This article considers the risks investors face when seeking to exit investments in Iraqi securities, and how those risks can be assessed and managed. Investors buying shares listed on the Iraq Stock Exchange, or unlisted shares in Iraqi companies, often focus on the investment case: the company’s growth, profitability and valuation. Exit receives less attention until the investor wants to sell. At that point, limited market depth, transfer procedures, regulatory approvals and difficulties repatriating proceeds can significantly affect the price and timing of exit.
Liquidity risk is not unique to Iraq, but the Iraqi market has particular features. Trading volumes in many listed companies are low, a significant proportion of shares in listed companies may be held by founders and the state, and procedures for large transactions and foreign investors involve additional steps. Understanding these features at the time of investment allows investors to price liquidity risk and plan exit routes.
The Interim Law on Securities Markets, issued as Coalition Provisional Authority Order No. 74 of 2004, and the rules of the Iraq Securities Commission, the Iraq Stock Exchange and the Iraq Central Depository govern trading, settlement and transfers of listed securities, including rules applying to non-Iraqi investors. The Companies Law No. 21 of 1997, as amended, governs transfers of unlisted shares. Sector legislation may require approval for acquisitions of significant stakes. Central Bank of Iraq requirements govern repatriation of proceeds. The Income Tax Law No. 113 of 1982, as amended, governs tax on gains.
Assessing market liquidity
For listed shares, investors should assess trading history, including average daily volume, the number of trading days with activity and the bid-ask spread. They should consider the free float, meaning the proportion of shares not held by founders, the state or long-term holders. A company with a small free float and low volumes may be difficult to exit without moving the price significantly.
Investors should also consider market-wide factors, such as investor participation, the presence of institutional investors and market sentiment. Liquidity can decline sharply in periods of uncertainty.
Understanding block trade procedures
Investors holding large positions may not be able to exit through ordinary trading. Stock exchange rules may provide procedures for large off-market or negotiated transactions, subject to conditions such as price limits, approval by the exchange or commission and disclosure. Investors should understand these procedures, including how long they take and what conditions apply, before acquiring a large position. Commercial and regulatory advice in Iraq can explain the procedures applicable to large transactions.
Identifying transfer restrictions
Transfers may be restricted by:
- Regulatory approvals. Acquisitions of significant stakes in banks, insurers and other regulated companies may require approval, limiting the pool of buyers.
- Foreign ownership limits. Some sectors limit foreign ownership.
- Lock-up arrangements. Investors who acquired shares in an offering or private placement may be subject to lock-ups.
- Pre-emption and consent rights. For unlisted shares, the articles and the Companies Law may give other shareholders priority rights or require consent.
These restrictions affect who can buy and how long a sale will take.
Planning exit for unlisted investments
Exit from unlisted Iraqi companies depends on negotiated rights. Investors should seek tag-along and drag-along rights, put options, registration rights in the event of a listing and cooperation undertakings from the company and other shareholders. Corporate advice in Iraq can help negotiate exit rights at the time of investment.
Repatriating proceeds
Foreign investors will want to repatriate sale proceeds. This requires a bank account through which proceeds can be received, conversion where proceeds are in Iraqi dinars and transfer abroad in compliance with Central Bank requirements. Banks may require evidence of the original investment, the sale, tax compliance and the investor’s identity. Investors should keep records of their investment and maintain banking arrangements throughout their holding period. Investment-licensed investments may benefit from guarantees on repatriation under the Investment Law.
Considering tax on exit
Gains on the sale of Iraqi shares may be subject to tax, depending on the type of shares, the investor and the applicable rules. Tax treatment may differ between listed and unlisted shares. Banks or the registry may require evidence of tax payment before completing transfers or remitting proceeds. Tax advisory services in Iraq can assess the tax consequences of exit.
Managing liquidity risk in portfolio construction
Investors can manage liquidity risk by limiting position sizes relative to trading volumes, diversifying across companies, building positions gradually, negotiating exit rights for larger stakes and maintaining relationships with potential buyers, such as strategic investors and other institutions. Funds with fixed lives should consider whether their exit timetable is realistic given market liquidity.
Disclosing liquidity risk to investors
Funds and investment vehicles offering exposure to Iraqi securities should disclose liquidity risk clearly to their own investors, including the potential for delays and discounts on exit. Accurate disclosure reduces the risk of disputes if exit proves difficult.
Preparing documentation for exit throughout the holding period
Exit is often delayed by missing documents rather than by legal obstacles. Banks repatriating proceeds may ask for evidence of the original investment inflow, the purchase transaction, the investor’s registration with the Iraq Central Depository, dividends received and taxes paid. Buyers may ask for evidence of title and the absence of encumbrances.
Investors should maintain an investment file from the start, containing:
- Evidence of capital inflow. Bank records showing the transfer of funds into Iraq for the investment.
- Purchase records. Trade confirmations, transfer documents and registry or depository records.
- Corporate actions. Records of dividends, rights issues and capital changes affecting the holding.
- Tax records. Evidence of tax paid or exemptions claimed.
- Investor documentation. The investor’s corporate documents and authorisations, kept current.
A complete file allows the investor to respond to bank and buyer requests quickly, shortening the time between sale and receipt of proceeds outside Iraq.
Illustrative example. A foreign fund acquires eight per cent of an Iraqi listed bank over several months. Three years later, it decides to sell. Average daily trading is a small fraction of its holding, so selling through ordinary trading would take many months and depress the price. The fund identifies a strategic investor, but the acquisition would take the buyer above an approval threshold, requiring Central Bank consideration. The fund negotiates a block sale conditional on approval, completed through the exchange’s procedure for large transactions, and arranges repatriation of proceeds with documentation prepared in advance.
Conclusion & how Etihad Law Firm can help
Investor exit and liquidity risk in Iraqi securities should be assessed at the time of investment, not at the time of sale. Market depth, block trade procedures, transfer restrictions, repatriation and tax each affect the price and timing of exit.
Etihad Law Firm advises investors on exit planning, block transactions, transfer procedures and repatriation for investments in Iraqi securities. We help clients structure investments with a realistic path to liquidity.