In the name of God
Ministry of Economic Affairs and Finance
Decree of Supreme Council for Implementation of the General policies of Principle (44) of the Constitution
Supreme Council for Implementation of General Policies of Principle (44) of the Constitution in its session of 15/2/2009, upon proposal of the Divestiture Board and on the strength of the provisions of part (3) and Note (1) of paragraph (a) of Article (40) of the Law on Implementation of General Policies of Principle (44) of the Constitution, approved the "Executive By-law of Methods of Setting The Price For Firms and Way of Enforcing the Said Methods within the same framework "as follows:
Executive By-law for the Methods of Setting the Price for Firms and Way of Enforcing the Said Methods within the Same Framework
Article 1- Terms in this by-law are defined as:
1- Divestible Shares: shares subject to divestiture which belong to the government or divestible state-owned companies.
2- Shares offered gradually: Shares offered in part and gradually, not in block, through Stock Exchange-market or markets outside of Stock Exchange-market.
3- Shares offered in full and in block: shares offered in full or in part at least equivalent to five percent of total shares of the company, through Stock Exchange -market or markets outside of Stock Exchange -market.
4- Shares offered through tender or negotiations: Shares offered for sale in full or in part and in block shares through tender or negotiation in a market outside of the Stock Exchange -market.
5- Active-Market Shares: Shares offered in Stock Exchange-Market, on the basis of reliable prices, which are constantly and commonly traded.
6- Shares offered for price estimation: Primary offer of shares in Stock Exchange -Market or outside of Stock Exchange -Market which will be subject to the Stock Exchange-market regulations.
7- Base Price: The price determined by the share-pricing expert according to the methods set forth in this by - law and set as the basis of the final price of divestiture after approval of the Divestiture Board. The base price for the shares which have an active market is equivalent to the price mentioned on the Stock -Exchange Board .
8- Share - pricing expert: Natural or legal person who takes care of determining the base price of divestible shares.
9- Expected Rate of Return on Investment : Equivalent to the latest rate of on account interest of governmental bond in the year of pricing plus a rate for investment risk which is determined annually by the Stock - Exchange Organization according to the type of the industry.
Article 2- Divestiture shares which have an active market will be priced according to the method mentioned in paragraph (a) of this Article and other divestible shares , depending on the case , will be priced according to other methods mentioned in this by-law.
a) - Market Method (using the prices of Stock-Exchange Market) :
The base price and price of divestiture for shares which are offered in parts and have an active market , is the price mentioned on the Stock - Exchange board at the time of transaction of shares.
The minimum base price for the shares which have an active market and are offered in blocks through Stock – Exchange Market, is the price mentioned on the Stock-Exchange board at the time of transaction of shares. Board of Divestiture may add to the base price and determine a new base price on the strength of the report of Privatization Organization.
b) Profitability Method:
In this method , share price is determined by dividing weighted mean of the modified profit of the last three years prior to the year of pricing before deduction of the tax (on the basis of audited financial statements of the company taking into account profit adjustment factors which are described here below)by the expected rate of return on investment and then such price will be adjusted according to the profit adjustment factors mentioned in paragraph(2).
Note 1 - To determine average relatives of the profit , it is necessary to apply a coefficient to adjusted profit before deduction of the related tax , respectively coefficient (3) for the first year before pricing, coefficient (2) for the second year before pricing and coefficient (1) for the third year before pricing , then total of products shall be divided by (6).
Note 2 -This method is only applicable to the companies whose average relatives
of past years profit, before deduction of this tax and after taking into account the
profit adjustment factors , is at least equivalent to the five percent of the net present value of their assets [as per paragraph (c) of this Article] .
Note 3 - In companies which , according to the accounting standards , consolidated financial statements shall be provided , consolidate profit before deduction of the tax, up to the last three years prior to the pricing year will be the basis of pricing.
1- Profit adjustment factors are as follows:
1-1- Incomes as well as exceptional and unexpected expenses according to the accounting standards.
1-2- Reserves deficit of the last three years as basis of determination of profit as per paragraphs of the report of the auditor and legal inspector and investigation of expert of pricing shares.
1-2-1- If due to the restrictions and ambiguity no amount is mentioned for reserves deficit in the report of the auditor and legal inspector , share pricing expert should make a reasonable estimation of the reserves deficit and include it in its calculations . Adjustment events occurred after the date of balance sheet and after the date of report of auditor and legal inspector and before the date of pricing report shall be taken into account in the adjustment of the related annual profit.
1-3- Incomes and non-operational expenses which do not fall within normal and regular activities of the company such as profit and loss arising out of the sale of fixed assets.
1-4- Other adjustment features according to the report of the auditor and legal inspector.
1-5- Profit of the intended years before the pricing year (after application of the above adjustments ) should be adjusted according to the changes of wholesale prices index , before they are included in determination of average relatives of the intended profit.
1-6- Governmental or non – governmental advantages and restrictions such as dependencies and special trade relations , customs duties , special policies for pricing goods and services ( imported and exported) , received subsidies , non-utilization and non - exploitation of production factors , enjoyment of special banking facilities ( normative ) , access to secure or exclusive market and application of special governmental laws and regulations which affect the companys profit but will not be extended or will change when they are divested will be evaluated by the share pricing expert and will be taken into account as adjustment factors for determination of the profit.
If for any reason the effect of such factors cannot be evaluated, share pricing expert shall disclose such cases with necessary explanations in his report.
2- When the shares price is determined in accordance with the above procedure, it will be adjusted according to the following factors:
1-2- Assets accrued from capital increase ( cash or kind ) will be added to the price of shares , except for the capital increase from the claims of persons and shareholders in the pricing year.
2-2- Resources distributed among shareholders in the pricing year or the year before pricing including distributed dividends will be deducted from the share price.
2-3- With respect to the years for which final assessment paper of corporation income tax is not issued , related tax reserves deficit and possible penalties provided in the direct tax law will be calculated and deducted from the price of shares by share pricing expert .
2-4- Net recoverable value of tangible and intangible fixed assets which have been unused until three years before the year of divestiture and has not affected the operation and profitability process and also recoverable value of rare goods will be added to the price of shares.
2-5- Value of development and supplementary projects including projects which are semi -prepared or ready for operation and are not operated until the end of the year of divestiture will be calculated , in each case , in one of the following ways along with the assumptions and justifications:
2- Net recoverable value
3- Net present value of future cash flow resulting from implementation of the project
4- Cost of the project which is determined according to accounting standards.
Note 1- Value of development projects which thirty months have passed from the date of their operation (since the end of the year preceding the pricing year) will be added to the share price provided that the return of each one on the basis of the rate of return as well as operation period in each year before the year of divestiture are calculated and deducted from the profit of the said years as adjustment factors.
Note 2- Such parts of the capital asset acquisition project whose budget are or will be provided through the public budget resources including semi-prepared projects or projects which are ready for operation and all movable and immovable properties up to the date of operation and divestiture will not be regarded as development projects of the intended company.
2-6- Present value of investment in other companies will be added to the shares price provided that it has not led to the control or significant influence on the recipient company and profits derived from such investments as adjustment factor will also be deducted from the profit of the company.
2-7-Investment in other securities will be added to the shares price. Profits of such investments will be deducted from the company profit.
2-8- Remaining cash inventory balance, investment deposits, bonds and other similar financial assets and rights which are derived from capital increase and cash contribution of share holders in the year preceding the pricing year and have influenced the process of profitability of the company and amount of this effect can be clearly evaluated will be added to the price of shares and its effect on profitability will be deducted as adjustment factor from the profit of the said year. In case such assets have had no effect on the profitability of the company during the preceding year, only the amount of it will be added to the price of shares. In case such assets have had a significant influence on the profitability of the company but this effect cannot be clearly evaluated, adjustment is not required unless the expert deems it necessary to a certain extent.
2-9- For the period between the end of last financial year and the date of pricing shares , a profit equivalent to the product of multiplication of the on account interest rate of governmental bond by the determined price of the company shares will be calculated and added to the price of shares after application of all adjustment factors.
C- Method of net present value of the company assets:
Net present value of the company assets is equivalent to value of all assets after deduction of all debts of the company which is determined as follows : In companies which preparation of consolidated financial statements are required according to the standards , net present value of the assets is determined according to the consolidated balance sheet of the end of the year preceding the pricing year.
1- Present value of the fixed asset of the company whose continuation of activities is under ambiguity will be determined on the basis of the their net recoverable sale - based value by the share-pricing expert using expertise of the qualified persons and preferably official experts of justice administration.
2-Present value of the fixed assets of the company whose activities are continued ( whether profitable or unprofitable ) will be determined on the basis of depreciated replacement value by the share-pricing expert using the expertise of qualified persons and preferably official expert of justice administration.
3- Present value of the inventory of raw materials will be determined on the basis of the replacement values. Present value of inventory of goods in the process of production will be determined on the basis of the cost and present value of the produced goods will be determined on the basis of net recoverable value.
4- In cases where shares of the investment recipient company are accepted in the Stock – Exchange Market and have an active market , present value of the investments which are not consolidated will be determined on the basis of transacted price in the Stock-Exchange Market. With respect to the companies which are not presented in the Stock – Exchange Market and are not active, such value will be determined as follows:
4-1-If such investment is between twenty percent to fifty percent, depending on the case ( and has had a significant influence on the investment recipient company),value of the investment will be determined according to the methods mentioned in this by-law or on the basis of the net worth.
4-2- If such investment is between five percent to twenty percent , depending on the case,( but has not led to the significant influence of the investing company on the recipient company),Value of the investment will be determined in accordance with paragraph( 4-1) , otherwise it will be determined on the basis of information existing in the unofficial market.
4-3- If percentage of shares of the investing company in recipient company is less than five percent, value of the investment will be determined on the basis of net book value of the asset of the recipient company.
5- Present value of the assets and monetary debts is equal to their book value according to the latest audited financial statements of the company, If the share pricing expert relatively ensures of the accuracy of the value of these items , on the basis of documents and evidences obtained , he is not required to re-calculate their present value , otherwise the expert will determine the remaining of every items on the basis of his investigations and will add/deduct the differential of book values and present values to/from the book values , depending on the case, and with regard to the provisions of the following paragraphs.
5-1- Deficit of reserves of bad debts, reserve for debts resulting from the realized expenses and related offences will be determined on the basis of the audit report of financial statements and will be deducted from the above items or will be added to it as adjustment . In case due to the ambiguity or restriction in investigation, determination of the said amounts by the auditor is not possible, pricing expert will make an estimation of them and will disclose his assumptions.
5-2- Reserved amount of end -of- service benefits of the employees of the companies which there is an ambiguity with respect to continuation of their activities will be determined on the basis of the last three months total salary and benefits for each year of their service. With respect to the companies whose activities are continued this amount will be determined according to the procedure of the company and related regulations. For extra work forces in the companies whose activities are continued reserves of end-of- service benefits will be determined on the basis of last three months total salary and benefit for each year of their service.
6- Price of the shares shall be determined in a date no longer than six months from the end of the last financial year of the company , otherwise pricing expert shall determine , in accordance with the above paragraphs, the present value of the items mentioned in the balance sheet on the basis of overviewed , Semi - annual financial statements and reflect it in the assessment report.
Note 1- Any significant event occurred between the end of the last financial year and the date of pricing shares which has had a significant influence on the assets and debts of the company shall be considered by the expert and all unilateral transfers (unilateral events) such as distribution of cash dividend out of components of share - holder equity as well as grants received or accorded during such period will be added to or deducted from the price of shares , depending on the case.
Note 2 - In case semi - annual financial statements are not prepared ; in the profitable companies the profit of the period between the end of the last fiscal year and the date of pricing shares will be determined by the pricing expert by application of the on account interest rate of the bonds to the net value of the assets, and in the unprofitable companies average of the profit or loss of the last three years before the pricing year will be determined by the share pricing expert and necessary adjustment will be made.
D-Determination of the price of minor shares:
In special circumstances and in case due to the minority of the amount or value of shares application of the procedures described in sections (a) to (c) above are not economically feasible, the base price of the shares will be determined on the basis of the nominal value or net book value of the assets (net worth) or any other appropriate procedures upon proposal the privatization organization and approval of the Divestiture Board.
E- Special Considerations:
1- Share pricing expert shall , relying on his expertise and skill , consider in pricing the shares the factors such as type of production , technology used , management, efficient work force, domestic & foreign market of productions, companys position in comparison with trade competitors whether domestic
or foreign, market shares of the companys products.
2-If share-pricing expert achieve quite different results by applying the methods contained in sections (b) and (c) above or determination of the share price on the basis of profitability method is not possible , he should use his professional judgment and apply financial analysis tools such as financial ratios and trends to analyze the obtained prices and finally determine and introduce a single base price for the company shares which shall be based on documented reasons and analyses and represent the fair value of the company.
Article 3- Base Price Adjustment:
a- Base price of the shares which are offered through tender is the expert price approved by the Divestiture Board. In case there is no purchaser for the shares at the base price , Divestiture Board , relying on the feasibility report of the Privatization Organization and considerations contained in the report of shares pricing expert, will determine and announce lower prices for the next tenders.
b- Base price for the shares which are offered for the first time through Stock-Exchange Market is the expert price determined in accordance with the procedure set forth in section (b) of Article (2) of this by-law .For the shares which are accepted in Stock- Exchange Market but doesn’t have an active market, expert price will be on the basis of the price approved by the Divestiture Board, but to discover the price, related shares are required to be traded for appropriate period, in sufficient numbers, by various agents. If discovered price is less than the base price, the discovered price will be valid for divestiture. Offering such shares in blocks in Stock Exchange Market before discovering the price is forbidden and after discovery, provisions of paragraph (2) of section (a) of Article (2) will be applied.
C- Base price of the shares sold through negotiation is the price approved by Divestiture Board, but Divestiture Board, relying on the feasibility report of Privatization Organization and on the basis of considerations contained in share pricing expert report, will determine the permitted range of deduction or increase of the share price.
4-1- Base price of the shares which are offered in blocks are valid until meeting of the general assembly of shareholders for the approval of new financial statements or change in the company capital is held, unless Divestiture Board specify a shorter term for its validity.
4-2- Features, terms and conditions of appointing share-pricing experts will be approved by the Divestiture Board upon proposal of Managing Director of Privatization Organization in accordance with related regulations.
4-3- Guidelines and performance framework and method of reporting on the pricing of divestiture shares will be prepared by the Ministry of Economic Affairs and Finance according to provisions of this by-law.
4-4- Member of board of directors and managing director of the companies whose shares are divestible and government or governmental companies have control or significant influence on them are obliged to provide the share-pricing expert with the required information and thus minimize the ambiguities of the share pricing. Members of the board of directors and managing director of such companies are individually or jointly, depending on the case, liable for any deficiency in the share value resulting from their failure to comply with this paragraph.
Article 5- Payment of the price by the purchaser will be as per the following arrangements:
a- If sold shares have an active market, payment of the price will be according to the principles practiced in Stock-Exchange Market.
b- If shares are offered and sold in a manners different with that of Stock-Exchange Market, payment of the price shall be made in accordance with the by-law of transactions of the Privatization Organization and observing provisions of this by-law.
Article 6- Pricing and procedure of its application to the ownership right of saleable assets of divestible firms, properties and good will, stock and subscription privilege derived from divestible shares or stocks of the governmental firms or those affiliated to the government, in all cases where divestiture of firms is not in the form of public or private joint stock companies will be in accordance with the provisions of this by - law, regardless of the procedure of divestiture.
Note- Amount of rental and management fee in divestiture by means of rental and management contract related to the exploitation and management right of the firms will be within the framework of guidelines which will be proposed by Privatization Organization and approved by the Divestiture Board.
Article 7- Ministry of Economic Affairs and Finance shall supervise the implementation of this by-law.
Seyed Shamseddin Hosseini
Minister of Economic Affairs and Finance