“The Requirements for Initial Public Offerings on the Iraqi Stock Exchange,”

International Law Office Brief, February 28, 2012 – By Thomas W. Donovan

Introduction
The Iraqi Stock Exchange (ISX) is preparing for the initial public offering (IPO) of several large domestic telecommunications companies, pursuant to the previously negotiated operating licences. Such IPOs will undoubtedly cause consternation and difficulties, given their size and domestic compliance requirements. Many observers have even labelled the ISX too small to accommodate the larger telecommunications companies. However, while the challenges are clear, the legal foundations and domestic capabilities of the ISX itself provide a platform that can accommodate the large scale roll-out of such IPOs. The role and requirements of the individual institutions are discussed below.

Securities Commission
The Iraqi Securities Commission has the authority to regulate the offer, purchase and sales of securities traded on securities markets in Iraq, as well as acting as the Iraqi capital markets regulator. The commission is established and its authority defined by the Securities Law 2008. Chapter 3 of the law provides the framework for the public offer of securities.
An independent government commission, its commissioners are accountable to the prime minister, but cannot be dismissed, unless for significant cause.

Trading on the ISX
The ISX is responsible for admitting securities to trading on the exchange. The ISX is a private non-profitmaking body owned by its licensed members, with an executive body, based in the Korodha area of Baghdad. It was established in 2004 (and was previously known as the Baghdad Stock Exchange). It operates on a daily schedule – the average value of weekly traded shares is approximately ID28.1 billion and the weekly trading volume is approximately ID51 billion (approximately $43.5 million). However, only 543 individual transactions a week are executed by non-Iraqis.

Companies Registrar
For a company to have an IPO of its securities, other regulators will also play a role. These include the Companies Registrar (particularly if the company must convert into a public joint stock company, as required under the law). It may also be necessary to seek the approval of other regulators, depending on the nature of the business. The registrar is the section of the Ministry of Trade that regulates and confirms the domestic compliance of the prospective companies. If the companies are not domestically compliant with various issues – including tax, social security contributions and labour filings – the registrar will not allow the IPO to proceed. Moreover, only joint stock companies are allowed to list on the ISX. The domestic entity and structure of the joint stock company must be confirmed by the registrar in order for it to proceed.

Public offer of securities rules
The law prescribes that a public joint stock company is the only entity which is entitled to offer its securities to the public. There is a maximum free float of 80% of the initial issued share capital (with a minimum requirement for the founders to have a 20% holding). There does not appear to be a minimum free float requirement.
A public offer of securities may be carried out in three ways:

  • by way of an underwriting (which may either be the underwriter committing to resell the shares of the issuer, or a guarantee to sell a certain percentage of the shares to the public);
  • a ‘best efforts underwriting’, under which the underwriter agrees to use “good faith attempts to affirmatively sell” the shares to the public, acting as agent for the issuer; or
  • a subscription arrangement (presumably a private placing) which may be carried out in accordance with the Securities Commission’s rules.

Listing and admission to trading
The law provides that an issuer that wishes to have its securities listed or admitted to trading on a licensed stock exchange (including the ISX) must meet the requirements set out by that exchange and approved by the Securities Commission. These include a requirement that the issuer sign an agreement with the ISX, under which it agrees to be contractually bound by all applicable listing and other requirements of the ISX, including the disclosure and financial reporting requirements.
A company with securities listed on the ISX may sell shares directly to foreign investors and use the proceeds in its business. Generally, there are no foreign ownership restrictions in Iraq in relation to holdings in companies incorporated in Iraq.

Comment
Although the theoretical challenges are great for the large IPOs which are currently scheduled, the legal foundations and established institutions remain clear and capable. Whether such institutions can accommodate the sheer size of the roll-out is the main question which will dominate Iraqi IPO schedules in 2012.