6 June, 2012
The new investment law requires the affected Mongolian entity to be the one to notify the Mongolian Foreign Investment and Foreign Trade Agency ("FIFTA"). This notification is required within 30 days of entering into a transaction. FIFTA has 45 days to submit its proposal to the government on whether to grant consent to the transaction, and the government then has a further 45 days to decide. FIFTA shall notify the applicant within 5 days upon receiving the decision from the government.
Factors to be considered by FIFTA when making its recommendation to the government include:
- national security;
- whether the applicant (i.e. the Mongolian entity) complies with local law;
- effects on competition;
- effects on Mongolian taxation revenue; and
- whether there is any other "negative effect".
The government is not allowed to reject any application on grounds not specified in the new investment law. Hopefully, the new regulations will clarify how much weight each factor will have in any decisions made by the Mongolian government.
Consequence of non-compliance
Transactions completed without approval will be invalid. The Mongolian government will also apparently have the power to shut down the offending Mongolian entity.
Much about the new investment law is currently uncertain. For example:
- it is not clear if existing foreign investors who wish to increase their shareholding to above 49% require parliamentary approval; and
- it is also uncertain if FIFTA has the ability to refuse to make a recommendation to the government, or whether the government itself is bound to agree with any proposal made by FIFTA. Finally, it is not certain whether a transaction in breach of the new investment law would result in expropriation of the assets by the Mongolian government.
The new investment law requires the Mongolian government to approve a detailed procedure on how applications for consent will be administered. There is no timeframe for publishing the application procedure, but hopefully any such procedure would clarify some or all of the questions above.
In the meantime, foreign private investors will have to consider the new approval and notification requirements as part of the structuring of any future Mongolian transaction. It seems that any transaction involving a foreign state or state owned entity will automatically require approval, regardless of whether it is in a strategic sector.
Existing foreign investors with shareholdings 5% or more in a Mongolian telecoms or media company should also consider taking local advice on whether they are required to notify FIFTA of their shareholding within 180 days of the effective date of the new investment law.
For further information, please contact:
Mark Robinson, Herbert Smith