11 July, 2012
Legal News & Analysis – Asia Pacific - Mongolia
On 7 June 2012, the Bank of Mongolia adopted regulations on bank licensing (the "Bank Licensing Regulations") to implement certain provisions of the Banking Law of Mongolia dated 28 January 2010 (the "Banking Law"). These regulations replace the regulations on bank licensing dated 7 August 2000. The newly-adopted regulations were officially published on the Bank of Mongolia website on 2 July 2012.
The promulgation of regulations consistent with the Banking Law had been pending for several months, and their issue should help to clarify uncertainties relating to the procedural aspects of the approvals and notifications process at the Bank of Mongolia.
The scope of the Bank Licensing Regulations is regulation of matters relating to applications to the Bank of Mongolia for establishing a bank, conducting banking activities, changing a bank's shareholding structure and share capital, and the review of such applications and supporting documents.
The regulations further clarify certain definitions, specify the requirements for establishing a wholly-owned subsidiary of a foreign bank in Mongolia and the circumstances in which banking licences may be issued, restricted, suspended, or revoked.
With respect to the entry of foreign banks into the Mongolian market, the Bank Licensing Regulations impose greater restrictions. Currently, it is not possible for foreign banks to operate through their branch offices in Mongolia, as under
Mongolian law it is prohibited for representative and branch offices to engage in revenue-generating activities. The Bank Licensing Regulations contemplate the establishment of wholly-owned subsidiaries of foreign banks and provide detailed requirements and procedures for setting up such subsidiaries. Foreign banks may establish local subsidiaries no earlier than one year after the establishment of their Mongolian representative offices. Accordingly, the establishment of a representative office is a prerequisite for establishment of a local subsidiary.
Further, the minimum share capital requirement for a Mongolian subsidiary of a foreign bank is set at MNT65 billion (US$50 million), which is much higher than the minimum capital requirement for an existing Mongolian bank (currently US$6 million and set to increase to US$12 million from 1 May 2013). This requirement is set out in Order # A-81 of the President of the Bank of Mongolia dated 7 June 2012.
According to Article 1.5.3 of the Bank Licensing Regulations, share capital is defined as "the sum of total par value of the bank's issued common and preferred shares and any share premium, which shall consist of the capital contributions made by shareholders as approved by the Bank of Mongolia". Thus, the share capital cannot take into account treasury stock.
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