeding total shareholders’ equity.”

Most of the 11 companies that remain suspended are likely to resume trading in the not too distant future. Indeed, it is not unusual for Iraqi companies to submit their year-end financials late, even though they get five months to prepare them and are allowed an additional two-month grace period after that. Evidently they find the ISC to be something of a paper tiger. And no wonder, as suspension from trading doesn’t really penalize anyone but the minority shareholder.

Even the ultimate penalty of delisting may make little difference to a company’s managers when it is heading for bankruptcy to begin with. Consider the case of INFF, for example, which was suspended in September of 2009 in advance of a rights issue in November and never subsequently resumed trading. This worked out fine for management—they got to go on paying themselves salaries with whatever money was raised. Once again it’s the outside investors, particularly those unlucky enough to have subscribed for the rights, that end up taking the fall.

So far two subscription periods for Warka Bank’s ID 150 bn rights issue have come and gone without any official announcement of the results.  The last date for existing shareholders to subscribe was May 16.  As most of them did not take up their rights, there was a subsequent public offering open to everyone except those eligible to participate in the first round.  These subscribers (if any) had until July 2 to get their money in.

Apparently the chairman, who holds about 60% of the shares, did not take up his own rights, which would naturally lead you to conclude that he must have had new investors lined up to invest in the public offering.  (Otherwise what would have been the point in doing such a huge capital increase in the first place?)  But if that had been the case, it seems that there should have been an announcement by now confirming that the second round shares had been taken up and revealing the identity of the new owners.

But no such announcement has been forthcoming and it now appears that the public offering is going to a final sixty-day third round.  As the stock must be suspended until the new shares are either taken up or cancelled, this would mean that BWAI would not resume trading until some time in September at the earliest.

In the meantime, however, the Iraq Securities Commission has further complicated the process by requiring the bank to reaudit its 2009 financials.  In an announcement dated June 6 (and posted on the ISX website on June 9), the ISC claimed to have found “abnormal figures” in the accounts and requested the company to replace the auditor and redo them.

All this leaves the minority shareholder with nothing but unanswered questions:  Did the chairman actually have any investors to take up the second round shares?  Will they subscribe during the third round?  Did they ever exist in the first place?  Did the ISC’s report scare them away?  Was the timing of ISC announcement, right in the midst of a public offering, a coincidence?  What will the bank’s new auditor conclude? 

And when, if ever, will the shares resume trading?