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GUIDE TO IRANIAN MARKET

Beginning in 1989, the buy-back method of transaction has become a feature of the national economy, especially in gas and oil industries. It is being supported by the Government as an efficient means of attracting foreign capital, services and technical know-how, while reducing foreign exchange expenditures, and expanding exports.
A number of buy-back arrangements have been implemented with various foreign companies, and efforts for more such deals continue.
The specific procedures for entering into buy-back agreements with Iranian parties are explained below.

What are the legal bases for buy-back transactions in Iran?
How does Iranian law define a buy-back transaction?
What exactly is meant by the terms Supplier and Buyer?
What guarantees are provided in buy-back contracts for their proper execution and fulfillment?
How is the collateral needed for issuing bank guaranties evaluated?
How effective is the guarantee issued by the concerned managing bank,regarding the payment of the supplier's installments through the export of goods and services?
What are the characteristics of a buy-back contract?
What are the other main points to be included in a buy-back contract?
According to the contract, what will be the method for paying sums due to the supplier?
How stable are permits related to buy-back transactions? What effect do new decisions have on already signed buy-back contracts?
To what extent can the conditions included in contracts be altered?
How are disputes between parties to a buy-back transaction settled?
Which authority is charged with supervising the execution of buy-back transactions?

What are the legal bases for buy-back transactions in Iran?

   The laws of the Five-Year Economic, Social and Cultural Development Plans of the Islamic Republic of Iran as well as the Annual National Budget Acts, have sanctioned buy-back transactions as a method of attracting foreign investments. The government is permitted to resort to buy-back transactions as a means of partially meeting its industrial and mineral needs in connection with exports, production and investment. The aforesaid laws have empowered the government to enter into buy-back deals through the country's banking system in order to meet some of its needs in connection with sub-structural projects, and increasing the export-oriented production capacity of Iran. The Council of Ministers has approved executive rules for buy-back transactions and the Central Bank of the Islamic Republic of Iran has issued the necessary directives in this respect.

How does Iranian law define a buy-back transaction?

   Generally speaking, a buy-back transaction is a form of countertrade whereby plants, machinery, production equipment and technology are supplied, in exchange for the goods which will be produced directly or indirectly by means of such facilities. However, the buy-back transaction has acquired a broader meaning under Iranian law.
   As defined by Article 2 of the executive rules approved by the Council of Ministers, a buy-back transaction refers to a deal in which the supplier wholly or partially puts the needed goods and services for the establishment, expansion, reconstruction, improvement or continued production of manufacturing enterprises of the country at the disposal of the producer.
   The price of the said goods and services, after deducting the mount of down payments plus the related costs disbursed on the basis of the concluded contract, is paid to the supplier or buyer through the delivery of goods or services of the producer and/or through delivery of other industrial and mineral goods and services produced in Iran.

What exactly is meant by the terms Supplier and Buyer?

   The Supplier is any natural person or legal entity who provides the Iranian producer with goods or services in a buy-back transaction. The Buyer refers to any natural person or legal entity who, by receiving goods and services from the Producer or Exporter, pays up the claim of the supplier from the producer. The Exporter refers to any Iranian natural person or legal entity who pays the price of goods and services, received by the producer, to the supplier by delivery of his goods or services to the supplier or buyer.

What guarantees are provided in buy-back contracts for their proper execution and fulfillment?

   Governmental or private companies are responsible for implementing buy-back deals. Hence, in the framework of contracts signed, they must settle the price of imported raw materials, intermediate goods, machinery and required services, through the export of finished goods or services. In this connection, as indicated by Note 22 of the Law of the Second Five-Year Plan, the concerned managing banks and insurance companies are bound to issue the necessary guarantees in favor of the supplier, in lieu of sufficient collateral (including the Iranian company's assets, imported and manufactured goods, shares and other means offered by the said company.(The concerned managing bank will also obtain acceptable assurances from the foreign party for the export of the manufactured goods. In any case, in buy-back transactions, the export of manufactured goods should be guaranteed by the concerned foreign companies, according to the conditions stated in the contract.

How is the collateral needed for issuing bank guaranties evaluated?

   All related securities are to be calculated at the floating rate of the relevant foreign exchange.

How effective is the guarantee issued by the concerned managing bank,regarding the payment of the supplier's installments through the export of goods and services?

Banks, in any event, are bound to meet their undertakings to the supplier. In case the producer or the exporter does not meet the obligations stipulated, the bank shall act with a view to paying the installments due to the supplier, through taking possession of the collateral it is holding. With regard to government-owned companies or those affiliated to the government, municipalities and other public agencies, whose foreign exchange obligations have been guaranteed by the bank without demanding the needed securities, the installments due shall be directly withdrawn from their bank accounts. Thus, there is no need on the part of the supplier to worry about a default on the part of the producer or exporter.

What are the characteristics of a buy-back contract?

   Contracts in need of a bank guarantee must have the economic, technical and technological confirmation of the relevant ministry. Regarding the financial legal and banking arrangements status-with due consideration given to the domestic and international financial situation and the Central Bank of Iran's policies-agreements should be confirmed by the managing bank.
   The managing bank or banks are those that are designated by the Central Bank to handle the affairs of buy-back transactions. The managing bank may act alone or in conjunction with other authorized banks or establishments which provide credit.
   The contract must contain specific arrangements for determining the price of export goods or services, based on international rates. In a buy-back contract, an independent and mutually acceptable inspection agency must be identified which will survey the quality of export goods in order to settle sums due to the supplier. The agency's view on the quality of the said export
goods is conclusive and binding for both parties.

What are the other main points to be included in a buy-back contract?

A typical buy-back contract should define all rights and obligations of the transacting parties, particularly with respect to transfer of the goods and/or services; financial relations; settlement of disputes; performance standards; methods for upgrading technological capacity over the period of the contract and related maintenance services; specifying the quantity and amount of exportable finished products; outlining a schedule to accommodate fluctuations in pricing and production costs and rates of foreign exchange over the long term; transport and delivery of the goods to be imported or exported; training of the required expert staff and increasing the skills of the existing staff and fixing a definite expiration date for the contract....

According to the contract, what will be the method for paying sums due to the supplier?

The contract may be arranged so that the payment of the sums due to the supplier by the producer is made through delivery of goods and services from the producer to the supplier or the buyer. In cases approved by the relevant ministry, payment can be in the form of delivery of industrial and mineral goods or services of the exporter to the supplier or the buyer. The contract may include the payment in cash or any other form to the supplier as a down payment or payment in return for shipping documents up to a maximum of 20 percent of the value of the goods and services rendered by the supplier. The amount of the down payment must be agreed to by the relevant ministry.

How stable are permits related to buy-back transactions? What effect do new decisions have on already signed buy-back contracts?

Permits issued by the relevant ministries for the import and export of goods subject to buy-back contracts, are binding on all related organizations and institutions. As long as buy-back arrangements and the obligations arising out of them are in force,
decisions by executive bodies, which may in any way result in a discontinuation of buy-back transactions, will not affect contracts signed prior to the said decisions.

To what extent can the conditions included in contracts be altered?

Any amendment, change or renewal of a buy-back contract mutually agreed upon by both parties, is permitted when endorsed by the managing bank.

How are disputes between parties to a buy-back transaction settled?

Parties to a buy-back transaction may refer to Iranian courts of law and the relevant authorities to settle disputes and claims arising from contracts. If necessary, they can resort to courts of law in other countries.  

Which authority is charged with supervising the execution of buy-back transactions?

In order to expedite the execution of buy-back contracts, and alleviate problems resulting from this process, a board has been established consisting of deputy ministers of the Ministry of Economic Affairs and Finance, Ministry of Commerce, the Plan and Budget Organization, the Central Bank of Iran, the relevant ministry, a representative of the managing bank and the Iran Chamber of Commerce, Industries and Mines.
The said board is the highest authority charged with supervising buy-back transactions and making decisions which are binding for all natural persons and legal entities. The board is chaired by the Deputy Minister of Economic Affairs and Finance in charge of banking and insurance. The managing bank is bound to send a copy of all the final contracts to the said board and provide it with monthly progress reports on all buy-back contracts.

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