INTRODUCTION TO LISTING RULE – LEGAL FRAMEWORK & REGULATION

29 August, 2016Ariuntuya Batsaikhan

Specialist, Listing & Research Division, Policy Planning Department

Contents• Legal framework: Laws and regulations • Listing and listing rule of MSE• Basics for listing• Listing entry criteria • Preparation process• Application to list on MSE• Securities prospectus• Listing requirements and waivers• Payments and fees

Legal framework: Laws and regulations• Company Law of Mongolia• Law of Mongolia on the Securities Market• Law of Mongolia on Investment Fund• Law of Mongolia on Securitization and Asset Backed Securities• Law of Mongolia on Legal Status of Financial Regulatory

• Registration rule of securities by FRC• Listing rule of securities by MSE

Important timeline on Mongolian capital market

MSE established 1.18.1991

1991 First company law

First securities law 1994

11.17.2005 Legal status of FRC

FRC established 1.25.2006

4.23.2010

Company law 10.6.2011

5.24.2013 Securities law

10.3.2013

11.23.2015

12.30.2015

FRC-Security registration rule

Asset backed securities law

MSE-Security listing rule

Investment fund law

Company law• Passed in October 06, 2011 (updated version)• 1.1. The purpose of this law is to regulate relations with respect to the

establishment, registration and reorganization of a company, its management and organizational structure, supervisory structure, the rights and obligations of its shareholders, and its liquidation.

Law of Mongolia on the Securities Market• Passed in May 24, 2013 (updated version)• 1.1 The purpose of this Law is to regulate relations concerning the

regulation and monitoring of activities of participants in the securities market, and the protection of the rights and interests of investors.• 1.2 In order to achieve the objectives of this Law, the following

principles shall be observed in its implementation: reducing the risks in the securities market system and ensuring fairness, transparency and efficiency.

Legal framework: Laws and regulations• Law of Mongolia on Investment Fund

• Passed in October 03, 2013• The Investment Funds Law regulates matters relating to the issue of licenses to investment funds, management of fund assets, the activities

of investment funds, safe-keeping and registration of fund assets, the disclosure of information to investors, and the operations of regulated entities that provide services to investment funds.

• It stablishes a fundamental basis to direct the infrastructure of the financial market into the right direction.

• Law of Mongolia on Securitization and Asset Backed Securities• Passed in April 23, 2010• It is the policy of Mongolia to promote the development of the housing finance market and the capital markets generally by supporting

implementation of securitization, by providing a legal and regulatory framework for securitization, and creating a favorable market environment for a variety of asset backed securities. This law is intended to provide the framework for implementation of securitization and the asset backed securities market by authorizing Special Purpose Companies to be created for the sole and exclusive purpose of holding revenue producing assets and issuing asset backed securities, subject to the regulation of the Financial Regulatory Committee of Mongolia.

• Law of Mongolia on Legal Status of Financial Regulatory• Passed in November 17, 2005• The purpose of this Law is to define the structure of the Committee, legal grounds for its activities, and govern relations arising from

regulation and monitoring financial services other than banking activities.

• Registration rule of securities by FRC (updated in November 23, 2015)

Listing: What we list?• Stocks• Bonds; company & government

In the future?• Derivatives; options & futures• Warrants• REITs• DRs • Other products

Listing: Statistics

7; 3%

46; 20%

175; 77%

Listed JSCs by classification

CLASSIFICATION I CLASSIFICATION II CLASSIFICATION III

19; 8%15; 7%

194; 85%

Listed JSCs by ownership

State owned Partly state owned Private

Listing: Statistics

Agricultu

re

Constructi

on

Food and beverages

Utilities

Retail

Light in

dustry

Building m

aterials

Mining

Real esta

te

Transporta

tions and lo

gistics

Financial s

evices

Hospita

lity and to

urism

Forestry

Geology and exp

loration

Information te

chnology

Heavy industr

y

Oil and gas

Media and publishing

0

5

10

15

20

25

30

35

29 28 27 28

18 18

14 14 14 13

9 8 75 5 4

1 1

Number of listed joint stock companies by sector as of 2015

Listing rule of securities by MSE• The amendment consists of 10 sections and 27 articles.• The regulation will register a securities issuer’s initial (IPO)

and additional shares and debt instruments on the securities registry of the MSE; determine listing categories and criteria; introduce securities to the public; and regulate relations concerning listing and de-listing of securities.• It includes set of requirements, entry criteria and forms

attached.

Importance of recent updatesThe following improvements were made on;

• Process for issuing securities• Decision on whether list or not• Regular duties• Listing criteria and fees

Listing rule: Listing criteria for issuers

• Financial and economic indicators (Sales, profit & earnings, and expected rate of return etc.), market capitalization, and stock public float are must meet the requirements and entry criteria,

• Issuance of an opinion from a law firm authorized to provide legal services (Securities law 10.6)

• The financial reports and legal opinion as verified by the entities specified (Securities law 10.7)

• Business and capital valuation report from the authorized entities

• Contract with the underwriter

Listing rule: Preparation process

To contract with underwriter company that accepted by FRC

Securities prospectus

To contract with business and capital

valuation company that accepted by FRC (Listing

rule 4.5, 4.6, 4.7)

Valuation report

Complete list of documents in

compliance with the listing rule

Application

Listing rule: Application to MSE

Required Documents

Application (Form 1)

Security issuer’s notification (Form 3)

Underwriter’s notification (Form 4)

Authorized person’s decision on issuance of securities

Securities prospectus

Legal opinion, business valuations and audit report set forth in rule 4.5, 4.6, 4.7

If the securities prospectus contains the valuations and opinions of independent experts or professionals (set forth in rule 4.4)

Payment slips of application fee

Listing rule: Prospectus

Prospectus consists of main three parts;

1. Information of issuer2. Information of securities itself3. The regulated entities and other professional

service providers involved in the public offer of the securities

A prospectus is a formal legal document that is considered as important factor for an investment decision and provides details about an investment offering for sale to the public.

Listing rule: Prospectus (cont.)

• The name, permanent address, postal and contact address of the securities issuer, its industry/business activities, and whether it is registered with the stock exchange;

• The state registration number and registration number and the registration date of the securities issuer;

• The full name of any influential shareholder, and if a legal entity, the name, state registration number, and the number and percentage of shares held by it and its connected persons;

• Information concerning the structure, organization, and governing persons of the securities issuer, and information concerning the number and percentage of shares held by such governing persons;

• Information concerning the amount of share capital of the securities issuer, the number, type and par value of securities that were previously authorized, issued, and redeemed, the net asset value and information concerning the securities issuer's tangible and intangible assets;

• The securities issuer's financial statements, and an auditor's report in relation to the same;

• Details of the contracts and transactions having a value of an amount equal to 5% or more of the share capital of the securities issuer, and information on performance and/or current status of the same;

• Property valuation reports prepared within the past one year;

Information of issuer

Listing rule: Prospectus (cont.)

• The number, type and par value of securities being publicly offered, the conditions and procedures for any public offer and/or trade of these, the conditions and procedures for distributing dividends, and in the case of debt instruments, the details of the maturity term, and the conditions and procedures for payment of the principal and interest;

• The rights and obligations attaching to the securities being publicly offered;• A business plan specifying the use of the capital to be raised by issue of the securities;• If a security is convertible into shares, the conditions and procedures for such

conversion; and• Risks for the security issuer's operations and risk management plans;

Information of securities

Listing rule: Prospectus (cont.)

• The regulated entities and other professional service providers involved in the public offer of the securities and the rights, obligations and liabilities provided in the contracts entered into therewith;• In respect of debt instruments, information regarding any guarantees

for repayment and/or pledged property; and• Details of the connected persons of the securities issuer;

The regulated entities and other professional service providers

Listing rule: Stock classification & its requirements

IIIIII

STOCK CLASSIFICATION

• LARGER companies that is prestigious, with high market capitalization, and with consistent & profitable business operation, • MEDIUM sized companies that meet the

requirements for market capitalization and current asset, • SMALL & MEDIUM companies that has high

risk and the trade of stocks is offered for only institutional & professional investors

Listing rule: Stock classification & its requirements (cont.)

№ Requirements on securities

1 Market capitalization (USD) 2.5 million ↑

0.5 million ↑

It varies regarding request of company and MSE set the

requirements per case2 Public float ≥ 25% ≥ 15%

3 Period of trade 2 year

4 Shares of stock/security must be available to trade

Securities for listing must not under pledge of third party, suspended, securities ownership rights separated for other

entities and should be free of any obligations.

Classification I

Classification II

Classification III

Listing rule: Stock classification & its requirements (cont.)№ Requirements for the issuer/company5 Period of business operation 3 year ↑ 2 year ↑6 Financial statements 3 year IFRS/GAAP 3 year IFRS/GAAP7 Sales amount for the last year (USD) 2.5 million ↑8 Profit for the last year (USD) 250 thousand ↑

9 Current asset Sufficient amount of current asset for period of 12 months after listed

10 Must have underwriter + + +

11 Compliance of corporate governance principals + + /if no explain/ + /if no

explain/

12Criteria for the company, board members, persons who hold a controlling block, and CEO

There should not be tax penalty or overdue of loan and if so details should be explained in the securities prospectus.

13 Experience of management and changes to persons who hold a controlling block

Authorized officials must have sufficient experience, no changes of CEO for last 1-2

years, no more 2/3 changes to management, and no drastic changes to CP holders

Classification I Classification II Classification III

Listing requirement waivers or alterations

• Waivers or alterations for entry criteria are possible;• Issuers and its underwriters have right to request submission of discount and

waivers with explanation that states the reason why. • Above permission is decided by the MSE’s CEO and decrees are passed. CEO

may set a certain period or conditions for the issuer to follow.

• Waiver and discounts for fees;• Waive for the first year of listing service fee after issuance of IPO,• Up to 20% discount if you issue additional shares of stocks in classification I,

upgrade of classification, and changes with no direct raise of fund etc., and• Flexible rate for government and local bonds based on discussion.

Waivers or alterations

Payments and feesClassification I Classification II Classification III

IPO or issuing additional securities 1,000USD 1,000USD 1,000USD

Making changes into the listed securities 750USD 750USD 750USD

Classification I Classification II Classification III

Stocks /0.1% of trade amount/ 5,000USD - 50,000USD 5,000USD - 25,000USD 500USD - 5,000USD

Classification I Classification II Classification III

Annual service fee /0.005% of companies market

capitalization/600USD - 12,000USD 600USD - 12,000USD 250USD - 5,000USD

Application and processing fee (one

time)

Stock listing fee based on the trade (one

time)

Annual service payment

Congratulations, you are listed. What know?

• Must follow the rules, laws, and obligations at all time!• Disclose, disclose and disclose! • Legal disclosure• Timely disclosure• Voluntary disclosure

• MSE has the right to monitor, take appropriate actions and provides consultation in a timely manner.

Further steps to take

THANK YOU

29-30 August, 2016Listing & Research Division,

Policy Planning Department,Mongolian Stock Exchange