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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Mongolia Approves New Securities Market Law

By Elena Fehrbach

Jun. 15 – Mongolian Government has just passed the new version of the Securities Market Law. The Law marks the new milestone in 22 years history of the capital market in Mongolia. The Law represents a strong, reliable and supportive document which is compliant with international standards. It is aiming to attract the required investments to Mongolia and provide conditions for better financial liquidity that would be comparable to some other Asian Stock Exchanges. Undoubtedly, the key developments of the new Law are the dual listing approval, custodian banking activities and stronger control of all the activities by the State regulatory authorities.

Dual listing
This provision allows companies listed on the Mongolian Stock Exchange (MSE) to list internationally and internationally- listed companies to list domestically. Interesting point is that the Law doesn’t prescribe the amount of outstanding shares that must be listed on the MSE. Existence of such condition is very important as it will ultimately allow companies to choose the number of shares to list with respect to the market size rather than the size of company’s capitalization. The stock issue at the MSE would require mandatory approval of the Financial Regulatory Commission of Mongolia, which is the part of the listing process.

The dual listing provision of the new Law was the most expectable development. According to Mr. Khangai Altai, the Chief Executive of the MSE, the new Law would attract more companies for the listing by introducing the international standards. He expects the total market capitalization of the MSE stock can climb to US$30-40 billion capitalization compared to the current capitalization of US$1.3 billion.

Custodian banks and investment funds
This is the first case when a Law in Mongolia has introduced the system of custodian banks. The provision for custodian banks with the function to provide custody for underlying securities will enable the establishment of custodian operations in the market.

The new Law also includes the detailed provisions on the following:

  • Issuance of depositary receipts based on underlying securities and other derivative products, which provide a wide range of options for investors;
  • Nominal and beneficial holders. Nominal holder is a regulated entity registered as a depositor in the securities ownership rights registry. The actual owner who has registered its securities under the nominal holder and who is legally entitled to any proceeds from securitiesis a Beneficial holder under the new Law;
  • Post payment system;
  • Stronger regulations and clear penalties; and
  • Other provisions in line with international standards.
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