Friday, August 16, 2013

MONGOLIAN EQUITY MARKET: HISTORY AND CURRENT SITUATION


           by Nandin-Erdene banzragch AUstralian National university

   Current regulation
Mongolia is a post-communist country in Central Asia with its 3 million population and 1.5 million sq km area. Mongolian stock market has been developed as a part of economic transition from a centralised economy to a market economy since 1991. Currently, Mongolia has one stock exchange (Mongolian Stock Exchange), that wholly owned by Mongolian government. Mongolian Stock Exchange was established in 1991 for privatizing state owned enterprises and organizing securities trading (Bolormaa, 2006).
Since 2006, Mongolian Government has been trying to strength its regulation and legal framework for corporate governance and stock market (Ayush, 2004).  The Mongolian basic laws for regulating corporate governance are Company Law, Securities Market Law and Auditing Law (World Bank, 2009). Also, there are specialized regulations including listing rules of MSE, Mongolian Corporate Governance code, that approved by Financial Regulation Committee of Mongolia.
The principal enforcement government institutions for corporate governance are the Ministry of Finance, which is responsible for enforcing accounting and auditing standards, the Financial Regulation Committee, which is responsible for regulating and supervising securities market, the State Property Committee, which is responsible for managing privatization of state owned enterprises or state owned shares. In addition, Mongolian Stock Exchange is responsible for organizing securities market and enforces its listing rules, the Securities Clearing House & Central Depository Co. Ltd (wholly state owned), which clears and settles trades, and serves as the central depository (Bold, 2011;World Bank, 2009; frc.mn).  
Along with those government institutions or state owned companies, there are non-government organizations which aiming to develop good corporate governance practice in Mongolia such as Mongolian Corporate Governance Development centre (partially funded by IFC) and Mongolian Institute of Certified Public Accountants. Following Figure 1 shows the regulatory hierarchy for corporate governance in Mongolia.    
Current market characteristics
As above mentioned, Mongolia has only one stock exchange which founded 1991 in order to privatising state owned enterprises and organizing securities trading. From 1991 to 1995, a total of 476 state owned enterprises was listed (partially or fully privatized) on MSE and traded by a voucher based scheme to every citizen, who born before 1991 (mse.mn; bbc.co.uk). By August 1995, over 1.1 million people, about 48 percent of population owed shares of those listed companies (Bolormaa, 2006). But the period of 1995-2000, a number of shareholders decreased and a majority (83.5%) of shares of listed companies was owned by just 2227 individuals due to a beginning of secondary market. Therefore, a number of listed companies had decreased from 476 to 330 due to a concentration of shares for period of 1995 to 2000 (Refer to Appendix 2).
Currently, there are 330 listed companies on MSE, and a market capitalisation of those companies is estimated at around 2 billion USD as of December, 2011 (FRC.mn). In contrast, 149.9 billion MNT (100 million USD) bonds traded as of 2001, on MSE which mainly issued by Mongolian Government and private companies.  
By 2011, 21 of listed companies are fully state owned, 35 of listed companies partially state owned and remaining companies are controlled by private sectors. The largest listed companies are mostly in mining and cashmere sectors due to home country’s economic structure. Market capitalisation of listed companies has been grown up significantly for last 2 years due to mining boom in Mongolia (Refer to Appendix 1). Also, some of private companies started to become a public company since 2006 such as a Mongolian biggest underwriting company BDSec and brewery company MonFresh. But the director of MSE Board, Bold stated that only 9 companies out of top 100 local private companies listed on MSE.
Although some companies understand the importance of CG, CG practices of those listed companies are a very weak. FRC estimated that only 28 companies paid a dividend to their shareholders as of 2011 and just 158 companies held annual meeting with their shareholders as of 2007. According World Bank recommendation, (2009) many board of listed companies do not guide management, but instead they manage the company on daily basis. Therefore, many boards consist from insiders or majority of shareholders, the participation of independent directors is very low on board decisions. A right of minority shareholders often disrespected and disclosure of corporate information remain underdeveloped.       
Average daily value of Mongolia stock trading is 1.4 billion MNT (1 million) and shares of 80 companies actively traded on daily basis out of 330 listed companies. The market participants of Mongolian stock market can be divided into two groups: individual and institutions (Refer to Appendix 3). A number of individual shareholders is grown up significantly to over 100 thousand from 58 thousand by 2011, but this growth is a mechanical because Mongolian Government has started to open an account of Erdenes Tavantolgoi on MSE to every citizen of Mongolia.  According to World Bank’s (2009) estimation, majority (~70%) of shares listed companies held by just 2-3 individuals.  A number of foreign individual investors, is fairly small, just 500 foreign individual investors have shares of Mongolian listed companies.
Institutional investors are not common participants in Mongolian stock market. According to FRC report, there are 724 institutional investors have shares of listed companies. But last few years, a number of foreign institutional investors has been increased due to mining boom and economic development of Mongolia (Bold, 2011).
 On the other hand, many local companies successfully made IPO on Hong Kong exchange, ASX and London Stock Exchange. For example, ASX has 8 listed mining companies that operate in Mongolia. Moreover, Mongolian Government decided to change a nomination policy of MSE Board which now led by a senior officer of a biggest Mongolian private company. In order to integrate its equity market to international market, Mongolian Government plans to sell shares of MSE to public as well as cooperating with London stock exchange for improving MSE activity.    
Based on above mentioned data, following conclusions can be made for the current level of Mongolian equity market.
·      Majority of shares concentrated on few participants (individuals or state)
·      Corporate Governance is not been adopted yet although there is a corporate Governance Code.
·      Market capitalization of listed companies has been increased significantly last 2 years due to mining boom.
·      Mongolian Government and MSE tries integrate its market to international market.    

Future Development
However Mongolian equity market remains underdeveloped, the Government of Mongolia desperately tries to integrate its equity market to international market. For example, the Government has established a working group which aiming to develop Mongolian legal framework for corporate governance and equity market. A working group has been nominated several legal changes to the State great Khural (parliament) of Mongolia such as changes of Pension Fund Law and Investment Fund Law. Also, FRC has agreed to approve dual listing of Mongolian local companies and FRC promotes its policy to foreign investors.         
On the other hand, MSE has cooperated with London stock Exchange and Korean stock exchange in order to develop its activity and corporate governance. The master service agreement has been approved by MSE and LSE by 2010 which likely to attract more foreign investors to local market (mse.mn)



written by Nandin-Erdene Banzragch
May, 2012 Canberra Australia 

Appendixes

Appendix 1: Market capitalization of Mongolian Equity market
(by million MNT) (1USD=1200MNT)

       Retrieved from FRC.mn
Appendix 2: Number of listed companies on MSE


APPENDIX 3: Number of shareholders (Account)
Year
Individual
Institutional
Foreign
Local
Foreign
Local
2009
74
8803
9
25
2010
203
5884
23
46
2011
501
113253
39
685

Reference list
Ayush, B. (2006) “Role of the Financial Regulatory Commission (FRC) in the enforcement of Corporate Governance in Mongolia”, 6th Meeting of the Eurasian Corporate Governance Roundtable, Istanbul, Turkey
Bold, B. (2011), “Mongolia-Investment opportunity”, Mongolia-Australia Forum, Sydney, Australia
Bolormaa, J (2004), “Securities market development of Mongolia” 6th Conference on Financial Sector Development in the Central Asian Countries, Azerbaijan and Mongolia, Istanbul, Turkey
Financial Regulation Committee of Mongolia, (2007), “Corporate Governance Code of Mongolia-unofficial translation”, accessed on 12th of May, 2012 < www.frc.mn/engnew/index.php?opt>
Financial Regulation Committee of Mongolia, (2011), “Annual Report 2011”, accessed on 12th of May, 2012, <frc.gov.mn/index.php?option=com_docman&task=cat_view&gid=201&Itemid=29>
Mongolian Stock Exchange, (2012) “General Information”, accessed on 12th of May, 2012, <mse.mn/content/show/id/34
N.d (2011)“Mongolian Stock Market: Capitalizing on Frontier Opportunities”, accessed on 12th of May, 2012 < www.netcapital.mn/index.php?lang=mn&pid=5&n=19>  
Sian, J. (2000) “How to start a stock exchangeaccessed on 12th of May, 2012, <http://news.bbc.co.uk/2/hi/asia-pacific/821685.stm>
World Bank, (2009) “Report on the Observance of Standards and Codes (ROSC): Corporate governance assessment Mongolia”, accessed on 12th of May, 2012, <www.worldbank.org/ifa/rosc_cg.html>



1 comment: