Overview of the Capital Market Regulation of Mongolia

May 20, 2025 > Mongolia > Capital Market

GRATA International Mongolia Law firm | View firm profile

GENERAL OVERVIEW & CONTEXT

  1. The primary laws and regulations governing the Mongolian capital market, the hierarchy of these regulations

The Mongolian capital market is governed by the following primary laws and regulations:

  1. Law on Securities Market
  2. Civil Code of Mongolia
  3. Company Law of Mongolia
  4. Law on Investment
  5. Law on Asset-backed Securities
  6. Law on Investment Funds
  7. Banking Law of Mongolia
  8. Law on Central Bank (Bank of Mongolia)
  9. Law on the Legal Status of the Financial Regulatory Commission

The hierarchy of these regulations is as follows:

  1. The Constitution of Mongolia
  2. International treaties to which Mongolia is a party;
  3. Laws passed by the State Great Khural (Parliament);
  4. Regulations and guidelines issued by regulatory bodies:
    • Financial Regulatory Commission (FRC)
    • Bank of Mongolia (Central Bank)
    • Ministry of Finance

If an international treaty to which Mongolia is a party contains provisions that contradict national laws, the provisions of the international treaty shall prevail. (Article 2.2 of the Law on the Securities Market)

The Law on Securities Market is the primary law regulating the issuance, registration, trading, and other activities related to securities in Mongolia. It provides the fundamental framework for the capital market, while other laws and regulations complement and provide more specific guidelines for different aspects of the market.

  1. Regulatory bodies responsible for overseeing the capital market, their specific roles and responsibilities, and independency

The primary regulatory bodies responsible for overseeing the Mongolian capital market are:

  1. Financial Regulatory Commission (FRC)

The FRC is the main regulator for the non-bank financial sector, including capital markets. Its key responsibilities include:

  • Regulating and supervising non-bank financial institutions;
  • Approving rules, procedures, and guidelines for the financial market;
  • Granting, suspending, and revoking licenses for financial services;
  • Monitoring activities of license holders;
  • Setting regulatory service fees;
  • Resolving disputes among market participants; and
  • Approving and monitoring ethical rules for FRC employees.

The FRC was established in 2006 as an independent regulator. Its funding consists of funds allocated from the government budget, regulatory service fees collected from licensees and registered entities, and other income generated from legal activities. However, this partial reliance on government funding may compromise the FRC’s independence.

  1. Bank of MongoliaWhile primarily responsible for banking sector regulation, the Bank of Mongolia also plays a role in capital market oversight:
    1. Supervising the banking sector;
    2. Collaborating with the FRC on issues related to financial market stability; and
    3. Participating in consolidated supervision of financial holding companies.
  2. Ministry of Finance

The Ministry of Finance is involved in capital market regulation as one of the primary regulatory institutions by formulating state policy for the securities market in collaboration with relevant state administrative bodies. This policy is aligned with broader investment and economic objectives. The Ministry also cooperates with and supports the functions of the FRC.

  1. Mongolian Stock Exchange

The MSE became a self-regulatory organization in 2015, allowing it to regulate its member securities companies and listed companies. The MSE has some self-regulatory functions:

  1. Regulating member securities companies and listed companies;
  2. Setting and enforcing trading rules; and
  3. Monitoring market activities.
  • The objectives of Mongolia’s capital market regulations (e.g., investor protection, market integrity, financial stability, etc.)

The stated objectives of Mongolia’s capital market regulations include:

  1. Investor protection, Regulation, and monitoring of market participants

The Law on Securities Market, Article 1.1, states that one of its primary purposes is “to regulate the regulation and oversight of market participants’ activities, and the protection of the investor interests in the securities market.”

  1. Market integrity, efficiency, and risk reduction

The Law on Securities Market, Article 1.2, emphasizes the “Principles of reducing systemic risks of the securities market and insuring its fairness, transparency and efficiency, shall be adhered to in implementation of the objectives of this law.”

  1. Financial stability

The FRC has the objective to ensure national financial market stability.

These objectives demonstrate Mongolia’s commitment to creating a robust, fair, and growth-oriented capital market framework that aligns with international best practices while supporting the country’s economic development goals.

MARKET PARTICIPANTS & INSTRUMENTS

  1. Types of regulated market participants

Based on the Law on Securities Market of Mongolia and the Law on Investment Funds, the following types of market participants are regulated:

  1. Securities brokers;
  2. Securities dealers;
  3. Investment funds;
  4. Securities investment advisors;
  5. Securities trustees;
  6. Underwriters;
  7. Securities ownership rights registrars;
  8. Securities trade clearing organizations;
  9. Securities trade settlement organizations;
  10. Securities central depositories;
  11. Securities custodians;
  12. Stock exchanges;
  13. Financial rating organizations; and
  14. Equity crowdfunding

Additionally, the Law on Securities Market regulates securities issuers (Article 7) and investors, although investors are not explicitly listed as a regulated entity.

  1. Licensing and registration requirements for the regulated participants and qualification requirements

Based on the Law on Securities Market of Mongolia, the licensing and registration requirements for market participants are as follows:

  1. Licensing Requirements

Regulated activities specified under II(i) shall be carried out on the basis of special permits (Article 24.2).

The FRC is responsible for issuing licenses (Article 28.1).

  1. Application Process

Applicants must submit documents listed in Article 27.2, including:

  1. Copy of company charter;
  2. Information on founders/shareholders, solvency, a statement of no overdue debt to banks, financial institutions or other entities, and information on being a suitable person;
  3. Proof of minimum capital requirements;
  4. Business and risk management plans (for three years);
  5. Proof of qualified personnel and necessary workplace, hardware, equipment, and software; and
  6. Other information as may be required.

Upon receipt of accurate and complete documentation, the application shall be resolved within 10 business days.

  1. Conditions for Granting Special Permits

Applicants shall meet the following requirements:

  1. No conflicts of interest with other operations;
  2. Authorized persons are fit and proper;
  3. Satisfies human resource requirements;
  4. Meets minimum capital and current asset requirements;
  5. Office, equipment, and software meet requirements; and
  6. Satisfies additional conditions set by the FRC.
  1. Specific Qualification Requirements
    1. Authorized persons must be fit and proper (Article 68)
    2. Professional participants must obtain authorization from professional associations (Article 35.1)
    3. The FRC defines types and ranks of professional authorizations (Article 35.3)
  2. Registration Requirements

Legal persons providing auditing, appraisal, and legal services to securities market participants must register with the FRC (Article 24.3).

These service providers must have a fixed number of professionals (e.g. lawyers, appraisers, auditors) working under permanent employment contracts, having passed the relevant exams (e.g. bar exam) and obtained licenses for professional activities. In the case of a legal entity engaged in equity crowdfunding activities, it must have special software that meets the requirements set by the FRC.

  1. Ongoing Compliance

Regulated persons must maintain membership with a self-regulatory organization (Article 69.3). They must comply with the principles for regulated operations (Article 25.1).

  • Types of securities and financial instruments traded on the Mongolian capital market

Based on Article 5 of the Law on Securities Market of Mongolia, the following types of securities and financial instruments are traded on the Mongolian capital market:

  1. Equities: Public company shares, representing ownership in companies.
  2. Debt Instruments: Company debt instruments and bonds, used for borrowing capital.
  3. Investment Fund Securities: Shares or units of investment funds, allowing collective investments.
  4. Depositary Receipts: Including Mongolian depositary receipts, representing ownership of shares in foreign companies.
  5. Asset-Backed Securities: Securities backed by a pool of assets.
  6. Derivatives: Including options contracts and futures contracts, based on underlying assets.
  7. Other Instruments: Such as warrants or rights to subscribe to specified quantities of shares or debt instruments.

The rules governing the issuance of securities

Based on the Law on Securities Market of Mongolia, the rules governing the issuance of securities include:

1.   Disclosure Requirements

Issuers must provide a securities prospectus containing detailed information about the company, its finances, risks, and the securities being issued. The prospectus must include inter alia:

  • Information on the issuer, shareholders, management, and organizational structure;
  • Financial statements and auditor’s reports;
  • Details of the securities being issued and associated rights;
  • Business plans for using the raised capital;
  • Information on binding agreements and transactions with a value equal to five percent or more of the issued capital and their implementation; and
  • Risk factors and management plans.

Issuers must immediately report any material changes or events that could impact investment decisions to the FRC.

2.   Prospectus Requirements

The prospectus must be prepared according to FRC instructions. It must be verified by an independent lawyer and auditor registered with the FRC. The prospectus must include expert assessments or conclusions, if any, along with information about the experts, and signed by the company’s Board Chairman, CEO, CFO, and independent experts.

3.   Listing Requirements

Securities must be registered with the FRC and approved for public offering. For listing on the Mongolian Stock Exchange (MSE), issuers must:

  1. Have a minimum paid-in capital of MNT 1 billion;
  2. Provide audited financial statements complying with IFRS; and
  3. Meet governance standards, including having an independent board.

Issuers must not have significant tax or overdue liabilities. The company’s latest financial report must not be older than six months at the time of listing.

4.   Registration Process

Issuers must submit an application, prospectus, and other required documents to the FRC. The FRC reviews the application within 20 working days, with a possible 15-day extension. Upon approval, the FRC registers the securities in the Registry of Securities Admitted to Public Offering. After FRC registration, the issuer must also apply for listing on the stock exchange.

  1. Different types of market participants regulated in terms of their conduct of business

1.   Client Protection

Brokers must:

  • Execute client instructions fairly and professionally (Article 36.4)
  • Prioritize client orders over their own trading (Article 36.5)
  • Segregate client assets in separate accounts (Article 36.8-36.11)
  • Know their clients and verify trade eligibility (Article 36.13)

Dealers must:

  • Execute accepted offers without dispute (Article 37.4)
  • Segregate own assets in special accounts (Article 37.5)

Investment funds are prohibited from:

  • Conducting activities not authorized by law or the FRC (Article 38.6.1)
  • Spending fund assets for personal interest (Article 38.6.4)

2.   Conflicts of Interest

All regulated persons must:

  • Avoid conflicts of interest and inform clients immediately if they arise (Article 25.1.4)
  • Not promote self-interest over client interests (Article 25.1.5)

Brokers must disclose conflicts of interest to clients (Article 36.6-36.7). Financial rating organizations are prohibited from performing services with conflicts of interest (Article 50.3)

3.   Market Manipulation and Insider Trading

The Stock Exchange must monitor trading to ensure it is conducted in accordance with applicable procedures (Article 49.1.5)

The FRC has the power to:

  • Take measures deemed necessary for promoting fair, efficient, competitive, and transparent practice in the securities market (Article 63.1.4)
  • Supervise the operations of regulated persons, impose corrective actions, and impose sanctions (Article 63.1.8)

Market manipulation and insider trading are criminal offenses in Mongolia, as defined by the Criminal Code. Convictions for these crimes can lead to penalties such as fines (ranging from approximately $780 to $2,890 USD), restrictions on travel, and imprisonment for periods between six months and twelve years (Articles 18.8 & 18.9).

If market manipulation and insider trading do not meet the elements for these criminal offenses, they may still be subject to penalties under the Law on Infringement.  These penalties can include a fine of approximately $5,780 USD, forfeiture of any ill-gotten gains, and mandatory compensation for resulting damages (Article 11.10).

4.   Information Disclosure

Securities issuers must disclose material information to the public the following information (Article 56.1):

  1. information on changes in the management structure of the issuer;
  2. information on changes in the structure of influential shareholders and their shares held in other companies;
  3. information on organizational changes in the issuer and its subsidiaries, affiliates, and related companies;
  4. information on the seizure or seizure of the issuer’s assets;
  5. information on the issuer’s license to conduct activities, or on its suspension or revocation;
  6. information on the decision of the issuer’s shareholders’ meeting; and
  7. other information that may affect the price and exchange rate of the securities.

Regulated persons must provide the following information to clients (Article 57.1):

  1. information about circumstances that may adversely affect the interests of the investor;
  2. information about the securities and the issuer that is available to the investor, except for information that is confidential in the process of receiving an order to buy or sell securities;
  3. information about restrictions imposed by the competent authority on the securities and the issuer and about special conditions of the securities;
  4. reasoned explanation in case of failure to fulfill or refusal to fulfill the client’s order; and
  5. information submitted by the relevant person to the client.

TRADING & MARKET INFRASTRUCTURE

  1. Securities trading in Mongolia, trading systems and platforms

Securities trading in Mongolia primarily takes place through the Mongolian Stock Exchange (MSE), which was established in 1991 and serves as the country’s main securities trading platform.

The MSE’s key trading systems include:

    1. Electronic Trading System: In 2012, MSE modernized its electronic trading system by implementing the Millennium IT platform from the London Stock Exchange Group (LSEG). This system has significantly improved trading efficiency by automating order processing, matching, clearing, and settlement processes.
    2. Remote Trading: Brokers can participate in trading from outside the exchange building using MSE’s remote trading system. This increases market accessibility and encourages trading participation.
    3. T+2 Settlement Cycle: MSE has adopted a T+2 settlement cycle in line with international standards. This means that securities ownership transfer and fund settlement are completed two business days after the trade date.
    4. Real-time Market Data: MSE provides real-time market data and trading information, enhancing market transparency.

While an over-the-counter (OTC) market exists, it is smaller in scale and less strictly regulated. OTC trading is primarily conducted among institutional investors and by securities dealers meeting specific criteria.

Recently, a new trading platform developed by AND Systems LLC has gained attention. This platform aims to enhance trading security and transparency by utilizing blockchain technology. It is also expected to support new forms of fundraising, such as crowdfunding, thereby improving capital market accessibility for small and medium-sized enterprises.

The Financial Regulatory Commission (FRC) of Mongolia continuously monitors these trading systems and platforms to ensure compliance with relevant laws and regulations. When necessary, the FRC introduces new regulations to strengthen market stability and investor protection.

  1. The role of the Mongolian Stock Exchange (MSE), how it functions

The Mongolian Stock Exchange (MSE) plays a crucial role in Mongolia’s capital market infrastructure. Established in January 1991, the MSE serves as the country’s sole stock exchange and has several key functions:

  1. Securities Trading:
    1. Provides a platform for trading stocks, bonds, and other securities;
    2. Coordinates trading activities among brokers, dealers, and other market participants; and
    3. Operates an electronic trading system for efficient order matching and execution.
  2. Market Regulation:
    1. Acts as a self-regulatory organization since October 2015;
    2. Develops and enforces trading rules and regulations; and
    3. Monitors trading activities to ensure compliance with applicable procedures.
  3. Capital Formation:
    1. Enables companies to raise capital through initial public offerings (IPOs) and secondary offerings; and
    2. Supports the development of various financial instruments, including equities, bonds, and derivatives.
  4. Market Information:
    1. Disseminates trading information to the public, including transaction details, security information, and price data; and
    2. Maintains market indices, such as the TOP-20 index, to track overall market performance.

The MSE functions through its electronic trading system, which was modernized in 2012 with the implementation of the Millennium IT platform from the London Stock Exchange Group. This system allows for:

  1. Automated order processing, matching, clearing, and settlement
  2. Remote trading access for brokers
  3. Real-time market data dissemination
  4. T+2 settlement cycle, aligning with international standards

The exchange operates under the supervision of the FRC and collaborates with other regulatory bodies to ensure market stability and integrity. As of September 2022, the MSE had 180 listed companies with a combined market capitalization of approximately US$1.5 billion.

Recent developments include the introduction of new products, such as the trading of mining products and preparations for new offerings, demonstrating the MSE’s ongoing efforts to diversify and expand its market offerings.

  • Other trading platforms or alternative trading systems (ATS) operating in Mongolia
  1. Over-the-Counter (OTC) MarketMongolia launched an over-the-counter (OTC) trading platform in September 2021. This platform is overseen by the Mongolian Association of Securities Dealers (MASD) and was developed by AND Systems LLC. Key features include:
    1. Trading of corporate bonds and other securities not listed on the main exchange
    2. Linked to the Mongolian Central Securities Depository’s registry and settlement systems
    3. Allows trading via a chat system among market participants
    4. Provides online submission and monitoring of security issuance applications
    5. Offers additional features like bond price and interest calculators
  2. Digital Assets Exchange (DAX)

Launched in December 2020, DAX is Mongolia’s first cryptocurrency and security token exchange. As of June 2022, it reported:

  • Over 400,000 registered customers
  • Trading volume exceeding 1.63 trillion MNT (approximately $572 million)
  1. Ard Financial Group’s “Ard” Mobile Application

This platform allows users to trade ArdCoin, a blockchain-based loyalty reward program. The company estimates that one in three Mongolians own ArdCoin.

  1. International Brokerage Platforms

Several international online brokers and trading platforms are accessible to Mongolian investors, including Interactive Brokers, XTB, and IG, among others. These platforms offer access to global markets and a wider range of financial instruments.

  1. The rules governing market surveillance and enforcement, investigation and prosecution of market abuses

The rules governing market surveillance and enforcement in Mongolia’s securities market, as well as the investigation and prosecution of market abuses, are primarily outlined in the Law on Securities Market and the Criminal Code. Key aspects include:

1.   Market Surveillance

The Financial Regulatory Commission (FRC) is responsible for:

  • Monitoring and supervising the activities of market participants to ensure compliance with relevant legislation (Article 63.1.8 of the Securities Market Law)
  • Developing procedures, guidelines, and regulations for market surveillance (Article 63.1.2)

The Mongolian Stock Exchange (MSE) is required to:

  • Monitor trading to ensure it is conducted in accordance with applicable procedures (Article 49.1.5)
  • Operate a fair, orderly, and transparent market (Article 49.1.6)

2.   Enforcement Mechanisms

The FRC has the power to:

  • Impose administrative sanctions on violators (Article 63.1.8)
  • Temporarily suspend or revoke licenses of market participants (Article 63.1.8)
  • Temporarily suspend trading or revoke the registration of securities in case of violations (Article 11.5)

The MSE, as a self-regulatory organization since October 13, 2015:

  • Can regulate its member securities companies and listed Joint Stock Companies by integrated standards
  • Has the ability to fine companies that fail to meet regulatory requirements

3.   Investigation of Market Abuses

The FRC is authorized to:

  • Conduct inspections of regulated entities without prior notice (Article 24.4 of the Law on FRC)
  • Access books, records, and request data from regulated entities (Article 25.1 of the Law on FRC)
  • Investigate suspected misconduct and violations of securities laws

The prosecutor’s office supervises the investigation process, ensuring:

  • Proper registration and investigation of cases (Article 14.1 of the Law on Prosecution Service)
  • Correct application of criminal law in investigations (Article 14.1.3)
  • Protection of human rights during investigations (Article 14.1.4)

4.   Prosecution of Market Abuses

Market abuse is criminalized under the Criminal Code of Mongolia: Article 18.9 deals with “Abuse of securities market”

The FRC may refer cases to relevant authorities for criminal investigation and prosecution (Article 25 of the Law on FRC).

Prosecutors have the power to:

  • Supervise the investigation of violations (Article 12 of the Law on Prosecution Service)
  • Initiate criminal proceedings based on evidence of market abuse
  • Present cases of market abuse in court

The regulatory framework aims to ensure market integrity and investor protection through comprehensive surveillance, investigation, and enforcement mechanisms.

INVESTOR PROTECTION

  1. Measures to protect investors in the Mongolian capital market

The Mongolian capital market has several measures in place to protect investors:

    1. Disclosure Requirements

Securities issuers must provide a comprehensive prospectus containing detailed information about the company, its finances, risks, and the securities being issued (Article 10.3).

Issuers must immediately report any material changes or events that could impact investment decisions (Article 20.1.9).

Companies must disclose shareholders’ meeting resolutions and submit relevant information to the Financial Regulatory Commission (FRC) and the Exchange within three working days (Article 20.1.8).

    1. Regulatory Oversight

The FRC has the authority to demand information from securities issuers and related persons if there are concerns about unlawful operations, fraud, or violations of investors’ interests (Article 21.1).

The FRC can submit claims to court against issuers or authorized persons on behalf of investors if unlawful actions or violations of investors’ interests are suspected (Article 21.2).

    1. Corporate Governance

Securities issuers must comply with corporate governance principles endorsed by the FRC (Article 20.1.10).

    1. Legal Protections

The law prohibits the issuance of securities not registered in the registry of securities admitted for public offering (Article 11.10).

Issuers and their authorized persons are collectively liable for losses incurred due to incorrect, false, incomplete, or misleading information in the prospectus (Article 9.14).

    1. Market Integrity

The stock exchange is required to operate a fair, orderly, and transparent market (Article 49.1.6).

    1. Restrictions on Fund Usage

Issuers are prohibited from using funds raised from securities trading for purposes other than those stated in the securities prospectus (Article 12.9).

  1. Protection of retail investors compared to institutional investors (in Korea)

    1. Professional Investor Classification

In South Korea, there is a clear distinction between professional investors (including institutional investors) and retail investors. The Financial Investment Services and Capital Markets Act defines “Qualified Professional Investors”, which typically include financial institutions, pension funds, and other sophisticated investors.

    1. Regulatory Protection

Retail investors in Korea generally receive more regulatory protection compared to institutional investors. For example:

    1. Mandatory investor education and margin deposit requirements apply to retail investors for certain high-risk products like leveraged ETFs.
    2. Restrictions on the combination of underlying assets and multiples for leveraged derivatives are in place for retail investors.
    3. Access to Investment Products

      Institutional investors have broader access to various investment products compared to retail investors. For instance:

        1. Certain high-risk products, such as 3x leveraged products or cryptocurrency-related products, are not permitted for retail investors in Korea but may be accessible to institutional investors.
        2. Private placement of offshore funds is limited to QPIs, excluding general retail investors.
    4. Tax Considerations

There are some tax advantages for retail investors engaging in direct foreign equity trading, such as basic capital gains deductions and the ability to offset capital losses.

While Mongolia’s current regulatory framework may not explicitly differentiate between retail and institutional investors to the same extent as South Korea, adopting some of these protective measures could be beneficial:

  • Implementing a clear classification system for professional and retail investors;
  • Introducing tailored educational requirements and risk disclosure for retail investors;
  • Considering restrictions on certain high-risk products for retail investors; and
  • Developing tax incentives to guide retail investors towards more stable investment vehicles.

By adopting such measures, Mongolia could enhance investor protection while still allowing for market growth and sophistication, balancing the needs of both retail and institutional investors.

  • The rules governing corporate governance of listed companies

Based on the Law on Securities Market, the Company Law of Mongolia, and the Corporate Governance Code (2022), the key rules governing corporate governance of listed companies in Mongolia are as follows:

    1. Board Structure and Composition

Public companies must have a Board of Directors with at least 9 members, one-third being independent (Company Law, Article 75.4). The roles of CEO and board chair must be separate (Corporate Governance Code).

    1. Corporate Governance Code Compliance

Public companies, insurers, non-banking financial trust services, and investment management companies are mandated to comply with the Corporate Governance Code (FRC approval, March 23, 2022).

Companies must report on code implementation annually in their activity report and on their website.

    1. Board Responsibilities

The Board of Directors is the governing body between shareholders meetings (Company Law, Article 75.1). The board must define the company’s strategic development and supervise financial and operational activities (Corporate Governance Code).

    1. Committees

Companies must establish an audit committee as a subcommittee of the board, composed of two-thirds independent directors (Corporate Governance Code)

    1. Executive Management

The executive management shall manage daily activities of the company and represent the company without proxy (Corporate Governance Code).

  1. Regulations addressing related party transactions and conflicts of interest

Based on the Law on Securities Market of Mongolia, there are specific regulations addressing related party transactions and conflicts of interest:

    1. Related Party Transactions

“related persons” is defined in detail, including family members, as companies where the person is an authorized decision-maker, and entities where the person holds 10% or more of voting shares. “affiliation of legal persons” related to market participants. The Stock Exchange must disclose information about significant transactions and agreements with conflicts of interest made by securities issuers.

    1. Conflicts of Interest

Regulated persons are required to avoid conflicts of interest with clients and other relevant persons, and inform clients immediately if a conflict of interest arises.

The Law prohibits regulated persons from promoting self-interest over client interests or utilizing information obtained during service provision for self-benefit; obliges brokers to inform clients about any existing conflicts of interest before entering into a service agreement and to immediately inform clients if conflicts arise later; holds brokers liable for material damage incurred by clients due to failure to inform about conflicts of interest; and prohibits financial rating organizations from performing services with conflicts of interest.

CROSS-BORDER ISSUES

  1. The rules governing foreign investment in the Mongolian capital market, restrictions on foreign ownership
    1. General Rules for Foreign Investment

Foreign investors can invest freely in most sectors and industries in Mongolia, except where prohibited or restricted by law.

Foreign investors must register their investments with the state in accordance with the Company Law, Law on State Registration of Legal Entities, and other relevant laws and regulations.

Foreign investors are granted certain rights, including:

  • Selecting investment objects, forms, amounts, and areas independently
  • Investing in one or more sectors, projects, or operations
  • Importing goods, works, and services for invested projects
  • Disposing of assets and transferring profits abroad
  • Managing or participating in the management of invested entities3
    1. Restrictions on Foreign Ownership

Foreign state-owned entities (SOEs) face additional restrictions:

    • Foreign SOEs investing in more than 33% of an entity in the minerals, communication, or financial sectors must obtain approval from the state central administrative body in charge of economy and development (the “Ministry of Economy and Development”).
    • A foreign SOE is defined as an entity of which a foreign sovereign state directly or indirectly owns more than 50%.

Specific sectors requiring approval for foreign state-owned legal entities holding 33% or more equity:

    • Mining
    • Banking and finance
    • Media and communication1
    1. The process for obtaining approval for foreign state-owned entities includes:
      • Submitting an application to the Ministry of Economy and Development
      • A 30-day review period for the administrative body to make a recommendation to the Government
      • A 5-business day decision period for the Ministry to approve or reject the transaction
    2. The Government considers factors such as:
      • Potential conflicts with Mongolia’s National Security Concept
      • Compliance with Mongolian laws and business norms
      • Impact on competition in the sector
      • Effects on budget income and other government policies
      • Potential negative impacts on the concerned sector6

The Law on Minerals restricts ownership of strategic mineral deposits to a maximum of 34%, whether held by a single entity or a group of related entities.  This limit can be exceeded only if an investment agreement with the Government specifically allows for a higher percentage (Articles 5.7, 5.8).

  1. Regulation of cross-border transactions

Cross-border transactions in Mongolia are regulated through various laws and mechanisms:

    1. Foreign Investment Regulation
    2. Foreign investors must obtain permits for transactions involving strategic sectors such as banking and finance, media and telecommunications, and mining. Transfer Pricing Rules
      • Apply to both cross-border and domestic related party transactions.
      • Taxpayers must submit annual transfer pricing reports to tax authorities.
    3. Capital Requirements

Foreign investors in a Business Entity with Foreign Investment must inject a minimum capital of USD 100,000, either in cash or in-kind.

    1. Banking Sector Regulations

Foreign investors in Mongolian banks are subject to prior review and approval by the Central Bank of Mongolia. Transactions involving over 5% of shares in a Mongolian commercial bank require regulatory approval.

    1. Securities Market

The FRC oversees cross-border transactions in the capital markets. New regulations are expected to establish frameworks for corporate bond products and fintech innovations.

  • Bilateral or multilateral agreements related to capital market cooperation

Mongolia has several bilateral and multilateral agreements related to capital market cooperation:

    1. U.S.-Mongolia Bilateral Investment Treaty
      • Signed on October 6, 1994
      • Entered into force on January 1, 1997
      • Protects U.S. investors and assists Mongolia in developing its economy
      • Provides national treatment and most-favored-nation treatment for investments
      • Allows for international arbitration of investment disputes
    2. S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment
      • Signed on September 24, 2013
      • Went into effect on March 20, 2017
      • Promotes transparency in policy-making and facilitates information exchange between governments
      • Applies to measures affecting trade in goods, services, investments, and intellectual property rights
    3. Mongolia-Canada Foreign Investment Promotion and Protection Agreement
      • Signed in 2016
      • Entered into force on March 7, 2017
    4. Mongolia-Japan Economic Partnership Agreement (EPA)
      • Signed in February 2015
      • Entered into effect in June 2016
    5. Multilateral agreements
      • Mongolia is a member of the World Trade Organization (WTO)
      • Mongolia is a party to the Seoul Convention establishing the Multilateral Investment Guarantee Agency
      • Mongolia is a signatory to the Washington Convention on the Settlement of Investment Disputes
    6. Other bilateral agreements
      • Mongolia has established Foreign Investment Protection and Promotion Agreements with 43 countries
      • Mongolia has Double Taxation treaties with 26 countries
    7. Economic Partnership Agreement Negotiations

As of September 10, 2024, South Korea and Mongolia launched the third round of talks for a comprehensive economic partnership agreement. This four-day negotiation in Ulaanbaatar focused on:

    • Strengthening cooperation on trade and supply chains
    • Discussing 13 segments, including goods, services, investment, and digital trade
    • Enhancing cooperation on stable supply chains
    • Joint responses to climate changes

ENFORCEMENT & SANCTIONS

  1. The enforcement powers of the regulatory authorities

Based on the Law on the Legal Status of Financial Regulatory Commission and other relevant legislation, the enforcement powers of regulatory authorities and types of sanctions for violations of capital market regulations in Mongolia are as follows:

1.   Enforcement Powers

    1. Investigation and Inspection:
      • Inspectors appointed by the FRC can enter offices or premises of license holders during working hours (Article 25.1.1)
      • Request and review documents, make copies, and question relevant parties (Articles 25.1.2, 25.1.3, 25.1.4)
      • Conduct inspections without prior notice if violations are suspected (Article 24.4)
    2. Information Gathering:
      • Obtain necessary reports, explanations, and documents from relevant organizations and authorities (Article 25.1.2)
    3. Compliance Monitoring:
      • Monitor activities of license holders (Article 6.1.4)
      • Supervise implementation of rules, procedures, and license requirements (Article 6.1.3)
    4. Regulatory Action:
      • Suspend activities of licensees, in whole or in part (Article 25.1.6)
      • Impose duties to eliminate violations and ensure their fulfillment (Article 25.1.5)

2.   Types of Sanctions

    1. Administrative Sanctions:
      • Impose administrative sanctions in compliance with relevant legislation (Article 25.1.7)
    2. License-related Penalties:
      • Suspend, revoke, or terminate licenses (Article 6.1.3)
    3. Financial Penalties:
      • Set and impose regulatory service fees on license holders (Article 6.1.5)
    4. Operational Restrictions:
      • Suspend activities of licensees, partially or fully (Article 25.1.6)
    5. Criminal Referrals:
      • Transfer relevant documents to authorities for criminal prosecution if violations are deemed criminal offenses (Article 25.1.9)
    6. Fines:
      • Infringement of the legislation is subject to penalties including fines, forfeiture of any ill-gotten gains, and mandatory compensation for resulting damages under the Law on Infringement. Fines typically range from $3 to $5,780 for individuals and $30 to $57,793 for legal entities depending on the severity of the offense.

3.   Criminal Penalties:

While not directly imposed by the regulatory authorities, serious violations can lead to criminal charges, including imprisonment for up to 12 years for abuse of the securities market and insider trading.

The regulatory framework aims to provide comprehensive enforcement powers and a range of sanctions to ensure compliance with capital market regulations and maintain market integrity.

COMPARATIVE ANALYSIS

  1. Comparison of Mongolia’s capital market regulations with South Korea and lessons to learn

Mongolia’s capital market regulations have been evolving to align more closely with international standards. However, there are still significant differences and areas for improvement.

The Mongolian capital market is relatively young and less developed compared to South Korea’s. While Mongolia has been making efforts to modernize its regulatory framework, South Korea’s capital market regulations are more sophisticated and comprehensive. For instance, South Korea has a more robust self-regulatory system, with organizations like the Korea Exchange and the Korea Financial Investment Association playing crucial roles in market supervision.

One key difference is in the financing structure. Mongolian companies still rely heavily on bank financing, similar to the German model. In contrast, South Korean companies have a more balanced approach, with a significant portion of capital raised through the stock market. This suggests that Mongolia could benefit from policies encouraging greater use of equity financing to diversify funding sources for businesses.

Mongolia has recently taken steps to enhance its capital market connectivity, as evidenced by the “Mongolian Capital Market Connectivity 2024: Korea” event. This initiative aims to attract South Korean investments and facilitate cross-listing of companies, indicating Mongolia’s recognition of the need to learn from and integrate with more developed markets.

In terms of corporate governance, Mongolia has made progress by adopting and revising its Corporate Governance Code, with the latest version in 2022 extending its application beyond listed companies to include insurers, trust service providers, and investment management companies. However, the implementation and enforcement of these governance standards remain challenges. South Korea, on the other hand, has a longer history of corporate governance reforms and stronger enforcement mechanisms.

Mongolia could learn several lessons from South Korea’s experience:

    1. Developing a more robust self-regulatory framework to complement government oversight.
    2. Encouraging greater market participation by diversifying financial instruments and improving investor protection.
    3. Strengthening the implementation and enforcement of corporate governance standards.
    4. Fostering a “securities culture” to shift from bank-dominated financing to a more balanced capital market structure.

 

 

 

References:

  • Law of Mongolia on Securities Market
  • Civil Code of Mongolia
  • Company Law of Mongolia
  • Law of Mongolia on Investment
  • Law of Mongolia on Asset-backed Securities
  • Law of Mongolia on Investment Funds
  • Banking Law of Mongolia
  • Law of Mongolia on Central Bank (Bank of Mongolia)
  • Law of Mongolia on the Legal Status of the Financial Regulatory Commission
  • Law of Mongolia on Infringement
  • Law of Mongolia on Prosecution Service
  • Law of Mongolia on State Registration of Legal Entities
  • Law of Mongolia on Minerals
  • Law of Mongolia on Infringement
  • Criminal Code of Mongolia

 

 

For further information, please contact V. Bolormaa, GRATA International Law Firm Partner at [email protected] or +976 70155031.

GRATA International in Mongolia is part of the global law firm, which has offices in 20 other nations. This legal material is not a thorough examination of any particular problems; rather, it is meant to provide general knowledge. Before making any decisions, the reader should consult a professional for advice that is suitable to their situation (s). Any consequences or damages resulting from the use of this legal information are not our responsibility.

More from GRATA International