Frontier: Growing Interest For Mongolian Stock Exchange To Upgrade To Global Standard
Mr. Peter Morrow, Vice Chairman of the Board of the Mongolian Stock Exchange, expanded on the reform process of the MSE, a scheme that was initiated by Prime Minister (PM) Batbold, eager to develop Mongolia's capital market. As such, the key aspects for reform were its technology platform, the applicable rules and regulation, and finally the status of the MSE (public to private).
This led to the MSE signing a strategic partnership contract with the London Stock Exchange (LSE), in charge for the latter to upgrade MSE technical platform by installing its Millennium IT system, to recommend suitable regulatory and legal structure for capital market, and to make MSE a principal strategic partner to LSE in Asia.
Mr. Morrow further mentioned that the development of MSE shall be beneficial to local citizens to the extent its enhancement will allow them to better participate in the capital gains potential of locally listed companies. Foreign companies shall also benefit from the greater involvement of local Mongolian shareholders as it should help tempering the local vs. foreign issue.
Mr. David Neuville, Partner at Jones Day, gave three fundamental factors that are necessary (but not sufficient) for the MSE or other exchanges to be successful. These factors are as follows:
(i) Listing criteria: besides typical criteria such as asset size and revenue, Mr. Neuville believes that accounting standard is an important criterion that may require more emphasis;
(ii) Corporate governance is the second necessary factor, and it notably includes dealing with related parties transaction; and
(iii) Reporting transparency is the final success factor and it details the area and frequency of disclosure.
Without these three success factors, it will be very difficult for any exchange to succeed.
Ms. Sarah Armstrong, Chief Legal Counsel Asia of South Gobi Resources (SGR), presented five areas of deficiencies of the current Mongolian legislation and regulation that are preventing foreign companies from listing on the MSE.
(i) The first deficiency consists in the fact that to list on MSE, a company has to be Mongolian and subject to Mongolian law. This is in conflict with SGR's requirement to comply with Canadian and Hong Kong law where the company is co-listed;
(ii) The lack of legal certainty on officers' criminal liability is the second roadblock;
(iii)The inability to split share ownership between a registered party (such as a broker) and the beneficial party (such as an individual investor) is the third difficulty foreign companies face when listing on the MSE;
(iv) The inability for shares to be freely transferred between the different exchanges where a company co-lists is the fourth hindrance.;
(v) Finally, the ambiguity and lack of certainty of definition on certain legislation and regulation is another problematic area preventing foreign companies from listing on the MSE.
Yet, Ms. Armstrong keeps a positive outlook because the authorities are aware of these problems and are working to resolve them.
During the question period, Ms. Armstrong said that SGR's large market capitalization (~US $2B) does not form a barrier for its listing on the relative small MSE. If the problematic areas are fixed such that SGR can co-list on the MSE, other foreign companies will follow making its market capitalization much larger. Mr. Morrow added that radical changes are needed to fix these problems, pointed to the Kazakhstan exchange, which grew its market capitalization from US $1B to US $100B in a decade, as an example of the upside potential for the MSE should the problems be solved.
All panelists concurred that in 3 to 5 years time, MSE will have a proper functioning platform with multiple foreign companies listed.
About Frontier Securities
Frontier Securities is the first local Mongolian Securities firm with a global network and international expertise. Established by Masa Igata, Frontier has been given full-service securities related license by the Financial Regulatory Committee (FRC) of Mongolia. Frontier also has brokerage, dealing and underwriting licenses that are regulated by FRC. Since its establishment, Frontier's primary area of focus has been the cross-border investment banking business.