Over the past few years, Brazil has been facing the constant and significant development of its equity and debt capital markets’ regulatory framework. Such legal framework has been subject to various amendments and updates, in an attempt by local regulators to simplify and modernise rules, promote higher standards of efficiency regarding public offerings, promote the adoption of better corporate governance and foster access to the capital markets by Brazilian issuers and investors.
Despite the current economic crisis and recent political developments, from the second half of 2016 to date, a number of public offerings have been implemented in the local markets, not only involving issuances of debt securities (such as the debentures offerings implemented by Algar Telecom, Autoban and Petrobras, as well as bond offerings structured for foreign investors as those made by Petrobras, Vale, Embraer, Fibria and BNDES’s green bonds), but also equity offerings, with the continuous performance of restricted equity offerings,2 such as those implemented by CCR SA and Banco Santander (Brasil) SA, which together raised over 6 billion reais, and the return of some initial public offerings, such as the ones from Azul SA, Atacadão SA (Carrefour group company in Brazil) and Biotoscana Investments SA, which together raised over 8 billion reais.
Despite the fact that local capital markets have also faced the challenge of a political unstable scenario, as witnessed by the impeachment of President Dilma Rousseff, the market has reacted well to the new government and the implementation of structural changes in Brazilian laws (such as the updating of local labour laws), with consequent improvement in some macroeconomic indicators.
A new infrastructure concessions plan was announced by the federal government in August 2017 in order to assist with government revenues. Such plan involves public auctions in various infrastructure sectors, such as airports, highways and ports. One of the effects of this new programme certainly involves the attraction of private investors to provide the long-term funding required for these projects.
In fact, a number of rules were enacted over recent past years to foster access to the capital markets for the long-term financing of infrastructure projects of local companies and the development of the debt securities secondary market (as per the provisions set forth by Law 12,431 which created the ‘infrastructure debentures’). In recent years, a number of local companies have relied on public offerings of these types of infrastructure debt instruments to obtain the funding required for their infrastructure projects in an amount totalling more than 20 billion reais from 2012 to 2016.
The current scenario of the local capital markets evidences that companies with a need for long-term financing (and investors with a demand for adequate investments) have all the necessary tools and mechanisms – and are indeed relying on such instruments – to use the local equity and debt capital markets for their funding and capital needs.
i Current legal framework
The Brazilian financial and capital markets system is a highly regulated sector, and is essentially composed of regulatory bodies such as the National Monetary Council (CMN) and the National Council of Private Insurance, and supervisory bodies such as the Central Bank of Brazil (Central Bank) and the Brazilian Securities and Exchange Commission (CVM), which supervise, regulate and inspect, as the case may be, publicly held corporations, financial institutions and stock exchanges, among other entities.
According to Brazilian securities law (Law 6,385, of 7 December 1976, as amended), the CVM regulates, develops, controls and inspects the securities market. The CVM is also responsible for regulating:
- a the examination and inspection of publicly held companies;
- b the trading and intermediation of the securities and derivatives markets;
- c the organisation, functioning and operation of stock markets, commodities and futures markets; and
- d the management and custody of securities.
Typically, federal laws applicable to the capital markets in Brazil contain general provisions, and their main purpose is to establish what Brazilian capital markets comprise, who may be the agents of the market, the different independent agencies that have powers of oversight and the limits of their authorities. The regulations that set forth the specific set of rules that each player and transaction has to comply with are the CVM’s instructions, Central Bank circulars and CMN resolutions. This system benefits the Brazilian capital markets, as the enactment of laws is a very bureaucratic procedure that cannot keep pace with the constant changes financial and capital markets suffer, and the enactment of Central Bank, CMN and CVM regulations involves a more quick and effective way of regulating such markets.
Most of the relevant capital markets regulations have been issued recently by the CVM in an attempt to update and modernise the Brazilian market. Among such regulations, it is worth mentioning:
- a Instruction No. 358, of 3 January 2002, which contains rules on the disclosure and use of relevant information regarding publicly held corporations, and restrictions on the trading of securities;
- b Instruction No. 361, of 5 March 2002, with rules on tender offers;
- c Instruction No. 400, of 29 December 2003, which sets forth the rules applicable to public offerings of securities in the local market;
- d Instruction No. 476, of 16 January 2009, which contains rules applicable to automatic registration of public offerings to qualified investors (restricted offers);
- e Instruction No. 480, of 7 December 2009, with provisions on registration as a publicly held corporation in Brazil;
- f Instruction No. 559, of 27 March 2015, with provisions on the approval of depositary receipt programmes of Brazilian securities, to be negotiated abroad; and
- g Instruction No. 560, of 27 March 2015, with provisions on the registration, requirements and disclosure of information regarding foreign investors.
The structure of the Brazilian financial and capital markets is also composed of a self- regulatory agency called ANBIMA (the Brazilian Association of Financial and Capital Markets), which created a set of rules with increased corporate governance for its associates (inter alia, banks, underwriters, brokerage firms, investment banks) to comply with. Currently, ANBIMA has a partnership with the CVM in order to expedite the registration of follow-on offers. By means of such partnership, ANBIMA is responsible for examining and making demands as regards offering documents (ANBIMA’s time limit to make demands is much shorter than the CVM’s on a regular public offer), and after ANBIMA is satisfied with the documents, they are subjected to the CVM’s final approval of the public offering.
Brazil currently has one registered stock exchange that allows companies to publicly trade their shares, B3 SA – Brasil, Bolsa, Balcão, formerly known as BM&FBOVESPA. It is worth mentioning that, in addition to the set of regulations provided by the CMN, the CVM and the Central Bank, publicly held companies that wish to trade their shares on the stock exchange must also comply with B3’s regulations (which contemplate, inter alia, regulations on minimum corporate governance requirements that must be observed by listed corporations). In terms of debt securities (inter alia, commercial papers, debentures), typically the trading of publicly offered securities is verified in authorised custody and settlement entities, such as CETIP SA – Mercados Organizados (CETIP), which also sets forth rules and regulations to be complied with by all participants in its electronic trading system. It is worth mentioning that in March 2017, the merger between B3 and CETIP was approved by the Brazilian Administrative Council for Economic Defense (CADE).
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
New Novo Mercado Rules
After a set of phases of public hearings to change the Novo Mercado Rules, B3 listing segment with the highest corporate governance requirements, the proposed new basic listing rules were approved on June 2017.
Among the approved amendments it is worthwhile mentioning:
- a the creation of audit, remuneration and evaluation statutory committees;
- b the reduction of the minimum free float from 25 to 15 per cent if the company’s shares average trading volume is higher than 25 million reais within the previous 12-month period; and
- c the requirement of preparation and disclosure of several policies, such as compensation, appointment of board of directors’ members, risk management and related party transactions, among others.
The above-mentioned changes will become effective at the beginning of 2018, and companies that are already listed in such listing segment will have a period of two years to adapt their by-laws to the approved amendments.
Investment-based crowdfunding offerings
In August 2016, the CVM issued a public hearing regarding the enactment of a ruling regarding investment-based crowdfunding offerings carried out through electronic platforms, to which a registration exemption would be applicable. The result of such public hearing was the recent enactment of CVM Ruling No. 558. The ruling is not be applicable to every kind of crowdfunding; for instance, donations, loans or contributions that entitle the receipt of souvenirs, rewards or participation in the pre-sale of products or services are not included, once such investments do not involve the issuance of securities. It applies in cases in which an idea, a project or a business presents itself as an investment opportunity that generates participation, partnership or remuneration rights.
The ruling determines that companies with an annual gross revenue, at the immediate previous fiscal year, of up to 10 million reais will be able to raise up to five million reais in one or more offerings within one year, provided that the term between two offerings is not less than 120 days. As a general rule, each investor will be able to invest up to 10,000 reais per year; nevertheless such restriction is not applicable to some investors, such as qualified ones or those that annually earn more than, or have investment gross assets of more than, 100,000 reais.
This type of offering is only allowed to be implemented by means of internet platforms registered with the CVM, which must comply with minimum requirements such as:
- a minimum capital;
- b officers’ and directors’ suitability;
- c the existence of the human and technological resources appropriate for the rendering of the required services; and
- d production of adequate disclosure materials.
Agricultural receivable certificates (CRAs) public offerings public hearing
In May 2017, the CVM issued a public hearing regarding the enactment of a ruling regarding CRAs public offerings. Since 2008 the CVM, when analysing CRAs public offerings, would apply the same legal rules applicable to real estate receivable certificates (CRIs), pursuant to CVM Ruling No. 414, creating uncertainty regarding some specific features of CRAs public offerings.
The main provisions of such draft ruling are:
- a definition of some concepts, such as the agricultural credit rights that can be linked to CRAs;
- b possibility of revolving credit, allowing the acquisition of new credit rights, by the securitisation companies, using the proceeds from the payment of the original credit rights linked to the issuance; and
- c allowing the use of the proceeds from the issuance of CRAs for hiring derivatives, provided that such derivatives are hired exclusively for hedging.
New rules applicable to fiduciary agents
On December 2017, the CVM enacted Ruling 583 (revoking CVM Ruling 28), carrying out a much needed update of several of provisions applicable to fiduciary agents (trustees that act on behalf of investors) that act in public offerings, once such ruling was dated from March 1983.
The updates made clear that the provisions of the ruling are applicable to the services rendered by fiduciary agents in public offerings of several securities, not only debentures. The ruling also made clear what the main conditions are that must be set when hiring fiduciary agents (duties, compensations, substitution) and in which document such conditions must be set forth. The new ruling also made clear that the only entities able to act as fiduciary agents are financial institutions previously authorised by the Brazilian Central Bank and that have, as corporate purpose, the management or custody of third parties’ assets, individuals acting as fiduciary agents no longer being allowed.
Implementation of structured funds management system
On June 2017, the CVM launched its structured funds management system (SGF), aiming at allowing structured investment funds administrators to automatically register such funds before the CVM, as well as providing an easier and faster way of providing information to the market regarding these funds.
The system allows its users to: (1) oversee and amend information from its managed funds; (2) initiate and conclude the registration of a fund; (3) update information from the fund; (4) register the pay up of quotas; and (5) inform the CVM regarding the substitution of the administrator or other participants; among other features.
Changes in administrative proceedings before the CVM
In June 2017, Provisional Measure No. 784 was enacted and made some updates and improvements regarding administrative proceedings carried out before the CVM and the Brazilian Central Bank.
The main changes regarding administrative proceedings that are verified before the CVM were:
- a a significant increase in the maximum amount of the penalties imposed by the CVM;
- b the possibility of leniency agreements being negotiated with the CVM ; and
- c the end of the automatic staying effect in appeals against CVM’s decisions before the Board of Appeals of the National Financial System (CRSFN). The maximum amount of the penalties imposed by the CVM was the higher of 500 thousand reais, 50 per cent of the amount of the irregular transaction or three times the economic advantage obtained with the infraction, which was increased to the higher of 500 million reais, twice the amount of the irregular transaction, three times the economic advantage obtained or 20 per cent of total revenue of the economic group in the previous fiscal year.
As regards leniency agreements, the CVM is now allowed to execute such type of deals with individuals and legal entities that confess irregularities regarding the CVM’s rulings, which may result in the termination of the punitive proceeding or a decrease from one-third up to two-thirds of the applicable penalty.
The staying effect of decisions rendered by the CVM when the defendant appealed to CRSFN used to be automatic. As from now, in order to obtain such effect, the defendant must request it to the CVM’s reporting officer assigned to the case, and is able to appeal the decision to the CVM’s plenary body.
It is important to note that, although the provisions of a Provisional Measure are valid and effective as from its enactment, the Brazilian National Congress has up to 120 days to convert it into law (otherwise its effectiveness is terminated).
New set of utility concessions and privatisations for 2017 and 2018
In August 2017, the Brazilian government announced a new set of utility concessions and privatisations to be carried out during 2017 and 2018 within the Investment Partnership Program reinforcing the importance of the private sector in long term financing of infrastructure projects, through the capital markets.
In recent years, infrastructure debentures have been important funding mechanisms for projects deemed as relevant by local authorities in, inter alia the following sectors: energy, telecommunications, transportation, urban mobility, aviation, and science and technology, complementing traditional forms of financing through the National Bank for Economic and Social Development (BNDES) and public banks.
In view of the above, it is expected that, in the next few years, infrastructure debentures, distributed through public offerings in the capital markets, will have an important role in the coming privatisations announced recently by the Brazilian government.
Securities distribution programme
On 22 March 2017, CVM enacted Ruling 584, which changed current regulations regarding securities distribution programmes. Distribution programmes involve a procedure that allows issuers that comply with predetermined requirements to obtain automatic registration for future issuances of certain securities. This new ruling brought some more colour on the applicable procedures. For example, to request the approval of a securities distribution programme, the issuer has to carry out registered public offerings of debentures or promissory notes of at least 500 million reais within the 48 months prior to the request and have a market cap of at least 2 billion reais. A securities distribution programme may last up to four years, and the securities that may be placed in it are currently only debentures and promissory notes.
ii Relevant tax law
On 31 August 2015, the Federal Revenue Offices enacted Normative Ruling No. 1,585 of the Brazilian Federal Revenue (IN 1,585), aimed at updating and consolidating rules regarding the taxation of income and gains recognised by local and foreign investors in financial transactions carried out in the Brazilian markets.
Before the introduction of IN 1,585, it was common that investors contributed their equity interest in corporations to investment funds, and, whenever such corporations paid dividends, these were paid directly to the quotaholders of the funds, such amounts being exempted from income tax as the legal nature of said payments would remain as dividends (which are exempted from income tax under the current tax regulations).
According to this new regulation – the lawfulness of which in respect of this specific provision is debatable – the direct on-payment of dividends by investment funds whose portfolios are focused on equity interest to their quotaholders would be treated as a legal act equated to a redemption or amortisation of quotas and, therefore, WHT would apply at the general 15 per cent rate.
Specific rules for new types of investment
On 5 September 2013, the CMN issued Resolution No. 4,263 regulating the issuance by Brazilian financial institutions of a new funding instrument: structure transaction certificates (COEs). COEs are ‘certificate(s) issued against initial investment, representing a single and indivisible set of rights and obligations, with a remuneration structure presenting characteristics of derivative financial instruments’, and may be issued exclusively by multiple banks, commercial banks, investment banks and savings banks, in book entry form and upon registration in registry and settlement systems authorised by the Central Bank or the CVM.
According to IN 1,585, COEs’ profits are subject to income tax at a regressive tax rate starting at 22.5 per cent and rising to 15 per cent. If the settlement of the COE occurs through the delivery of assets, including shares, the acquisition cost of the asset can be deemed as the acquisition cost of the COE. Losses arising out of COE investments cannot be compensated with profits on equity transactions by a natural person; nevertheless, legal entities can deduct such losses from their taxable profits.
Exemption from income tax on capital gains of a natural person on investments in various securities
The former regulation exempted certain debt securities (LCIs, LCAs, CRAs, CRIs, CDA/WAs, CDCAs and CPRs) from income tax; nevertheless, they were not exempted from tax over capital gains. According to the provisions of IN 1,585, such investments are exempted from tax over capital gains – a positive change that has been requested by the market for a long time.
Changes in capital gains rates
Under Brazilian tax law, the general rule is that non-resident investors are subject to the same tax rules applicable to individuals that are tax residents in Brazil when it comes to income and capital gains derived from transactions carried out in Brazilian financial and capital markets.
In this scenario, capital gains derived by foreign investors on the disposition of shares in Brazilian companies have been generally subject to WHT at a 15 per cent rate. Effective 1 January 2017, however, Brazilian law (Law 13,259/2016, as converted from Provisional Measure 692/2015) changes such rate to a progressive regime under which the applicable rates vary as follows:
- a 15 per cent on gains that do not exceed 5 million reais;
- b 17.5 per cent on the portion of gain exceeding 5 million reais, but that is lower than 10 million reais;
- c 20 per cent on the portion of gain exceeding 10 million reais, but that is lower than 30 million reais; and
- d 22.5 per cent on the portion of gain that exceeds 30 million reais.
Only if the investor is based in a blacklisted tax haven jurisdiction would these rates be increased to a flat 25 per cent rate.
It is worth mentioning that capital gains accrued on the disposition of Brazilian listed stock, when carried out in the Brazilian Stock Exchange by an investor registered pursuant to the terms and conditions of Resolution No. 4,373/2014 that is not located in any blacklisted tax haven jurisdiction, qualifies for a full exemption from WHT. As a result, if a 4,373 investor disposes of shares in a Brazilian listed company at a gain in the Brazilian Stock Exchange, this transaction would be exempt from any WHT in Brazil.
III OUTLOOK AND CONCLUSIONS
Brazil has a comprehensive legal framework in terms of securities laws and regulations applicable to investors and issuing companies, and requirements that must be observed by each type of equity or debt security. In recent years, local regulators have enacted a number of rules completing and updating this legal framework to provide better access to the capital and financial markets by local companies, and detailed guidance and transparency to local and foreign investors that are willing to acquire securities issued in Brazil.
This effort – witnessed in recent years with the enactment of the set of rules described in this chapter and others enacted the years before – is recognised by market players. In fact, its results have been verified in practical terms: in spite of the current economic and political crisis affecting Brazil, a number of debt and equity securities public offerings have been observed in the local market over the past few months, evidencing that both investors and issuing companies are increasingly relying on the capital markets for their (short as well as long-term) funding and capital needs.
1 Ricardo Simões Russo is a partner and Gustavo Ferrari Chauffaille and Luiz Felipe Fleury Vaz Guimarães are associates at Pinheiro Neto Advogados.
2 Restricted public offerings are the ‘476 offerings’, which are granted with automatic registration provided that the securities are only offered to a limited number of qualified institutional investors.