by Nandin-Erdene banzragch AUstralian National university
Current regulation
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 exchange” accessed
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>
Very well researched on mongolianstock market
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