Chair­man of Fi­nan­cial Reg­u­la­tory Com­mis­sion S.Davaa­suren dis­cusses prospect of Mon­go­lia’s stock mar­ket


The fol­low­ing is an in­ter­view with Dr. S.Davaa­suren, the Chair­man of the Fi­nan­cial Reg­u­la­tory Com­mis­sion, de­tail­ing to about the cur­rent state, fu­ture out­look, pol­icy and reg­u­la­tion of Mon­go­lia’s stock mar­ket.

Mon­go­lia has long dis­cussed ways to de­velop its stock mar­ket. How­ever, the stock mar­ket ac­counts for less than five per­cent of the to­tal fi­nan­cial mar­ket and it has been this way for 20 years. Is this due to short­com­ings pol­icy wise or has it been caused by an un­fa­vor­able le­gal en­vi­ron­ment?

Around 26 years have passed since Mon­go­lia es­tab­lished a stock mar­ket but liq­uid­ity and trade vol­ume is very low. This has been caused by a num­ber of fac­tors in­clud­ing the over cen­tral­iza­tion of stocks, in­ad­e­qua­cies in the gover­nance of com­pa­nies, in­suf­fi­ciency of trans­parency and fi­nan­cial re­ports, and lack of new prod­ucts and ser­vices on the mar­ket. In ad­di­tion to in­suf­fi­cient le­gal en­vi­ron­ment, lack­lus­ter le­gal en­vi­ron­ment and pol­icy man­age­ment, I per­son­ally be­lieve that the spirit to de­velop the stock mar­ket was lack­ing. The stock mar­ket acts as a dis­trib­u­tor of cap­i­tal to other eco­nomic sec­tors, con­tribut­ing to eco­nomic growth. There­fore, it is nec­es­sary to state that the un­der­de­vel­op­ment of the stock mar­ket is a hin­drance to the over­all eco­nomic growth of Mon­go­lia.

We have ob­served an over cen­tral­iza­tion of stocks in the mar­ket. Due to this, mar­ket par­tic­i­pa­tion wors­ened and the vol­ume of trade de­creased. Econ­o­mists say that lack of op­por­tu­ni­ties to profit on the stock mar­ket out­side of gov­ern­ment bonds has been the main fac­tor for today’s sit­u­a­tion. What poli­cies must the gov­ern­ment im­ple­ment to im­prove par­tic­i­pa­tion in the stock mar­ket?

As of 2016, there were seven bil­lion shares of pub­lic com­pa­nies on the se­cu­ri­ties mar­ket. The ma­jor­ity of share­hold­ers - 99.6 per­cent only - own up to a five per­cent stake. Those who own over a 33 per­cent stake only ac­count for 0.1 per­cent of all share­hold­ers. The over cen­tral­iza­tion of stocks has neg­a­tively af­fected liq­uid­ity. This is one rea­son. Out­side of the over cen­tral­iza­tion of stocks, other fac­tors that cause trad­ing on the stock mar­ket to be low is the in­suf­fi­cient num­ber of busi­nesses and in­di­vid­u­als in­volved in the stock mar­ket and the in­abil­ity to at­tract both do­mes­tic and for­eign in­vestors. In ad­di­tion, knowl­edge of the stock mar­ket is rel­a­tively low amongst the pub­lic and the lack of new op­por­tu­ni­ties is also a big ob­sta­cle.

Are there any pos­i­tive signs or trends? The im­pe­tus or the stim­u­lus for de­vel­op­ment in the stock mar­ket seems to be in­suf­fi­cient. What are your thoughts on this?

The fi­nan­cial mar­ket is af­fected most by changes in any eco­nomic sec­tor. Mon­go­lia’s econ­omy has been per­form­ing rel­a­tively well com­pared to a year or two ago, and it has been show­ing signs of re­vival. In line with this, the stock mar­ket has pro­gressed fur­ther com­pared to the past. This year, many com­pa­nies have been able to suc­cess­fully is­sue their stocks and se­cu­ri­ties.

For in­stance, two of the lat­est IPOs were over­sub­scribed by 180 per­cent and 290 per­cent, re­spec­tively. This just goes to show that the Mon­go­lian stock mar­ket has sig­nif­i­cant cap­i­tal and has the op­por­tu­nity to at­tract more in­vestors.

In the past, four com­pa­nies were not able to raise enough cap­i­tal and two were re­jected by the com­mis­sion. How many com­pa­nies have submitted their re­quests to the Fi­nan­cial Reg­u­la­tory Com­mis­sion to is­sue IPOs?

Never have we had a year in which both the num­ber of IPOs and the suc­cess rate of IPOs have been so high. I be­lieve it is im­por­tant to note that the fact that none of the IPOs this year have failed is not by ac­ci­dent. The Fi­nan­cial Reg­u­la­tory Com­mis­sion looked at its past mis­takes and made the de­ci­sion to pay special at­ten­tion to the stock mar­ket and spe­cific IPOs. The com­mis­sion has re­ceived one more re­quest for an IPO.

Rais­ing cap­i­tal from the pub­lic is not some­thing that any­one who wishes or needs to can do. A com­pany must meet a num­ber of re­quire­ments be­fore be­ing al­lowed to re­lease its IPO. As the com­pa­nies will be us­ing peo­ple’s money to ex­pand their op­er­a­tions or to im­ple­ment cer­tain projects, the com­mis­sion needs to know how likely it is to be suc­cess­ful, whether they will be able to pro­vide a re­turn on the in­vest­ment, and if the IPO meets the le­gal re­quire­ments.

There are many in­stances where com­pa­nies that do not meet re­quire­ments and that have a low chance of im­ple­ment­ing their in­tended projects are re­jected. In ad­di­tion, if a pro­fes­sional con­sul­tant com­pany such as an un­der­writer has made the wrong cal­cu­la­tions, it leads to an un­suc­cess­ful IPO.

Mon­go­lia was taken off the FTSE Rus­sell fron­tier mar­kets watch list. Will this neg­a­tively af­fect the Mon­go­lian stock mar­ket and com­pa­nies reg­is­tered on it? How does the Fi­nan­cial Reg­u­la­tory Com­mis­sion see this is­sue?

Our goal was to el­e­vate Mon­go­lia to the ac­tual FTSE Rus­sell fron­tier mar­kets list from just the watch list. Un­for­tu­nately, Mon­go­lia was cut from the list. The main rea­sons for the re­moval was the in­ad­e­quacy in the ca­pac­ity of com­pa­nies, the lack of cap­i­tal in the stock mar­ket, and the un­der­de­vel­op­ment of the stock mar­ket’s in­fra­struc­ture. It is a sign that pro­fes­sion­als who have been work­ing in the stock mar­ket for al­most 30 years have not de­vel­oped their pro­fes­sional skills.

In coun­tries with a de­vel­oped stock mar­ket, the val­u­a­tion of the mar­ket and the num­ber of par­tic­i­pants pos­i­tively af­fect each other. That is not the case in Mon­go­lia. In the sec­ond quar­ter of 2017, less than 10 per­cent of pub­li­cally reg­is­tered com­pa­nies dis­trib­uted div­i­dends to its share­hold­ers. More than 60 per­cent of pub­lic com­pa­nies do not record prof­its and some are in deficit. Whether a com­pany will dis­trib­ute div­i­dends or not first de­pends on the op­er­a­tions and profit of the com­pany. Even though the econ­omy and the peaks and val­leys of the econ­omy are fac­tors, the main fac­tor is the op­er­a­tion of the com­pany.

The com­mis­sion is tak­ing step by step mea­sures to help im­prove the fi­nan­cial, pay­ment, and pro­fes­sional ca­pac­ity of both par­tic­i­pants and com­pa­nies in­volved in the stock mar­ket. In ad­di­tion, we are work­ing to make the le­gal en­vi­ron­ment and reg­u­la­tion more com­pre­hen­sive than what it is today. If par­tic­i­pants and com­pa­nies in­volved in the stock mar­ket im­prove their op­er­a­tional ca­pac­i­ties, it will in­crease the num­ber of listed com­pa­nies, help­ing to lead the stock mar­ket to a new level.

The Fi­nan­cial Reg­u­la­tory Com­mis­sion is re­ceiv­ing feed­back from the pub­lic on the re­form of rules and pro­ce­dures for the stock mar­ket. What ideas has the com­mis­sion come up with in re­gards to im­prov­ing the leg­is­la­ture and le­gal en­vi­ron­ment sur­round­ing the stock mar­ket?

In July 2016, the Gen­eral Ad­min­is­tra­tive Law came into ef­fect. The law re­quires all gov­ern­ment agen­cies to abide by ar­ti­cles in this law when draft­ing acts or im­ple­ment­ing ac­tion. As a re­sult of this re­quire­ment, the Fi­nan­cial Reg­u­la­tory Com­mis­sion is cur­rently in the process of chang­ing the rules and pro­ce­dures on not only the stock mar­ket but the in­sur­ance sec­tor, non-bank­ing fi­nan­cial in­sti­tu­tions, and sav­ings in­sti­tu­tions in line with the law.

Cur­rently, the com­mis­sion over­sees the en­force­ment of 20 dif­fer­ent laws and 160 rules and pro­ce­dures in the sec­tors that it reg­u­lates. In light of the new Gen­eral Ad­min­is­tra­tive Law, the word­ing and of­fi­cial use of terms in acts im­ple­mented by the com­mis­sion will be changed. More than half of what will be changed is re­gard­ing the stock mar­ket.

In ad­di­tion to amend­ing the rules and pro­ce­dures, there is a need to re­form laws and have more in­ter­con­nec­tiv­ity be­tween laws re­gard­ing the sec­tors that the com­mis­sion reg­u­lates. Par­lia­ment ap­proved a guide­line for im­prov­ing and mak­ing Mon­go­lian laws more com­pre­hen­sive un­til 2020. In that guide­line, more than 10 laws re­gard­ing sec­tors the com­mis­sion reg­u­lates will be re­formed.

In ad­di­tion, the na­tional agenda to de­velop Mon­go­lia’s fi­nan­cial mar­ket un­til 2025 has been ap­proved re­cently. This agenda de­ter­mined that the main driv­ing force of de­vel­op­ment in the fi­nan­cial mar­ket will be the stock mar­ket. Not only will the com­mis­sion be work­ing to ad­dress cur­rent is­sues, it has set a goal to make the stock mar­ket the dom­i­nant sec­tor in the fi­nan­cial mar­ket by 2025.

Since the turn of 2017, has there been any sig­nif­i­cant changes in the stock mar­ket?

As of the third quar­ter of 2017, the to­tal val­u­a­tion of the stock mar­ket is 2.1 tril­lion MNT. This is a 100 per­cent or two-fold in­crease in a span of one year. This is very close to the level that the val­u­a­tion reached dur­ing 2011 when our coun­try’s eco­nomic growth reached 17.5 per­cent. Yet, we know how low the eco­nomic growth is today. At that time, the in­crease was mainly caused by an in­crease in for­eign di­rect in­vest­ment be­cause of a min­ing boom.

This time around, this is solely a fac­tor of in­creas­ing par­tic­i­pa­tion of do­mes­tic in­vestors and the in­creas­ing in­ter­est of the pub­lic. In other words, it is a rel­a­tively sus­tain­able growth.

Last year, the com­mis­sion made the de­ci­sion to in­crease the min­i­mum cap­i­tal re­quire­ment of non­bank­ing fi­nan­cial in­sti­tu­tions. This de­ci­sion has more so helped in­crease the flow and im­prove the dis­tri­bu­tion of cap­i­tal rather than limit the num­ber of non-bank­ing fi­nan­cial in­sti­tu­tions. It is even pos­i­tively af­fect­ing the in­crease in the val­u­a­tion of the stock mar­ket. Peo­ple might re­mem­ber that the com­mis­sion said at the time that by tak­ing this step, in­ter­est rates would drop. Today, you can say it is a re­sult of the com­mis­sion’s ef­forts that the con­ver­sa­tion on de­creas­ing in­ter­est rates has be­come a topic amongst politi­cians and banks.

A tem­po­rary list of for­eign ex­changes that com­pa­nies are al­lowed to be dual-listed on was ap­proved by the com­mis­sion. Cur­rently, there are 34 Mon­go­lian com­pa­nies listed on five dif­fer­ent for­eign ex­changes. Is it pos­si­ble to im­ple­ment the dual list­ing sys­tem?

The ma­jor­ity of the 30 com­pa­nies listed on for­eign ex­changes that op­er­ate in Mon­go­lia are fo­cused on min­ing. In ac­cor­dance to the Law on Re­sources, these com­pa­nies must of­fer no less than 10 per­cent of their stock on the Mon­go­lian stock mar­ket. In order to en­force this law, the need to im­ple­ment a dual-list­ing sys­tem arises.

There is an ex­pec­ta­tion that dual list­ing will bring the stock mar­ket in Mon­go­lia to new heights. Dual list­ing on a for­eign ex­change has the ben­e­fit of help­ing im­prove liq­uid­ity, in­creas­ing in­vestors, and pro­vid­ing ad­di­tional source of cap­i­tal for a com­pany. In ad­di­tion, Mon­go­lian com­pa­nies will have the chance to in­tro­duce their op­er­a­tions in­ter­na­tion­ally, im­prove their value, and to in­crease their sales and prof­its.

How­ever, in order to im­ple­ment a sys­tem of dual list­ing, Mon­go­lia needs to de­velop its stock mar­ket in­fra­struc­ture, im­prove its pay­ment and trad­ing sys­tem to in­ter­na­tional stan­dards, and make the in­vest­ment en­vi­ron­ment more com­pre­hen­sive. In order to con­trib­ute to these ef­forts, the Fi­nan­cial Reg­u­la­tory Com­mis­sion re­leased a list of 26 worldlead­ing for­eign ex­changes ap­proved for dual list­ing. Right now, the com­mis­sion is re­ceiv­ing feed­back from mar­ket par­tic­i­pants, in­vestors, the pub­lic, and pro­fes­sion­als to ap­prove the rules and pro­ce­dures re­gard­ing dual list­ing.

The min­i­mum cap­i­tal re­quire­ment to be listed on the Mon­go­lian Stock Ex­change was in­creased to 20 bil­lion MNT. How will this pos­i­tively af­fect the do­mes­tic stock mar­ket?

In 2006, the Com­mis­sion on State Prop­erty set the min­i­mum cap­i­tal re­quire­ment for a com­pany listed on the Mon­go­lian Stock Ex­change at 1.9 bil­lion MNT. It is un­de­ni­able that hav­ing the re­quire­ment this low for so long has played a part in the shrink­ing par­tic­i­pa­tion in the stock mar­ket. There­fore, in­creas­ing the min­i­mum cap­i­tal re­quire­ment for the Mon­go­lian Stock Ex­change to 20 bil­lion MNT was an im­por­tant de­ci­sion.

Cur­rently, there are two or­ga­ni­za­tions that man­age trad­ing on the stock mar­ket in Mon­go­lia. One is state-owned and the other is a pri­vate ex­change. Both of them have been ful­fill­ing the re­quire­ment set forth by the com­mis­sion. The first pri­vate ex­change in Mon­go­lia, the Mon­go­lian Se­cu­ri­ties Ex­change re­ceived its li­cense two years ago but had not con­ducted its op­er­a­tions un­til this year. The pol­icy mea­sures taken by the com­mis­sion helped the Mon­go­lian Se­cu­ri­ties Ex­change be­gin its op­er­a­tions and it has suc­cess­fully con­ducted its first trade.

Today, it is cru­cial to im­prove the com­petive­ness of an or­ga­ni­za­tion that man­ages stock trad­ing and ex­changes that sup­port small-to-medium en­ter­prises. Only then will the stock mar­ket de­velop, with more com­pa­nies is­su­ing IPOs and rais­ing cap­i­tal from the pub­lic.

You were elected as one of the nine mem­bers of Al­liance for Fi­nan­cial In­clu­sion (AFI) board of di­rec­tors rep­re­sent­ing 114 cen­tral banks and reg­u­la­tory or­ga­ni­za­tions of 95 coun­tries around the globe. In Mon­go­lia, how do we need to in­crease equal ac­cess to fi­nan­cial prod­ucts and en­sure fi­nan­cial in­clu­sion? Com­pared to other de­vel­op­ing coun­tries, where is Mon­go­lia at?

The Al­liance for Fi­nan­cial In­clu­sion is one of the largest fi­nan­cial al­liance or­ga­ni­za­tions with the most num­ber of mem­ber coun­tries. As a re­sult, its in­flu­ence on the in­ter­na­tional fi­nan­cial pol­icy and per­for­mance has been in­creas­ing rapidly. The nine mem­bers on the board of di­rec­tors man­age the co­op­er­a­tion and re­la­tions be­tween mem­ber coun­tries and set the pol­icy of the al­liance. In other words, these nine peo­ple are es­sen­tially di­rect­ing the fi­nan­cial in­clu­sion of around 100 coun­tries.

Re­gard­less of a coun­try’s level of de­vel­op­ment, in­creas­ing fi­nan­cial in­clu­sion and the use of fi­nan­cial prod­ucts is im­por­tant. Fi­nan­cial in­clu­sion is en­sur­ing that every­one has ac­cess to a wide choice of need­based trans­par­ent fi­nan­cial ser­vices and prod­ucts at a low cost. In order to im­prove fi­nan­cial in­clu­sion, fi­nan­cial ser­vices and prod­ucts based on in­for­ma­tion tech­nol­ogy need to be de­vel­oped and im­ple­mented. In ad­di­tion, im­ple­ment­ing RegTech (reg­u­la­tory tech­nol­ogy) has be­come cru­cial.

Mon­go­lia ranks high in terms of the por­tion of the pop­u­la­tion that owns a bank ac­count with al­most 90 per­cent. Yet, the re­al­ity is that the trans­ac­tions of those ac­counts are low, the fi­nan­cial ed­u­ca­tion of cit­i­zens is in­ad­e­quate, most peo­ple have not learned habits of long-term fi­nan­cial planning or sav­ing money, and do not ac­count for risks well. As a com­bi­na­tion of all these fac­tors, the fi­nan­cial in­clu­sion of Mon­go­lia is in­suf­fi­cient.

One of the lat­est de­ci­sions made by the AFI board of di­rec­tors is to sign a mem­o­ran­dum of un­der­stand­ing with the Asian De­vel­op­ment Bank. The mem­o­ran­dum opens up the op­por­tu­nity for both or­ga­ni­za­tions to co­op­er­ate more in terms of pro­mot­ing fi­nan­cial in­clu­sion. Be­cause Mon­go­lia will be a part of these projects and agen­das, as a mem­ber of the board of di­rec­tors, I have paid close at­ten­tion to this is­sue. Mov­ing for­ward, the Fi­nan­cial Reg­u­la­tory Com­mis­sion will work to de­velop Mon­go­lia’s fi­nan­cial mar­ket, in­crease fi­nan­cial in­clu­sion, and co­op­er­ate with many other coun­tries in this re­gard.

Chair­man of the Fi­nan­cial Reg­u­la­tory Com­mis­sion S.Davaa­suren

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