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Brazil’s path to growth revisited

Rodrigo de Campos Vieira
In a previous article published in this magazine, the author commented on Brazil's unique opportunity to develop the mechanisms for early stage, smaller and also more established medium-sized companies to access the funds they need to grow their business through the equity capital markets.

The previous article discussed a project conducted by investment banks, law firms, civil entities, associations and auditors to be presented to the government with alternatives to unlock the growth of Bovespa Mais, the only access stock market in Brazil.

It also mentioned that BM&FBovespa itself, together with the securities commission (CVM), the National Social and Economic Development Bank, the Brazilian Agency for Innovation, and the Brazilian Agency of Industrial Development presented the results of their analysis of growth markets in other countries with a focus on successful experiences in stimulating access to the stock markets to smaller and medium-sized companies.

The last and more relevant development in connection with this matter comes from the CVM. On July 5 2013, it published the results of a public hearing with a proposal to amend existing Instruction CVM 391 that governs Brazilian private equity funds (FIPs).

Instruction CVM 391, as in effect, determines that FIPs should have a prominent role in the decision making processes of invested companies and effective influence in the strategy and overall management, including through the appointment of members of the boards of directors of such companies.

The proposed amendments to Instruction CVM 391 are related to the easing of the requirements mentioned above. The CVM understands that with some flexibility in relation to this obligation of influencing the activities of invested companies, an FIP could be able maintain its participation in a company about to launch an initial public offering (IPO) of its shares that would result in the dilution of its participation and, therefore, limiting FIPs' political powers (including losing the right to appoint board members).

In addition, such proposed amendments would also allow FIPs to acquire shares of a company distributed in an IPO since they would not be under the obligation to appoint board members after becoming shareholders.

The CVM proposes that the influence in the management of companies could be dismissed for investments representing up to 20% of the net worth of an FIP, provided that the companies are listed in access stock markets and have adhered to tighter corporate governance standards as compared to the standards required by law.

The CVM also proposes that the 20% limit should be increased to 100% during the: (i) investment period established by Instruction CVM 391, to allow recently launched FIPs (which are in the early stages of investing the available capital) to invest in IPOs in the access stock markets; and (ii) disinvestment period in relation to a given company, since it is natural that political powers will be reduced as the FIP sells its shares.

There are some discussions in the market around the 20% limit as well as in connection with the length of the 100% exemption period. Some market agents defend higher limits and larger exemption periods. Regardless of the outcome of the public hearing and the final provisions of the new rule to be enacted by the CVM, it is a very positive outcome of the efforts brought by the Brazilian society towards the development of accessible stock markets in Brazil.

Rodrigo de Campos Vieira

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