Mongolian companies must change their ways before international listing

D.Achit-Erdene, President of the Mongolian International Capital Corporation and a pioneer in investment banking in the country, tells N.ARIUNTUYA that the capital market will not develop without improving the accounting system and corporate governance in domestic companies.

What is special about what MICC, your organization, does?
 
MICC was the first investment bank in Mongolia when we started work five years ago and we have been active in the country’s capital market ever since. At the outset, let me make it clear that an investment bank is not the same as a commercial bank. We do provide money to individuals, companies and even the Government but we also give advice on the best method of raising capital, whether through selling securities or bonds or taking commercial loans. We also arrange the entire process of raising capital. The other side of our work is with investors. An investment bank renders financial brokerage service to investors by finding the best investment projects for them. For three years or so, we were alone in the sector, but then competitors came along, and now we have foreign investment banks such as Eurasia Capital, Frontier Securities, Mongolian BDSec, and Monsec.

We help Mongolian companies find sources for their financial capital, and also work closely with foreign investors and investment funds.  So far we have raised around $100 million for some 20 companies. We also work in brokerage, and have a seat in the stock exchange. We do research on companies listed on the local stock exchange as well as on foreign companies operating in Mongolia but listed on a foreign stock exchange, and advise investors on any query.

How has the capital market in Mongolia developed? How do you see its future?

The capital market is still in its infancy here, and is dominated by commercial banks. But these banks themselves are still very small and even all of them together cannot provide the funds required for a major mining project. In this situation, companies seek funds, including in the form of loans, abroad. Also, they have to be listed in a foreign market to be able to attract investment. This is where we come into play. The last twenty years, since we chose the market economy, has seen commercial banks develop very well and now the time has come for investment banks to strike roots. The capital market is set to expand.

What do you think of the present moves of the Government to develop the capital market and the stock exchange? Which model should we follow and which stock exchange should be our partner?

All major capital markets, be it in Hong Kong, Australia, New York or elsewhere, have similar regulations, meant to safeguard shareholders from undue risks. The most important issue is the availability of undoctored information. An investor must have  access to all relevant information about a company where he plans to invest  and he must not be misguided by inaccurate and misleading information. We have a provision that all listed companies must submit their financial statement to the Mongolian Stock Exchange, and many of them do this, too. However, in Mongolia, companies prepare their financial statement once a year, while in foreign countries, these are published once every three months. Shareholders and the public must be able to keep track of a company’s progress and their confidence in its future, or lack of it, will determine the share price. Details of all loans the company has taken and the terms for them must be revealed, so that investors draw their own conclusions on whether to sell or buy shares in it. Sadly, no such information is available in Mongolia.

Before deciding on whether to collaborate with the Hong Kong or the Frankfurt stock exchange I think we should enforce here the information disclosure requirements that have already been standardized worldwide. In general, the accounting system followed by Mongolian companies is very poor. The language of business is said to be accounting and there is no conversation between a domestic company and an investor. At the end of the year, an audit basically checks whether all the income has been actually included in the statement of accounts and if expenses have been shown to be higher and the extra money siphoned off. The audit report is distributed to shareholders. This essential facet of corporate governance and financial transparency is not practised by many companies listed on our stock exchange, and certainly also by companies that are not listed. Only a handful of Mongolian companies issue their financial statements according to international standards. This is the gest obstacle to the development of our stock exchange and attracting investment. The accounting system and corporate governance practices have to be improved. This is the top priority when we  talk about developing the capital market.

This development will be easy to achieve once investors, especially individuals, are provided with information about a company and once there is general confidence in companies observing good management and proper accounting principles. There should be a clear policy on penalties for those failing to maintain a proper accounting system and it should be ensured that the policy is implemented. That we lack reliable corporate governance and financial transparency is because of our limited experience of the market economy, while in the West it has for long been part of life.

Why do foreign invested companies working on Mongolian natural resources manage to raise capital on foreign stock exchanges while domestic companies cannot?

It is the same question of lack of accounting principles and corporate governance, to which has to be added a lack of understanding and experience of capital markets. Foreign stock exchanges obviously give preference to companies with clear financial statements. If a Mongolian company meets their needs, it can be successful as well. Take the example of Petro Matad. Petrovis is the main shareholder. Petro Matad appointed an Australian director and became a public company. It has raised capital on the London Stock Exchange to explore for oil in Mongolia. There was no  obstacle placed on this Mongolian company. But we have very few companies that are prepared to get listed, submitting proper accounting and financial reports, following good management practices, preparing  a reliable prospectus, and ensuring operational stability. I am confident our companies will understand the importance of all this and will change their ways of work.

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