Financial Market - New Investment Environment: Challenges for Potential Issuers & Intermediaries January 15, 2016 Financial Market Development National Forum 2016 Takayuki Urade JICA Consulting Team

Current Status

Size of the Capital Market One of the smallest in the region… 3 Sources: JICA Consulting Team from the World Bank database

Role of the Capital Market Source: JICA Consulting Team 4 Missing tools for ‘long-term’ & ‘large-scale’ financing

Out of 200+ listed companies, only are traded in small volumes.  Many dormant companies should be delisted.  There is only a few IPO deal since Info disclosure of listed companies is very limited.  Insufficient disclosure for potential investors. Companies with funding needs use bank loans or go to foreign capital markets, and do not have much interest in Source: The World Bank database data. Lack of both issuers’ interest & investor confidence in domestic securities market Number of listed companies & trading value Availability of English information for MSE Top 20 companies Issuers (1): Current Shortfalls 5

Issuers (2): Mongolian Businesses Financing Abroad 6

SOCs’ privatization, with a view to; 1) improving efficiency, & 2) reducing fiscal burden. Growth-oriented private companies (e.g. agriculture, tourism, construction…) Mining companies listed at MSE or overseas, which can utilize dual listing scheme Financial institutions which need long-term & diversified funding sources Issuers (3): Future Challenges Potential Businesses for Financing through MSE 7 Just a few successful, symbolic deals will be desired to vitalize the future market activities.

Source: MSE Annual Report 2011 Market has been dominated by limited number of players. Many firms have been struggling financially due to the recent stagnant markets. Industry consolidation will be required through; Minimum capital requirements Measures for smooth business transformation e.g. Tax incentives for M&As. Intermediaries (1): Current Shortfalls Characterized by a few dominant players & many other small brokers/dealers, calling for the need for further consolidation… 8 Distribution of MSE members by owners’ equity as of Q (MNTmn) Source: MSE’s website broker broker/dealer full line Market Share for Securities Trading

IT infrastructure Effective IT infrastructure including front & back office system to be introduced. Financial soundness Introducing financial indicators such as capital adequacy ratio to be examined. Research & product development capability Effort to develop new financial product such as investment trust to be strengthened.  Attract investors’ interest  Ensure investor confidence in the securities market & intermediaries Internal control & operational management Corporate governance, compliance & operational management to be improved. Intermediaries (2): Future Challenges Capability of security companies are not sufficient… 9

What To Be Done?

Roadmap for Capital Market Development (1) 11

12 Roadmap for Capital Market Development (2)

13 Key Issues 1.Balanced development (between 5 categories) 2.Appropriate measures for the economy size 3.‘Sequencing’ in market development Roadmap for Capital Market Development (3)

IPO & Dual Listing Seminars Training courses Pilot IPO Pilot dual listing Policy Committee Consulting for FRC (structure, management, inputs, etc.) Investor Education Consulting for FRC Seminars Promotion activities SRO Seminars Training courses Consulting for FRC, MSE & MASD Risk-Based Supervision Consulting for FRC Training courses JICA’s Technical Assistance (TA) Capital Market Development 14

JICA TA Consultant Team a Candidate Issuer Companies bc Technical Support (under NDA) A Underwriting Companies BC … … Regulate & Examine Feedback Scheduling for IPO / DL Accounting system Capital policy Documentation Corporate governance Post IPO disclosures Budget planning IR activities Internal auditing Inputs (& others) Pilot IPO & Dual-Listing 15

For a Successful IPO… 16 Attractive pricing Confidence in management Compelling equity story Readiness to provide transparency & good corporate governance Reputation of the banking syndicate Listing venue selection Right timing Size of transaction Factors for a Successful IPO 16

Equity Financing in Mongolian Context MSEOverseas Exchanges Mongolian Investors Retail Institu- tional Foreign Investors Mongolian companies listed at… Harder Easier Main target of JICA TA Possibly SWF Interest rate / inflationary pressure need to come down Thin investor base (Takes time…) Dual Listing Less incentives to MSE… Strategic investors Emerging funds Opportunistic investors Most likely for the time being… (For issuers) Cheaper FCY financing available for blue chip companies 17

Takeaways for Potential Issuers & Intermediaries Appropriate market size & simplicity for the economy Globally compatible transparency for market credibility Just a few successful role model cases as catalysts 18

/groups/mglcm/ c.f. Introducing Facebook Group for the Project

Thank you!