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The Proposed Amendment to the Strategic Foreign Investment Law of Mongolia: Not the cure-all as advertised

15 April 2013

There has been much speculation during the past several weeks about a potential liberalization of the Law of Mongolia on the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (the "Strategic Foreign Investment Law" or the "SFI Law") that was enacted on 17 May 2012. On 8 April 2013, a proposal to amend the SFI Law appeared on Parliament's official website (the "Draft Amendment"). The Draft Amendment is reportedly scheduled for discussion this week by Parliament. This follows on from reports that the Cabinet approved a draft version of the Regulations on Receiving and Determining Applications by Business Entities Operating in Strategically Important Sectors (the "Draft Implementing Regulations") in early March. The Draft Implementing Regulations have yet to be published in the official state gazette but have been circulated unofficially among Government departments and businesses in Mongolia.

The SFI Law has had a material impact on investor confidence in Mongolia. We provided our analysis of the law, along with our English translation, in client alerts dated May and June 2012. In those client alerts, we highlighted certain areas in the law that might be clarified through the legislative process or by way of the promulgation of implementing regulations. Our optimism at the time was underscored by the title of the first of these client alerts where we queried whether the SFI Law was only a temporary inconvenience. Nearly one year later, the ongoing lack of clarity of the terms of the substantive law and the absence of straightforward application procedures and approval criteria mean that foreign investors and their advisors are still left with insufficient guidance. The Draft Amendment and the Draft Implementing Regulations do not provide the much-needed answers. As a consequence, the inconvenience is not temporary, and the risks of non-compliance still largely undefined.

Background
The SFI Law provides for a mandatory approval process for certain acquisitions of Mongolian companies by foreign investors. The law applies to acquisitions conducted on an on-shore or off-shore level for business entities operating in sectors of strategic importance ("BESIs"). The SFI Law define BESIs broadly as Mongolian companies engaged in businesses in the minerals, banking and finance or telecoms/media sectors. Parliament or the Cabinet is the relevant approval authority depending upon the terms of the acquisition. Further, the SFI Law applies to all acquisitions by any non-Mongolian state-owned enterprise in any business sector regardless of the percentage of equity acquired (or the percentage of state ownership in the foreign acquirer).

Under Article 4.7 of the current SFI Law, Parliament must approve an acquisition when a foreign investor acquires more than 49% of the equity of a BESI and the investment exceeds 100 billion Mongolian tugrugs ("MNT") (approximately US$ 72 million at the exchange rate of today's date). All other acquisitions are subject to the approval of the Cabinet.

Article 8.1 of the SFI Law also imposes a notification requirement in the event a foreign company acquires between five percent and one-third of a BESI or otherwise triggers the provisions of Article 6.1.7 of the SFI Law with respect to a BESI (please refer to our analysis in our May 2012 alert.) Such notification must be made to the state administrative agency for foreign investment within thirty days of the acquisition.

The consequences of non-compliance are potentially severe. Among other measures, the authorities may revoke any licenses issued to the Mongolian company that is the ultimate target of the acquisition.

The SFI Law stipulates that applications for approval are to be submitted to the state administrative agency for foreign investment. This function has been assumed by the Foreign Investment Registration and Regulation Department ("FIRRD") under the Ministry of Economic Development ("MED"), which has taken a robustly conservative approach in dealing with applications and inquiries related to the SFI Law. We are unaware of any approvals issued through FIRRD for an investment project that falls within the scope of the SFI Law. Further, it appears that in the absence of implementing regulations, FIRRD has refused to accept any applications that even tangentially relate to the three economic sectors specified in Article 5.1 of the SFI Law.

Please click here to read the full alert

The team

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