16 April, 2013

 

Legal News & Analysis – Asia Pacific – Mongolia

 

Mongolia is one of the fastest growing economies in the world. Its mining sector currently accounts for 89% of total exports and generates almost one-third of Government revenues. The enthusiasm of foreign investors has been dampened in the recent past by actions of the Mongolian Government aimed at capturing a bigger share of revenues generated by the natural resources sector. However, new legislation is in prospect which may serve to resolve the issue to the satisfaction of foreign investors.

 

According to the Bank of Mongolia, foreign direct investment dropped 17% in 2012. This followed the introduction of certain legislative measures. In response to that drop and to the negative reaction from industry leaders (in particular in the natural resources sector), the Mongolian Government is now looking to reassure investors by introducing new laws and revising some of the existing legislation, as described in this note.

 

The Strategically Significant Entities Foreign Investment Law (SSEFIL) was passed by the Great Khural (Mongolian Parliament) in May 2012. Presently under the SSEFIL foreign investors are required to obtain parliamentary approval before they can acquire more than 49% of, or invest 100 billion MNT (approximately US$70 million) in, “strategic sectors”. These sectors include natural resources, banking and finances and media and telecommunications.

 

In March 2013 the Government submitted a revised draft of the SSEFIL to the Parliament, which aims to ease these conditions and so encourage foreign investors. The key amendments to SSEFIL under consideration are:

 

  • the removal of the 100 billion MNT investment threshold; and
  • restricting the requirement for the parliamentary approval to the acquisition of more than 49% interest in “strategic sector entities” so that it shall only apply to acquisitions made by foreign state-owned interests, not privately owned companies.

 

A new Mining Law was also prepared for submission to the Mongolian Parliament last year. The draft Mining Law would (if passed) require every mineral company to be at least 34% Mongolian owned; allow the government to change tax rates applicable to mining licences; and make it easier for the mining authority to withdraw mining licences.

 

The Mongolian Government has announced the postponement of the parliamentary debate on the new Mining Law until after the presidential elections scheduled for June 2013. This has been viewed as a positive move, as the delay will afford the Government time to carry out further discussions with the stakeholders of the mining industry.

 

Some caution that SSEFIL and the proposed new Mining Law may further deter foreign investments, without which the exploitation of the country’s mineral wealth is not feasible. Others are of the view that the creation of a stable regulatory and fiscal regime will contribute towards the country’s ability to realise its resource potential and will encourage investments through local financial institutions and the Mongolian Stock Exchange.

 

In furthering the development of a stable regulatory and fiscal regime, the Mongolian Government has prepared a revised draft of the Securities Law which was enacted in 1994. Despite several amendments to the existing Securities Law it is now generally accepted that the law does not adequately regulate the market. The new, substantially revised Securities Law is expected to pass later this year. The key aspects of the revised Securities Law will facilitate:

 

  • participation in the capital markets by private and state owned pension funds and other financial institutions
  • issuance of depositary receipts
  • offshore listing of onshore listed companies and vice versa  
  • derivatives, and–custodial services by local banks

 

Once the new Securities Law is in force, it will provide a solid legislative framework for new investments which in turn is hoped will counter-balance any negative impact which the proposed new Mining Law may have had.

 

 
For further information about this article, please contact:
 
Ildiko Gergely, Clyde & Co
ildiko.gergely@clydeco.com
 
Altansuvd Brewin, Clyde & Co
altansuvd.brewin@clydeco.com
 
 

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