Tag Archives: Securities

Investing in a Mongolia Company: Common vs Preferred Shares

In general, purpose of investment is for one to gain profits and raise capital by acquiring certain assets, such as real estate, shares, bonds and so on, which are projected to rise in value. However, the significance of investment, particularly foreign investment is that it lets the investor not only raise its own capital, but it also becomes a tool for economic growth in Mongolia or any country. In this article we will take a look at a shareholder’s practical options as regards ownership of shares in a Mongolia company.

As provided in the Law of Mongolia on Securities Markets, a share evidences the investment of a shareholder in a company, gives its holder the right to vote at shareholders meetings, to receive dividends and to receive a proportionate share of proceeds from the sale of the company’s assets remaining following its liquidation. Shares are classified into common or preferred shares. There are several differences between the two, with each having it’s own pros and cons.

Most companies issue common shares, and similarly most investors acquire common shares. Common shares may benefit shareholders through appreciation and through dividends. Common shares also come with voting rights, giving shareholders more control over the business. In addition, common shares come with pre-emptive rights, ensuring that existing shareholders have a right to buy new shares and maintain their original percentage of ownership when the company issues new shares. A Common shareholder is entitled to following:

  1. Receive dividends: depending on company’s profitability and board of directors’ decision whether to distribute the profit, shareholder is entitled to receive dividends. Dividends may be paid in cash, as well as in form of assets and/or securities.
  2. Be involved in the management of the company by voting: shareholder is entitled to participate in shareholders meetings and vote regarding all issues proposed at such meetings. One common share comes with one voting right.
  3. Shareholder is entitled to receive and obtain all and any information regarding the company’s activities at any time.
  4. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company: following liquidation of the company and payment of all debts to creditors, shareholder is entitled to receive a share of proceeds (if any) from the sale of the company’s remaining assets.

In contrast, preferred shares in Mongolia, as in other countries, take priority over common shares, when dividends are distributed, as well as when the company is liquidated and pays its lenders, preferred shareholders receive payment before common shareholders. However, preferred shares typically do not offer voting rights in the company and have set payment criteria, a dividend that is paid out regularly. Usually preferred shares are issued when privatizing a state property or if a private company wants to attract additional funding (investment) without changing company’s control package. Preferred shareholder is entitled to following:

  1. Receive dividends before common shareholders: dividends are paid out to preferred shareholders before common share dividends are issued.
  2. Receive dividends regularly: while for common shareholder dividends are paid out only if company is profitable and board of directors decides to distribute profit, for preferred shareholder dividends are paid out regularly regardless of circumstances. Even if the company was not profitable and could not pay dividends, the payment is accumulated, and two-year dividend should be paid the following year.
  3. Receive a share of proceeds from the sale of the company`s remaining assets following liquidation of the company first: if the company is liquidating, shareholder is entitled to be paid from company assets first (before common shareholders).
  4. If provided in company charter, preferred shares may be converted into common shares.

Preferred shares are an optimal alternative for risk-averse equity investors. Preferred shares are typically less volatile than common shares and offer investors a steadier flow of dividends. Also, preferred shares are usually callable; the issuer of shares can redeem them at any time, providing investors with more options than common shares.

So, if you are thinking about buying shares in a Mongolian company, be sure to look into it more closely. There might be more options than just buying common shares.

Mongolian Securities: What is a Depository Receipt?

What is a depository receipt?

According to Article 4.1.12 of the Security Market Law of Mongolia a “Depositary receipt” is a security issued by a depositary receipts issuer (depositor) for the purpose of future trade of that security on the securities market of another jurisdiction (where the depositor is not normally resident) on the basis of having deposited an underlying security at an institution conducting securities depository services (custodian) within that target jurisdiction.

In practical terms, a depository receipt is traded on the open stock market and it is a form of security and similar to a company share. Shares registered in the stock market of a foreign countries (for example Mongolia) are authorized to issue in another country’s stock market (for example USA) as a depository receipt.

In Mongolia, depositary receipts have the following types:

– Mongolian depositary receipts; and

– Foreign depositary receipts.

Mongolian depositary receipts

A “Mongolian depositary receipt” is a financial instrument registered and issued by a depositary receipts issuer for sale on the securities market of Mongolia on the basis of a deposit. The deposit is kept with a legal entity, such as a bank, licensed to undertake custodial services, of an underlying security registered with a stock exchange in another jurisdiction.

A domestic stock company which has fulfilled the requirements to issue depository receipt in a foreign market may deposit their own shares in any approved foreign custodian bank in that country. The bank issues depository receipts based on those shares, which will be traded in the foreign stock market.

The Mongolia Financial Regulatory Commission (“FRC”) defines the list of countries, types of underlying securities of Mongolian depositary receipts and current underlying security registration of relevant stock market based on proposal of Stock exchange. It is prohibited to trade or sell a depository receipt in Mongolia which are based on underlying securities that are not included in the list outlined by FRC.

Foreign depositary receipts

A Foreign Depositary Receipt is a financial instrument issued by a depositary receipts issuer on the basis of securities issued in Mongolia through an entity authorized to undertake custodial services. This means foreign companies are not required to register in the Mongolian Stock Exchange, and therefore place their shares in any custodian bank and its possible to sell or trade their depository receipts based on those shares in Mongolian stock market. One depository receipt may be represented by any number of shares. It’s prohibited to issue depository receipt unless the underlying security of depository receipt has not been deposited or incomplete quantity and amount. Issuer of depository receipt is prohibited to be beneficiary owner.

A foreign depositary receipt may have a name which identifies the market and jurisdiction in which the relevant depositary receipt will be traded.

A securities issuer that has decided to issue a global depositary receipt based on its own securities must inform the public, the FRC, and the stock exchange in writing after adopting a resolution to that affect.

There will be no consideration in the event of any conversion of a depositary receipt into an underlying security, or an underlying security into a depositary receipt.

Securities Registry Opens Opportunity for Mongolia Business

As we have written about in the past, Mongolia opened an internet based registration system for pledges, in March of this year. In addition to serving as a platform for registration of international pledges for some of the world’s largest financial institutions, the new system has also supported over 10,000 registrations in favor of small and medium sized entities (SME).

The registry, implemented by the Ministry of Justice and Home Affairs, is one part of a major project to reform security backed transactions and financing in Mongolia. Enabled by the newly enacted Law on Tangible and Intangible Movable Property Pledges, the online registration service offers web based filing and public access for security interests on movable collateral in complex financial transactions.

The major benefit of the online platform is the ability of potential financiers to conduct a web-based search on property held by potential partners, to determine if the property offered up for collateral is already subject to a previously existing pledge or other security. This information will have a major impact on the business of lenders and will hopefully make potential lenders more likely to make funds available to a borrower after they are able to confirm there are no other securities on the proposed collateral.

According to The Financial, 38% of the more than 10,000 overall registrations are for equipment, 25% are for livestock, 5.4 percent are receivables, and 1.7% are vehicles. These stats suggest that local farmers have been quick out of the gate to take advantage of the new opportunities opened up by the new registration system and the availability of additional financing to promote development and growth.

Update on Online Security and Collateral Registration

As we have mentioned in the past, the Mongolian Law on Pledge of Movable and Intangible Property came into force on March 1, 2017. In order to fully implement this new law,  an official Procedure for Online Registry of Pledges of Movable and Intangible Properties was adopted by Minister of Justice and Internal Affairs on March 3, 2017 and a centralized online registry system, www.mpr.gov.mn, has been established to facilitate for the registration of pledges on movable and intangible properties.

All types of movable assets, present or future can be registered in this electronic database as collateral. This includes accounts receivable, construction equipment, agricultural equipment, crops, consumer goods, documents, industrial equipment, intellectual property, office items, inventory, vehicles, domestic animals, wood, furniture, household item, investment security, mineral resources and others.

The registered collateral information in the database will be available to the public and searchable online by the following key terms at www.mpr.gov.mn :

  • an initial registration number of notice of pledge;
  • creditor’s name and registration number;
  • debtor’s name and registration number; and
  • serial number for vehicles.

Furthermore, this collateral registry system is accessible online for verification, amendment, extension and cancellation of the details of the registered collateral. This centralized modern collateral registry is a big positive step to protect the non-possessory security rights of creditors against third parties by ensuring transparency.

Mongolia Movable Property Pledges: Online Registration is Perfection

As we posted previously, the Mongolian Law on Pledge of Movable and Intangible Property was adopted on July 2, 2015. This new legislation was supposed to come into force on September 1, 2016. However, effective date of the law had been postponed until March 1, 2017 due to lack of preparation of the required online database for registration of pledges.

In order to fully implement this new law, the Ministry of Justice and Internal Affairs, the International Finance Corporation, the Intellectual Property Rights and State Registration Office, the Bank of Mongolia, and other organizations have cooperated to establish an online database for the registry of pledges on movable property and information regarding collateral.

According to the law, collateral may be all kinds of stocks, securities, rights to demand, industrial designs, trademarks, all creative works of sciences, arts and other movable properties or intangible assets and present or future movable properties of individuals that are usable and transferable to other’s ownership of individuals that is valid and transferable to other’s ownership. Under the law, a Pledge will be perfected upon registration of a notice of the pledge with online registry, whether collateral is not transferred to the pledgee’s possession or a pledge is created by operation of law.

As for movable and intangible assets which have been pledged prior to the new law coming into effect, these collateral need to be registered with the new online database within six months after the entry into force of the law.

The new online database shows how Mongolia is utilizing new technologies to make its legal and financial systems more efficient, and will benefit Mongolian citizens and foreign investors alike. The implementation of this law provides a new lifeline for the economy and will create new opportunities in the business sector. Furthermore, information in the database will be available to the public, and registered information will become official records of assets and collateral.

Mongolia Set to Allow Trading of Real Estate Interests Via Stock Exchange

Mongolian Parliament approved the Law on Allocation of Land to Mongolian Citizens for Ownership (LALMCO) in 2002 under the authority of Article 6.3 of the Constitution, “the state may give for private ownership plots of land, except pastures and areas under public and special use, only to the citizens of Mongolia”.

Implementation of LALMCO began May 1, 2003, granting every Mongolian Citizen a right to own a plot of land. This was the first time in the history that Mongolian citizens were entitled by law to own land. However, implementation of this law was not satisfactory. The right to acquire land for ownership is opened to all Mongolian citizens according to LALMCO, but implementation mechanism were not set out in this law, as result, many citizens face obstacles to their legal acquisition of land for their ownership. Those individuals who live in an apartment in the city, in particular have encountered difficulty in gaining access to land ownership despite the  guarantee in the LALMCO. Since LALMCO’s implementation only 7.6% of the 1.2 million city dwellers in Mongolia have been granted the land rights as guaranteed.

Reasons for the unsatisfactory implementation of LALMCO are not for lack of available land, or   limitations on use of land. The law is missing specific regulations and procedures with regard to establishing and confirming land ownership rights obtained under LALMCO. As a result of the lack of clear regulations and procedures, some national and local authorities have used the law to distribute land to friends and family through corruption and without transparency or public oversight.

As set forth in the new draft law, a Certificate of the Right to Own Land will be issued to each citizen, and upon establishing Land Ownership, a Certificate of Land Ownership will be issued. A Certificate of the Right to Own Land will represent each respective citizen’s right to own land. The Certificate of Land Ownership will clearly set out the individual’s ownership rights to a specific plot of land.  Details regarding issuance of these certificates and relevant regulations are also set out in the draft law.

The draft law also provides an interesting mechanism regarding the Land Ownership Certificate. Land Ownership Certificates will be able to be securitized and traded via the Mongolian Stock Exchange. This will provide an avenue for profits for those citizens, such as city dwellers, who are not planning on living on or using the granted land rights themselves.

While real estate can be very valuable, undeveloped land, may not always offer any profit or other benefit to the owner. Development of the land often takes substantial resources and time commitment, which owners may not be able to provide. The ability to trade ownership interests in these plots of land could be a major reform for the Mongolian economy enabling many citizens to profit off land ownership in new ways.

Currently, it remains unclear whether foreign individuals or companies will be able to invest in and trade the Land Ownership Certificates once they are listed on the exchange. This could also be a substantial opportunity for foreign investments in Mongolia. We will keep our eye on developments and update here when we know more.

Holding a Perfected Pledge in Mongolia just got 100% Better!

As part of the firm’s project finance practice, we do a lot of work with securities, and particularly pledges of movable and immovable property. When advising clients, we often receive pushback and incredulity when we explain Article 54.2 of the Law on Enforcement of Court Decisions which states, “A pledgee shall be responsible for other creditors’ payments.” Clients rightly ask, “what is the value of holding the pledge if after receiving the pledged assets you have to give it all away to other creditors of the pledgor?”

However, a plain reading of Article 54.2 led to the inevitable conclusion that the law was specifically making pledgees a first priority security interest in collateral responsible for payments owed by the pledgor to other creditors, even where the pledgee has not done or agreed to anything whereby it would otherwise assume any of those obligations.

Article 54.2 provided legal justification for Mongolia’s Court Decision Enforcement Agency, which is responsible for the enforcement of valid court decisions, to demand a pledgee take action to recover funds due to other creditors of a pledgor, even by going so far as to require redistribution of proceeds earned via the sale of the collateral and in some cases the pledgee’s own assets! All of this required no additional court decision or ruling against the pledgee. Naturally, once we convince a client of the meaning and implications of the law, the typical reaction would be, “Well, that’s just not fair!”

Luckily, the Mongolian Constitutional Court agrees. The court recently concluded that Article 54.2 resulted in outcomes in violation of Article 16.3 of the Constitution of Mongolia. Article 16.3 protects, “The right to fair acquisition, possession and inheritance of movable and immovable property.” The court ruled that due to violations of that provision of the constitution, enforcement of Article 54.2 shall be stopped.

This is great news for investors and foreign investment in Mongolia. In a country were major mining and infrastructure projects are financed via complex securities transactions with international banks taking pledges over local real estate and other assets, the legal regime provided for by Article 54.2 increased the risk of these international banks and made acquiring funding even more difficult that it would normally be. We consider this a step in the right direction for Mongolia and foreign investment in the country.