CORRECTED-Mongolia exempts private firms from foreign investor law

Fri Apr 19, 2013 9:15am EDT

(Corrects month law was passed in paragraph 2 to May 2012 from March 2012)

* Amendments to exempt private firms from investment restrictions

* Curbs on foreign SOEs to be tightened

* Law blamed for deterring foreign investment in Mongolia

ULAN BATOR, April 19 (Reuters) - Private firms looking to invest in Mongolia will no longer have to seek government approval after the country's parliament amended a controversial foreign investment law on Friday.

Mongolia's Strategic Entities Foreign Investment Law (SEFIL), passed in May 2012, was designed to restrict foreign investment in firms in sectors like mining to just 49 percent, and came amid concerns about the growing role played by overseas capital in the country's mining-led economic boom.

But the law, passed shortly after China's Chalco made a bid to buy a majority stake in the Mongolia-focused coal miner SouthGobi Resources, was heavily criticised by investors worried about the growth of Mongolian "resource nationalism."

Partly as a result of the law, foreign investment in Mongolia fell 17 percent to $3.9 billion in 2012, and in February this year, the country saw its lowest monthly inflow of foreign investment since at least 2010, according to the Mongolia International Capital Corporation.

"The SEFIL was one of the key factors holding foreign investors back," said Vidur Jain, an analyst at the local investment firm Monet Capital.

The amendment passed on Friday will exempt privately-owned foreign companies from the scope of the law, which demands government approval for the purchase of equity in a company operating within sectors like mining, banking and finance, and communications and media.

"Excluding private entities from the law will be a step towards attracting investment back to the country. However investors would want to see a clear and well-structured law before taking the plunge again," Jain said.

But the amendment also tightened the restrictions on foreign state-owned entities (SOEs), removing a 100-billion tugrik ($71 million) threshold triggering government intervention.

That means all foreign SOEs will need the approval of Mongolia's cabinet in order to buy into a Mongolian firm, regardless of the size of the stake.

For purchases of stakes of more than 49 percent, the approval of parliament will also be required.

The foreign investment law, launched by a number of nationalist backbenchers in Mongolia's parliament last year, is widely believed to have been primarily targeted at state-owned firms from China.

Many politicians and citizens in Mongolia have been increasingly alarmed by their southern neighbour's growing economic hegemony, with China responsible for around 90 percent of the landlocked nation's export trade. (Reporting by Terrence Edwards; Editing by David Stanway and James Jukwey)