Tax break on capital increase to revive beleaguered companies

Financial Tribune | Amir Havasi: The Iranian Parliament decided on Saturday that companies with losses exceeding half of their capital will be exempt from taxation on capital increase through revaluation of fixed assets. 

The measure, once implemented, can help a number of financially struggling companies stand on their feet, with one of the prime beneficiaries being Esfahan Steel Company.

The measure was discussed in an open session of the parliament, according to Mohammad Reza Tabesh, a member of Money and Credit Council as well as Majlis Planning and Budget Commission.

“Tax on capital increase through revaluation of assets is now zero for companies subject to Article 141 of the trade law,” Tabesh told Bourse 24. “This will be vital for these firms, as it will save them from bankruptcy and revive their production.”

Article 141 holds that if losses wipe out at least half of a company’s nominal capital, the board of directors is mandated to hold an extraordinary shareholders meeting to vote on either the company’s dissolution or the reduction of nominal capital to the current actual amount.

Tax exemption on capital increase via asset revaluation was abolished, following the conclusion of the Fifth Five-Year Development Plan (2011-15), and was replaced with a 25% flat rate.

Tabesh’s announcement is the clearest signal yet that taxes have been removed following several conflicting announcements in the last few months by the head of Management and Planning Organization, Mohammad Baqer Nobakht, the head of Iran Chamber of Commerce, Industries, Mines and Agriculture, Gholamhossein Shafei, and Chairman of Securities and Exchange Organization Shapour Mohammadi.

Saving a Giant and Selling it

Capital increase through asset revaluation does not really bring any new money into company accounts and is only a nominal change to keep Article 141’s heavy shadow at bay.

Accordingly, this will only effectively help a select few, such as the troubled Esfahan Steel Company that has been put up for sale many times in recent years. Increasing the company’s nominal capital through asset revaluation will help it to be offered at the “right” price, company managers say.

ESCO is currently grappling with 21.4 trillion rials ($455 million) of accumulated losses with a nominal capital of 33.18 trillion rials ($706 million). A mix of mismanagement (rampant increase in workforce size to five times what current output requires, failure to cut down prices during a global steel bust and unaccounted expenses) and unfavorable local and global market conditions, including weakening demand in the construction sector and increasing coal prices, has sent ESCO down the spiral.

Esfahan Steel Company is Iran’s oldest steelmaker and the largest producer of structural steel. It was jointly established in 1965 by Iran and the Soviet Union’s Tyazhpromexport Company. Its steel production facilities became operational in 1972.

“Zob-Ahan’s (ESCO’s Persian name) nominal capital will reach 80 trillion rials ($1.7 billion) through asset revaluation and only then its price would be right … It is wrong to look at market quotes for prices, as the 33.1-trillion-rial capital does not properly reflect the company’s real value,” Saeed Fazel, a member of ESCO’s board of directors, told Financial Tribune.

Ironically, however, most of Iranian Privatization Organization’s attempts to sell ESCO’s stakes have failed due to what traders deemed as “unrealistically high prices”.

Stakes in the company owned by Steel Pensioners Fund and Social Security Organization–16.75% and 55.95%–have been offered so many times on Iran Fara Bourse that it has become an inside joke in the over-the-exchange market.

The offerings, which started about three years ago, caused the sale price to sink every time it failed to attract buyers. Reports indicate IPO eventually gave up and settled for a retail sale of the 16.75% stake on Saturday with share prices at less than 1,000 rials (2 cents).

Indian Buyers?

Fazel’s idea of “right” sale price does not seem to have attracted many local buyers, leading one to believe that ESCO and SSO officials are vying for foreign buyers.

Morteza Lotfi, the head of Social Security Investment Company, told reporters on February 7 that an Indian company has come forward as a potential buyer.

A week later just before President Hassan Rouhani’s visit to India, Chilan Online–Iran Steel Producers Association’s news agency–reported that SSO officials will accompany the Iranian delegation to negotiate the sale with India’s Essar Steel.

Essar Steel, however, was forced into insolvency proceedings last year after an extended default, Financial Times reported.

The company was founded by the Ruia family into one of India’s largest producers of the metal with an annual production capacity of about 10 million tons.

A bankrupt steelmaker would seem unable to buy another plant, suggesting that ArcelorMittal, the Luxembourg-based steelmaker bidding for Essar Steel, is ESCO’s actual buyer.

SSO officials declined to comment on the issue.

An ESCO official, who chose not to be named, told Financial Tribune that ArcelorMittal had also vied for the Iranian steelmaker before.

“They offered an industrial plan to completely renovate and upgrade the factory at their own expense and eventually purchase it … Their proposal was not accepted due to certain concerns,” the official said without elaborating.