A step forward or a step back? New approval requirements on telecoms foreign investment in Mongolia

June 7 (Herbert Smith LLP) Mongolia's parliament has recently adopted a new foreign investment law requiring foreign operators and investors to obtain approval from the Mongolian government and, in some cases, from parliament for their investments in certain strategic sectors, including media and telecoms.

On 17 May 2012, the Mongolian Parliament approved a draft law entitled "Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance" which, according to media reports, became law on 28 May 2012.

The new investment law complements the existing foreign investment law enacted in 1993, which permits foreigners to take majority and even full ownership of any Mongolian company or investment without having to obtain prior government approval. Indeed, Mongolia's largest mobile operator, Mobicom, is majority owned by Japan's Sumitomo and KDDI.

Scope of the new investment law

The new investment law itself does not expressly define which media and telecoms companies or businesses (e.g. telecom infrastructure) are regarded as being of strategic importance.

Notwithstanding this ambiguity, it appears that the main effect is that consent from the Mongolian government must be obtained before investments in media and telecoms and the other strategic sectors can be completed. Certain shareholder agreements also appear to be caught if these give de facto control to a foreign investor.

The approval requirements of the new investment law do not appear to apply retroactively and will therefore seemingly only affect transactions concluded after the law comes into force, leaving existing investments intact. Importantly, investments made pursuant to international treaties are unaffected.

In addition, the new investment law also creates new notification requirements. These new notification requirements appear to apply to both current and future foreign investors who are shareholders in companies in strategic sectors in Mongolia, and require the Mongolian entity concerned to make the notification.

The new consent and notification requirements appear to be as follows:

Type of investor		Transaction	Consent or notification required		Timeframe
Foreign state Foreign state owned enterprise (including those in any form of partnership with private investors)		All types	Consent from the Mongolian government		Application to be made within 30 days of entering into the transaction Processing of application may take up to 90 days Decision to be notified within 5 days
Foreign private investor		·         Acquiring 33.33% or more of the shares of a company operating in any of the strategic sectors; or ·         Concluding an agreement which gives a foreign investor the right to veto key strategic decisions or exercise strategic management of such company; or ·         Dilution of any existing shareholdings in such company	Consent from the Mongolian government		Application to be made within 30 days of entering into the transaction Processing of application may take up to 90 days Decision to be notified within 5 days.
		Acquiring more than 49% of the shares of a company operating in a strategic sector and the transaction is worth more than 100 billion togrogs (roughly US $76 million)	Consent from the State Great Hural (Mongolian parliament) on  recommendation of the Mongolian government		Application to be made within 30 days of entering into the transaction No set timeframe for the processing of application
Future foreign private investor		Acquiring 5% to 33% of the shares of a company operating in a strategic sector	Notification to FIFTA on the acquisition and on any agreements permitting dilution of other shareholders		Notification to be made within 30 days of entering into the transaction
Existing foreign private and foreign state investors		Owning 5% or more of the shares of a company operating in any of the strategic sectors	Notification to FIFTA		Notification to be made within 180 days of the effective date of the new investment law

Mechanism for obtaining Mongolian governmental consent

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.

Observations

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.