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Implementation measures of the Amendment to the Banking Law

The relation of issuing permission for bank establishment was first regulated in Mongolia by the “General Rule on Establishment of Commercial Bank and its Operations” approved by Resolution No. 422 of the Ministers’ Council of the People’s Republic of Mongolia dated 24 August 1990. The first Banking Law was passed on 20 April 1991. Since then, the law was revised twice on 03 September 1996 and 28 January 2010 respectively. The 2010 Banking Law was amended 23 times, of which Amendment of 18 January 2018 (54 articles, paragraphs and sub-paragraphs) and Amendment of 28 January 2021 (21 paragraphs and sub-paragraphs) brought fundamental changes.

The Law on Amendment to the Banking Law (2021/01/28) introduced the following amendments and addendums:

  • Criteria for determining influential banks in the banking system
  • Form of banking companies
  • Limit on ownership of bank share and related securities
  • Number of overall Board members and independent members
  • Some grounds for revocation of permission for bank establishment
  • Convene Shareholders’ Meeting of bank at the initiative of the Central Bank (Mongolbank)
  • Give permission to own bank shares
  • Some powers of Mongolbank to monitor a bank
  • Declare a bank to be insolvent (or such grounds have occurred)
  • Preventive measures imposable on bank
  • Provisional administration of bank
  • Grounds and scope of bank restructuring measures
  • Order of enforcement.

Also, the Law on Implementation Procedure of the Amendment to the Banking Law (2021/01/28) was passed simultaneously by the State Great Khural. According to this Law, banks, i.e. licensees of the Mongolbank, are obliged to take the following measures:

Measures to be taken by banks Time
1 Approve a PLAN about measures to implement the following legal regulation and send it to Mongolbank and FRC:

– Influential bank in the banking system shall be in the form of an open joint-stock company, and the remaining banks in the form of a joint-stock company (4.2), due date for implementing the requirement of limiting the ownership of bank shares and related securities (both alone and together with related parties) at 20% of all issued shares of the bank (36.1);

– Plan for open and closed public offering of securities;

– Share price forecast;

– Research on potential investors;

– Others deemed necessary.

 

2021/07/01

2 Have the measure of changing company type implemented. In other words, the legal requirement for “influential banks in the banking system to be in the form of open joint stock company, and for other banks to be in the form of joint stock company” shall be complied. 2022/06/30
3 Limits set on the bank shareholding to be fully complied. In other words, the legal requirement for “bank shareholding (both alone or together with related parties) to be no more than 20 percent of all issued shares by the bank” shall be complied. 2023/12/31

 

The law provided that in case of a failure to implement planned activities within the above time, Mongolbank will take measures including preventive measures as specified in the Banking Law, take measures for provisional administration, or deduct parts of shares and related securities exceeding 20 percent requirement from equity capital. Moreover, Mongolbank is empowered to suspend voting and other legal rights of a shareholder who failed to comply with this legal requirement and to demand forced sale of shares exceeding the limit without paying dividends for such shares and related securities.

The following amendments introduced to the Law on Amendment to the Banking Law (2021/01/28), are provided to come into force from 30 June 2022:

  • Mongolbank shall not issue permission for bank establishment and for shareholding in the following case: up to 20 shareholders owning the most shares failed, in the absence of influential shareholder in the bank, to send Mongolbank information about number, total amount and volume of owning shares (24.1.5)
  • The highest governing body of a bank shall be the Shareholders’ Meeting, and in the case of a state-owned bank, it shall be implemented by the Government and/or its authorized persons (29.1).
  • No less than one-third of the total members of the Board of Directors of a Bank shall be independent members (33.1)

The plan on transforming the form of a bank from LLC to JSC as provided by Article 1 of the Law on Implementation Procedure, is the restructuring plan to transform the bank as specified in Article 23.2 of the Company Law of Mongolia. According to Article 23.2 of the Company Law, the restructuring plan shall be developed by the BoD and approved by the Shareholders’ Meeting.

The restructuring plan  to transform a bank shall need to be consistent with laws and reality,  considerate of the time specified in the laws and ensure implementation stages, possible risks, rights and legal interests of the current shareholders.

It is our understanding that this operation regarding implementation of amendments to the Banking Law can be successful by combining experience in the Banking and Central Bank legislations with the service specialized in the Company Law, the Law on Securities Market, Rules and Procedures passed by Financial Regulatory Commission and Stock Exchange, corporate governance and legal consulting services in the securities market.

“MDS&KhanLex” LLP is one of the leading law firms in Mongolia and has been assisting national, foreign, and multinational business entities by providing a wide range of legal consulting services that define solutions in line with their needs and requirements. In 2021, “MDS&KhanLex” LLP has been ranked as “Tier 1” Leading Law Firm in the corporate law sector by Asialaw and Legal500, legal guides that rank law firms and lawyers in an international level, and this is associated with our recognized services specializing in securities market, banking and finance, corporate governance and project management.

For more information about this article, please contact our partner Dugerjav. D and counselor/lawyer Bayartuul. Ch at +(976) 11330048, or dugerjav@mdsa.mn, or bayartuul@mdsa.mn

 

DISCLAIMER:

MDS and KhanLex LLP is a limited liability partnership, incorporated in accordance with the Law on Legal Status of Lawyers and authorized to conduct the professional legal activity as per Mongolian law.

This publication may not cover core or important issues of the topic and is prepared with the sole intention to provide general information to our clients and/or other interested persons. This publication does not, and is not intended to, constitute legal service provided as part of a lawyer’s professional activity.

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