MONGOLIAN SECURITIES MARKET UPDATE

December 2013

PART I.

LEGAL AND REGULATORY ENVIRONMENT

1

LEGAL AND REGULATORY REFORM

MSE

Rules &

Regulations

Depository

Receipt rules

Trading rules

Membership

rules

• Listing Rules: Designed to meet

highest international standards,

setting out the entry requirement

and obligations for companies on

the market

• Ensures smooth process for dual

listing in other markets

• Trading rules cover how participants access the trading

and procedures and behaviour while trading

• Trading rules are aligned with the operation and system

rules of the trading system

• Membership rules to ensure conduct and general suitability

of market participants. Required to provide access to trading

National legal

framework

Securities

Law

Companies

Act

Post Trade rules

Mineral Law

• Settlement rules cover how the activities after trading and

management of risk of default before delivery

• Settlement rules are aligned with the operation and system

rules of the settlement / post trade systems

Investment

Law

Investment

Fund Law

Private

Pension

Fund Law

Listing rules

Custodian rules • Custodian rules to ensure conduct and general suitability of

custodian banks. 2

THE REVISED SECURITIES MARKETS LAW

an important and established concept in common law

jurisdictions

"nominal holder“ is regulated entity

who is registered as depositor/custodian of a given

security

who is not the beneficial owner of such security

"beneficial owner" is "real" owner of the security

who is entitled to enjoy the rights and benefits attached

to such security

increases the range of tradable securities to include

derivatives (options, futures), depositary receipts and

warrants

over-the-counter trading of securities is expressly permitted

exchange to set the standards of listed futures and options

contracts

regulatory framework for depositary receipts

global and Mongolian DR-s

ongoing disclosure requirements

semi-annual and annual financial reports

changes to the management, influential shareholding

structure

shareholding meetings

share transactions by the issuer and insiders

operational updates and press releases

mandatory facilitation of disclosure information via issuer’s,

exchange’s and FRC’s websites

securities clearing activities

matching trades and managing settlement risk

securities settlement activities

delivery-versus-payment

rolling settlement process

securities ownership registry activities

central securities depositories

nominee ownership records of members

custodian banks

nominee and beneficial ownership records of banks

clients

Distinction between nominal and beneficial owner Increased market transparency

Increased liquidity Clear definition of post trading activities

3

THE REVISED INVESTMENT LAW

Key features The form of investment

Promotion of Investment

• Applies to both foreign and domestic direct investments.

• Companies with foreign investment need only register with the Legal Entities Registration Office ("LERO").

• No approval requirements are imposed on foreign private investment.

• Increases the minimum capital requirements for foreign- invested entities. Each foreign shareholder contributes US$ 100,000 if foreign investor(s) hold a 25% or more interest therein.

• Provides the definition of a foreign state-owned legal entity ("FSOE") as "a legal entity in which a foreign state directly or indirectly holds more than 50 per cent of the entity's issued shares".

• Removes the classification of strategic economic sectors for foreign private investment, but maintains the approval requirements for certain equity investments made by FSOEs in those sectors that were regarded as strategically important under the SFI Law.

• Appoints the Ministry of Economic Development ("MED") as the approval authority for certain investments by FSOEs.

i. Incorporation of a business entity;

ii. Purchase of securities;

iii. Merging or consolidating a company;

iv. Enter into concession, production-sharing, marketing or management agreements;

v. Financial lease and franchise; or

vi. Other types

Non-tax incentives

in relation to land rights, customs clearance,

foreign labour quotes, immigration matters

Tax incentives

exemption from the payment of certain taxes,

preferential tax treatment, accelerated

depreciation and amortisation that is deductible

from taxable income, carrying forward of losses

TAX STABILISATION

(i) Stabilisation Certificates

(ii) Investment Agreements

Came into force on 1 Nov 2013

4

THE INVESTMENT FUND LAW

Will be effective from 1 Jan 2014

MUTUAL FUNDS

Can raise funds through public

offering to 50 or more people

All funds will be allowed to run for

up to 10 years

PRIVATE FUNDS

Not allowed to go public marketing

SPECIAL

PURPOSE VEHICLE

Funds will be

established by Fund

Management companies,

licensed by the FRC*

*FRC – Financial regulatory commission of Mongolia www.frc.mn

Custodian services

Investable asset classes:

1. Government bonds

2. Municipal and aimag bonds

3. Listed stocks

4. Private company shares

5. Public debt instruments

6. Private debt instruments

7. Foreign gov. bonds

8. Asset backed securities

9. Derivatives

10. Foreign and local currency

11. Gold and other commodities

12. Real estate

5

SPV, investments funds will

not be taxed. Investors will pat

income tax

PART II.

LSE-MSE STRATEGIC PARTNERSHIP

6

TOTAL LISTED COMPANIES - 262 JSCs /100%/

LISTED - 183 JSCs /69.8%/

“A” board - 36 JSCs

“B” board - 147 JSCs

DELISTABLE - 58 JSCs /22.1%/

100% State owned - 21 JSCs

CAPITAL MARKETS KEY STATISTICS

47

57

41

70

47

Number of listed companies

Mining

Manufacturing

Agriculture

Construction &transportation

Trade & Services

1019.2 2030.81

10256.13

5583.22 6189.91

14759.81

32954

17714.51

13829.76

2005 2006 2007 2008 2009 2010 2011 2012 2013

ТОP-20 INDEX PERFORMANCE

TOTAL MEMBER COMPANIES - 82

Broker, dealer and underwriter - 17

Broker dealer - 49

Broker, dealer, underwriter - 8

and investment advisor

Broker, dealer and investment advisor - 8

0

0.5

1

1.5

2

2.5

In t

rill

ion

MN

T

MARKET CAPITALIZATION

7

April 2011

The Master Services

Agreement was signed

with the London Stock

Exchange for the purpose

of implementing the MSE

Development Plan;

April 2011

July

Millennium IT technology,

was introduced to Mongolian

market.

T+3 settlement system

introduced with the new

technology.

RECENT DEVELOPMENTS IN CAPITAL MARKETS

July-August

Advanced level Capital

markets training provided

by London Stock Exchange

Academy professionals in

Ulaanbaatar and London.

April

Brokers started remote

trading. Currently 15

brokers are trading from

their offices.

August

Established

cooperation agreement

with the FTSE group

for the design and

calculation of FTSE-

MSE indices

September

Placed on FTSE

Frontier Market

Watchlist.

October

FRC established MOU

with Securities and

Futures Commission

of Hong Kong

8

2011 2012

2013

The Principle Objective of the Plan is to transform the MSE to a world class Exchange Operator and Develop the Mongolian

Capital Market as a whole

9

FRC

Central Bank of

Mongolia

MSE Equities &

Debt

Commodities

Derivatives

CCP

MSCH&CD

Domestic Issuers

Local Brokers

International Brokers

International Investors

Investors

Domestic Banks

Custodian Banks

MSE LOOKING TO THE FUTURE

Authorities with regulatory

oversight

Mongolian market infrastructure

Key Participants using

the market

Key

Existing

Future

MSE GROUP

NEW FRONTIER MARKET

• The Mongolian capital market has been placed on FTSE’s Watch List for possible promotion to Frontier market status.

• FTSE assumes a major position in global financial market and enjoys an unparalleled reputation for provision of indices

and market data that many international investors an investment funds base on to make informed investment decisions.

• The implementation of a world standard trading and

settlement system and market infrastructure and increased

transparency in the market had a major influence in placing

Mongolia on a Watch list for possible promotion to Frontier

market status.

10

Delisted

Existing listed companies who failed to meet

the new listing standards

PROFILE OF TARGET LISTED COMPANIES

Existing

Current listed companies who meet (or

close to) the new listing standards

New Domestics

Existing Mongolian companies

which decide to list on the

market

Ap

pro

x. m

ark

et ca

pita

lisa

tion $

m

Repatriations

Mongolia companies listed on another exchange who decide to dual

list on MSE

(e.g South Gobi / Petro Matad)

Approx. timing

State Privatisations

Significant state assets listed on MSE and LSEG for capital raising

New Licences

Small parcels of mining assets sold off by Government

Foreign Listings

Siberian mining companies too small to list on

MICEX (or London) but wanting to raise further

capital. Success could establish MSE as a

regional exchange

Increasing the quality of the companies on the market is key to attracting new investors. There are seven categories of

companies that we should target.

11

“MONGOLIAN STOCK EXCHANGE” JSC

Sukhbaatar Square-2, Ulaanbaatar city, Mongolia

Fax: (976)-11-325 170

Email: info@mse.mn

Website: www.MSE.mn

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