Insurance and banking are among the fields that, in addition to their extraordinary significance, are perhaps considered some of the most attractive sectors for the presence of foreign companies. However, there are ambiguities regarding the activities of foreign investors in these areas, which will be addressed. It should be noted that addressing these two sectors does not imply that there are no ambiguities in the laws or practices of relevant authorities in other fields of activity for foreign companies. Therefore, each sector requires a thorough and detailed examination of the specific laws governing that industry, which demands the precision and expertise of legal professionals. Navigating foreign direct investment in Iran’s insurance and banking sectors requires a clear understanding of the legal framework. Karimi and Associates Law Firm offers expert guidance and tailored solutions to address complexities.
Foreign Direct Investment in Iran
Despite the fact that having a definition of foreign direct investment (FDI) in the Investment Law could have resolved many ambiguities regarding acceptable investments, no such provision is found in the mentioned law or its regulations. However, in a table prepared by the Ministry of Economic Affairs and Finance in line with Article 3 of the regulations, foreign direct investment is defined as “the legal participation of a foreign investor in an existing or new Iranian company.”
It seems that to achieve a precise understanding of the concept of “direct” foreign investment, we must compare it with “indirect” foreign investment. The factor that distinguishes direct from indirect investment is the issue of “management and control.” The International Monetary Fund (IMF) has also adopted this criterion, defining foreign direct investment as investment in companies that are effectively controlled by foreign individuals or entities. In contrast, the concept of indirect foreign investment refers to investments where the relationship between share ownership and company control is not direct. In such investments, the investor, for example, by purchasing securities, does not participate in the company’s decision-making or management.
According to Clause 1, Paragraph “B” of Article 4 of the Foreign Investment Regulations, two specific characteristics are outlined for foreign direct investments. The first characteristic is that “investment is permitted in all areas authorized for private sector activities.” The second is that “there are no restrictions on the percentage of foreign investors’ participation.” It can be concluded that foreign direct investment is not feasible for all types of contractual arrangements; rather, the types of investments mentioned in Paragraph “B” of Article 3 must be carried out jointly with an Iranian partner. This requirement aligns with the nature of such investments, which are based on contractual agreements. Given that the authorized areas for private sector activity are defined under Article 44 of the Constitution, we will first explain this article, then refer to the General Policies of Article 44, and finally examine the possibility of engaging in insurance and banking activities.
Article 44 of the Constitution
According to the article 44: “The public sector includes all major industries, core industries, foreign trade, large mines, banking, insurance, energy supply, dams and major water supply networks, radio and television, post, telegraph and telephone, aviation, shipping, roads and railways, and similar sectors, which are under public ownership and managed by the government. The private sector includes those parts of agriculture, livestock, industry, trade, and services that complement the economic activities of the public and cooperative sectors.”
Although the legislation does not specify the exact scope and boundaries of each sector, it has entrusted this to the law, as stipulated in the following provision of the mentioned article: “The law defines the details, scope, and conditions of all three sectors.” For example, although foreign trade is designated as a public sector activity in the aforementioned article, through the adoption of Export and Import Laws and Regulations, which authorize the private sector to take part in export and import, part of foreign trade has been allocated to the private sector, acting as a complement to the government’s economic activities. Therefore, investors who engage in direct investment under clause “a” of Article 3 of the Investment Law must refer to the applicable laws in the country to understand the authorized fields for activity.
General Policies of Article 44
According to Clause 2 of Section “A” of the aforementioned General Policies of Article 44, it is stipulated that the government has no right to engage in new economic activities outside the matters listed in the first part of Article 44. The government is obligated to transfer any activity that does not fall under the categories mentioned in the first part of Article 44 to the cooperative, private, and non-governmental public sectors by the end of the Fourth Five-Year Development Plan. Therefore, although, as mentioned earlier, the scope of the public sector in Article 44 is laid out only through mentioning examples, the general policies of Article 44 limit the scope of this sector to the specific matters outlined in the mentioned Article. The second clause of Section “A” of these policies allows the private sector to engage in certain areas explicitly assigned to the public sector by Article 44 of the Constitution. With the opportunity for investment in these areas, as provided in Clause “A” of Article 3 of the Investment Law, foreign investor participation in these areas will also be possible. The following areas are introduced:
- Large industries, mother industries (including downstream oil and gas industries), and large mines (excluding oil and gas).
- Foreign trade activities within the framework of the country’s commercial and currency policies.
- Banking by non-governmental public institutions, cooperative joint-stock companies, and public joint-stock companies, subject to a law determining the maximum shareholding limit for each shareholder.
- Power supply, including electricity production and import for domestic use and export.
- All postal and telecommunications services, except for the core telecommunications networks, frequency allocation matters, main network segmentation and exchanges, and management of basic postal service distribution.
- Roads and railways.
- Aviation (air transport) and shipping (marine transport).
Foreign Direct Investment in the Insurance Industry
Although the participation of foreign individuals in Iran’s insurance industry was permitted under the Law on the Establishment of Central Insurance of Iran and Insurance Operations, enacted on 20 June 1971, this participation came to an end with the nationalization of the industry under the Law on the Nationalization of Insurance and Credit Institutions. Not only did this end foreign participation, but it also eliminated the possibility of establishing private domestic insurance companies. However, with the passage of the Law on the Establishment of Non-Governmental Insurance Companies, domestic private individuals were granted the opportunity to invest in this industry, establish insurance companies, and operate within it. Nonetheless, since this law explicitly refers to the establishment of insurance companies by Iranian individuals (natural persons), it has been assumed that conditions for foreign investment in this industry are still not available. However, pursuant to Clause (e) of Article 3 of the Foreign Investment Law, “direct foreign investment in areas where private sector activity is permitted” has been made possible. Furthermore, the executive regulation of the aforementioned law specifies as one of the “special features and facilities of direct foreign investment” that “investment in all areas permitted for private sector activity is possible.”
Furthermore, according to Regulation No. 40 concerning the establishment of non-governmental insurance institutions, which was approved by the High Council of Insurance on January 21, 2002, a “Iranian natural person” refers to a citizen of the Islamic Republic of Iran. However, in defining a “Iranian legal entity,” it is stipulated as follows: “A legal entity that holds Iranian nationality and is registered with the competent authorities under the laws of the Islamic Republic of Iran.” Therefore, it appears that what the legislator disapproved of was granting permission for the direct establishment of insurance institutions by foreign individuals. This explains why, regarding Iranian legal entities, no consideration has been given to the shareholders of such entities, allowing these shareholders to be non-Iranian.
Foreign Direct Investment in the Banking Industry
In the banking industry, a situation very similar to what occurred in the insurance industry has unfolded. If we examine the historical background of foreign involvement in this sector, we find that foreign individuals began banking activities in Iran in 1887 with the establishment of a British bank. The Monetary and Banking Law of the country, enacted on July 9, 1979, addresses the procedures for establishing domestic banks, the permissible level of foreign investment in these banks, and the process of establishing foreign banks. However, with the enactment of the Law on Nationalization of Banks on June 7, 1979, not only was foreign involvement prohibited, but the establishment of private domestic banks was also banned. The enactment of the Law Permitting the Establishment of Non-Governmental Banks on (April 10, 2000, paved the way for the establishment of private banks after nearly 20 years. Nonetheless, according to this law, permission to establish banks by the non-governmental sector was granted exclusively to Iranian natural and legal persons, raising ambiguities about the possibility of foreign investors participating in this area. To address such ambiguities, several points need to be considered, which are outlined below:
First Point: Similar to the insurance industry, while the aforementioned law allows only domestic individuals to establish private banks, the enactment of the Investment Law and Clause “A” of Article 3 of this law permits foreign investors to operate in areas where private sector activities are allowed. Second Point: Regarding the extent of foreign participation, the Monetary and Banking Law of 1972 established regulations that remain valid Article 31 of the Monetary and Banking Law states: Any bank with more than 40% of its capital owned by foreign natural persons or foreign legal entities is considered a foreign bank under this law and must be registered as such. Iranian banks cannot transfer more than 40% of their shares to foreign individuals or legal entities whose entire capital is not owned by Iranian nationals. The transfer of shares in Iranian banks to foreign governments is strictly prohibited. As can be observed, Article 31 permits foreign participation up to 40% of a bank’s capital. Foreign involvement exceeding this percentage causes the bank to be classified as a foreign bank, for which no authorization currently exists for establishment. With a dedicated team specializing in diverse areas of law, Karimi and Associates Law Firm, ensures comprehensive support and tailored consultations.