Friday, April 22, 2011

Common and Preferred

Underground mineral of Mongolia is the property of Mongolian people and all citizens must equally benefit from it. Our country has become one of the world leaders in minerals with its underground resources. Certain companies are making enormous profits by extracting and importing gold, copper and coal only to the southern neighbor.

Their extraction is likely to increase in geometric progression in coming years. Besides, more and more new deposits of rare earth elements such as silver, iron and zinc are being discovered one after the other.

These fabulous natural resources must be used for improving livelihood of all citizens, not of a group of people. Otherwise, the gap between rich and poor will grow leading to social and political conflicts.

History of many countries, whose natural resource is damned, evidence that it can evoke disorder and unrest and destroy everything created and built.

Anyway, Mongolian government launched a new project to distribute shares of state-owned new companies to every citizen. Such a distribution of shares is a golden chance for two ruling parties to be seen as if fulfilling their promise of last elections to give a cash of $2,000 to each person.

Some foreign countries had implemented similar methods to dish out natural resources to their citizens. Oil rich countries like the Gulf states, Lybia, Nigeria and Alyaska implemented a method so-called “Resource Share”. Mongolia is trying to apply this method by deepening its concept.

Authorities already made a decision to turn the resource into shares and to distribute them to each person, after which to distribute dividends and to allows people to trade their shares at capital market after a certain period. Though the Government announced the number of shares to be distributed, it is yet to announce nominal price of shares.

The Government established a corporation called “Erdenes Mongol” as the owner of the strategic deposits of coal in the country. 10 per cent of “Erdenes Tavan Tolgoi” Ltd, one of fifteen subsidiaries of Erdenes Mongol Company, will be distributed in 565 shares for each citizen. This was a major political show of Mongolian politicians.

Their next show for April will be the release of preferred shares of Erdenes Mongol Company to be distributed one share per person and give the remaining shares to every new-born child. What is the difference between common and preferred shares? An owner of common share can turn his share into cash by selling it at the market price of that day or receiving dividend from shares.

If everything would go in the way we expect or dream of, the first option would mean give golden-egg-laying duck in return for three or four eggs.

The second option would mean golden eggs each year. But the time for egg-laying or dividend distribution is too far. Dividend from shares are distributed from the money left after the companies pay off all operational costs, including cost of credit taken and income tax, after many years.

Besides, it is not obligatory to allocate dividends despite the operation is in surplus. There will be no dividend to distribute if incomes are spent for expansion of business activities and injecting investments. For this simple reason, shareholders seek to have own physical representative in the Governing Board of the company.

Because the Government is aware of this, it is regularly reminding the citizens that they will make cash if they sell their shares. If citizens would sell their shares to those with money to make one-time cash, then the poor will spend this cash in a single day and remain poor forever. Preferred share usually carries no voting rights which common share carries.

Preferred share is often likened to bonds because fixed amount of dividend must be given every year from such shares. Bond holders receive certain amount of payment (coupon) every year regardless of the fact that the company is profitable or not. Another advantage is preferred shares have priority over common shares in the payment of dividends and upon liquidation.

That’s why it is called Preferred stock. Erdenes Mongol Company is believed to issue 100,000 common shares and 3,000,000 preferred shares.

Common share will make money. But in case of three million preferred shares, money will be given in dividend. In both cases, the company can liquidize the value of shares of preceding shareholders by issuing additional shares. The silence of the Government about issuing new shares or not means they don’t deny it. Another point should be noted here that company shares are issued for the purpose of raising money but not for distributing money like being done in Mongolia.

It should be considered that such a distribution can evoke multilateral conflicts within the company governance. Executive administration of the company must assume extraordinary responsibility for their actions and deeds and their activities must be kept transparent.

One thing obvious is that Mongolian people who got shares without paying a cent will compete with investors who bought shares to trade their shares, which will relatively reduce share prices.

It would be more efficient from the point of distribution if 10 per cent of Erdenes Tavan Tolgoi is distributed to all citizens instead of selling it to Mongolian domestic business entities at nominal price. It would be also efficient for increasing share price of secondary market.

A certain group of people benefit from underground resources of Mongolia, while ordinary citizens are panicking in an attempt to find their space. If there is no new jobs created, no significant improvement in livelihood of citizens and no immediate change in the country’s infrastructure quality in the process of exploring and processing underground resources, our resource for sure will not be a blessing, but yield serious consequences instead.

Translated by P.Shinebayar

UB Post
April 22, 2011

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