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AmericasJuly 2 2006

New market takes off

Brazil is working hard to make its capital markets attractive and the Novo Mercado, with its modern corporate governance standards, is helping. Brian Caplen reports.
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Corporate governance in Brazil used to be so bad that many investors avoided the market altogether. Brazilian companies had (and still have, in many cases) a two-tier share structure combining voting shares and ordinary shares. Typically the owners would control the company through the voting shares, and ordinary shareholders would miss out during takeovers and other crucial events.

The challenge faced by capital markets authorities in trying to change this situation was in getting the legislation passed in congress. Lawmakers were bound to view proposals as an attack on Brazil’s numerous family companies and oppose them. Instead, they introduced a new market, the Novo Mercado, on which companies that met modern corporate governance standards could list, reassuring minority investors they would be treated fairly. Companies that conformed to only some of the requirements were granted either level 1 or level 2 status to reflect their improvements.

Now 49% of the market capitalisation of the Brazilian stock market, the Bovespa, and 53% of total trading turnover is made up by the 70 companies that are either listed on the Novo Mercado or have level 1 or 2 status. Some of Brazil’s blue chip companies, such as aircraft maker Embraer, are listed on the Novo Mercado, while iron-ore company CVRD has level 1 status.

Back to Brazil

The former trend among internationally minded Brazilian companies to list in New York rather than São Paulo has been reversed. Of the 21 companies that listed in the past couple of years, 19 listed only in Brazil.

Bovespa CEO Gilberto Mifano says: “Now when companies are doing a road show and they are asked by investors about corporate governance, they only have to say they are in the Novo Mercado. Everyone understands the advantages.

“The idea for the Novo Mercado came when the corporate law was being discussed in congress in 2000. We realised that major changes in the law would not be so easy to achieve and would not be sufficient to offer investors the best environment.

“We decided instead to offer both investors and companies a completely new environment, properly regulated, but adopted on a voluntary basis and not imposed. This way, we have recovered the future for Brazil’s capital markets.”

The Brazilian approach has been so successful that other countries, including India, the Netherlands, Argentina, Mexico and Costa Rica have been studying it, and the World Bank and the Inter-American Development Bank have been pushing the model.

However, the magnitude of change in Brazil’s stock market, as well as with the rest of its financial infrastructure, has not been fully appreciated by the entire investment community – at least, that is the view of the Brazilian authorities. For this reason, the BEST initiative to promote the reforms to investors was launched by Bovespa together with the Brazilian Clearing and Depository Corporation (CBLC), the Brazilian Mercantile and Futures Exchange (BM&F) and the National Association of Investment Banks (ANBID).

“Brazil has changed a lot in the past five years but when I visited Europe and the US in 2004 no-one was aware of it. We needed to get the message out,” says Pedro Luiz Guerra, an executive at Citigroup securities services in São Paulo and with ANBID.

Investment grade path

Rodrigo Azevedo, director of monetary policy of the Banco Centro do Brasil, says: “Substantial progress has been made over the past couple of years to put Brazil on the path to investment grade. The achievements on the macroeconomic front are better known but the work done in creating a safe, reliable and efficient architecture for financial transactions is not so well appreciated.”

As well as creating the Novo Mercado, Brazil has removed the last restrictions on foreign portfolio investment, introduced a new payments system, revised the corporate law and removed the investor-unfriendly CPMF tax on financial transactions.

Initiatives include a project to integrate the Mexican and Brazilian stock markets, enabling investors to trade in their own currency in stocks on either bourse and Bovespa Mais, a market for smaller companies. Much work has been done in Brazil – but no one is resting on their laurels just yet.

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Read more about:  Americas , Brazil