The International Capital Markets Review: Brazil
Over the past few years, Brazil has undergone constant and significant development of its equity and debt capital market regulatory framework. The Brazilian capital market regulatory framework has been subject to various amendments and updates in an attempt by the local regulators to simplify and modernise rules, promote higher standards of efficiency regarding public offerings as well as the adoption of better corporate governance requirements, and to foster access to the capital markets for Brazilian issuers and investors.
Despite the recent economic crisis, recent political developments and the covid-19 pandemic, a significant number of public offerings have been implemented in the local markets, especially over the past five years (during which the Brazilian economy has demonstrated signs of recovery).
It is noteworthy that despite the effects of the covid-19 pandemic, the Brazilian capital markets had registered a volume of 213.3 billion reais in transactions from January until the end of August 2020 according to the Brazilian Financial and Capital Markets Association (ANBIMA) database,2 with particular emphasis on transactions involving equity securities, such as shares and Brazilian depositary receipt (BDR) offerings. This impressive performance by the local capital markets in the context of the covid-19 pandemic arises largely from important economic measures taken by the federal government, such as the reduction of the Brazilian basic interest rate (the SELIC rate) to its lowest historical level, and from the easing of the volatility of the local markets. Local equity offerings of note between July 2019 and August 2020 include those implemented by C&A, Priner, Petz, Grupo Soma, Aura Minerals and Cogna, among others.
The performance of the fixed income and the securitisation markets have also shown resilience in the context of both the covid-19 pandemic and the low SELIC rate scenario.
Furthermore, public policy of the federal government has seen investments in infrastructure, the privatisation of public companies and the performance of several reforms to reduce public expenses and bureaucracy, which has had a positive effect on market perceptions regarding Brazil. Specifically, long-term infrastructure financing performed by means of capital market transactions has been gaining prominence over the past few years, with consolidation of the use of instruments such as infrastructure debentures (created by Law No. 12,431) and evidenced by the large number of local companies relying on public offerings of these types of debt instruments to obtain the funding required for their infrastructure projects.
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 and the Brazilian Securities 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 the Brazilian securities law,3 the CVM regulates, develops, controls and inspects the securities market. It is also responsible for regulating:
- the examination and inspection of publicly held companies;
- the trading and intermediation of the securities and derivatives markets;
- the organisation, functioning and operation of the stock markets and commodities and futures markets; and
- 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 the composition of the Brazilian capital markets; the persons entitled to operate as agents in the market; and the different independent agencies with powers of oversight and the limits of their authority. The regulations setting out the specific rules with which each market participant and transaction has to comply are the CVM instructions, Central Bank circulars and CMN resolutions. This system benefits the Brazilian capital markets, as the enactment of laws is a very bureaucratic procedure and cannot keep pace with the constant changes to which the financial and capital markets are subject, and the enactment of Central Bank, CMN and CVM regulations involves a quicker and more effective way of regulating the markets.
Most of the relevant capital market regulations have been issued by the CVM in an attempt to update and modernise the Brazilian market. Note the following in particular:
- CVM Normative Ruling No. 358, of 3 January 2002, containing rules on the disclosure and use of relevant information regarding publicly held corporations, and restrictions on the trading of securities;
- CVM Normative Ruling No. 361, of 5 March 2002, containing rules on tender offers;
- CVM Normative Ruling No. 400, of 29 December 2003, setting out rules applicable to public offerings of securities in the local market;
- CVM Normative Ruling No. 476, of 16 January 2009, containing rules applicable to automatic registration of public offerings to professional investors (restricted offers);
- CVM Normative Ruling No. 480, of 7 December 2009, containing provisions on registration as a publicly held corporation in Brazil;
- CVM Normative Ruling No. 559, of 27 March 2015, containing provisions on the approval of depositary receipt programmes for Brazilian securities to be negotiated abroad; and
- CVM Normative Ruling No. 560, of 27 March 2015, containing provisions on the registration, requirements and disclosure of information regarding foreign investors.
Another element in the structure of the Brazilian financial and capital markets is ANBIMA, a self-regulatory agency that requires compliance by its associates (inter alia, banks, underwriters, brokerage firms, investment banks) with the set of rules it has created to improve standards of corporate governance. Currently, ANBIMA has a partnership with the CVM to expedite the registration of public offerings. Through this partnership, ANBIMA is responsible for examining and requesting changes to the documents for public offerings (ANBIMA's time limit for changes to documents in a regular public offer is much shorter than the CVM's) and, once ANBIMA is satisfied with the documents, the public offering is subject to final approval by the CVM.
Brazil currently has one registered stock exchange that allows companies to publicly trade their shares, debentures and other equity and debt securities, the B3 SA – Brasil, Bolsa, Balcão (formerly known as BM&FBOVESPA). In addition to the 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).
The year in review
i Developments affecting debt and equity offerings
Covid-19 related regulations
In 2020, most of the regulatory activity was dedicated to mitigating the effects and distortions in the local capital markets caused by the covid-19 pandemic. In this regard, the CVM has enacted various rules, such as Resolution No. 849 of 31 March 2020, the provisions of which, among other things, extended the term for compliance with certain regulatory and disclosure obligations for publicly-held companies in fiscal year 2020, including disclosure of reference forms and publication of quarterly financial information. The provisions implemented by this Resolution correspond with those of Provisional Measure No. 931 of 30 March 2020 (later converted into Law No. 14,030 of 28 July 2020), which extended the term for compliance with legal obligations applicable to joint-stock companies in fiscal year 2020, including extending the term for convening the ordinary shareholders' meeting from April to July 2020.
CVM Normative Ruling No. 625
In accordance with the social distancing measures implemented because of covid-19, the CVM enacted Normative Ruling No. 625 on 14 May 2020 to regulate the holding of digital meetings by holders of debentures, commercial paper and certificates of real estate receivables or agribusiness related to publicly-held and closely-held companies whose securities have been the subject of public offers with restricted efforts under CVM Normative Ruling No. 476.
Under the new rules, meeting call notices must stipulate the documents required for investors to be admitted to the digital meeting and must request the prior filing of the investors' documents at least two days before the meeting. The presentation of documents by means of a digital filing should be allowed and this should be indicated in the corresponding call notice.
To conduct distance voting ballots, the company or the fiduciary agent (depending on who convenes the meeting) must establish the template document to be adopted, subject to the provisions of the issuance instrument, with a view to sending remote voting instructions with the information necessary for decision-making by investors. This information should explain all resolution proposals, such that for each proposal the security holder only needs to indicate whether he or she approves, rejects or abstains in relation to that matter.
As for meetings in which remote participation and voting through electronic systems are permitted, the company or the fiduciary agent (depending on who makes the call) must ensure that the electronic system adopted ensures: (1) registration of the attendance of the security holders and their respective votes; (2) the possibility of hearing and being heard, as well as simultaneous access to any documents presented during the meeting that have not been made available previously; (3) the possibility of communication between security holders; and (4) the recording of the meeting.
CVM Resolution No. 3 of 11 August 2020.
On 11 August 2020, the CVM enacted Resolution No. 3 (CVM Resolution No. 3) with the objective of making the regulatory framework for BDRs more flexible and allowing diversification of the portfolio of securities that can be represented by these instruments.
The following stand out among the main changes to the BDR regime proposed by the CVM in CVM Resolution No. 3. These important changes may provide the regulatory framework necessary for the dissemination of BDRs in Brazil.
New category of foreign issuer
CVM Resolution No. 3 has introduced a new category of foreign issuer of shares that can be represented by BDRs, which takes into account both the location of the foreign company's headquarters and the 'main market' for the trading of securities issued by the company. The concept of the main trading market corresponds to a stock exchange that is (1) headquartered outside Brazil and in a country whose regulatory body has entered into a cooperation agreement with the CVM; and (2) classified as 'recognised market' in the regulations of the securities market management entity in which the BDRs will be traded (and these regulations must be submitted for approval by the CVM).
Acquisitions by unqualified investors
The new CVM Resolution No. 3 permits the acquisition of Level I BDRs by unqualified investors. This flexibility, however, is subject to the following conditions: (1) the market with the highest trading volume of securities represented by BDRs must qualify as a recognised market, as outlined above; and (2) the foreign issuer must be subject to the supervision of the capital markets regulator in the country where the recognised market is located.
BDR backing by debt securities
CVM Resolution No. 3 introduces the possibility of BDRs being backed by debt securities, with specific changes proposed in the regulations pertaining to BDRs, so that references to BDRs' ballast (asset backing) mention 'securities' rather than simply 'shares'.
ii Relevant tax law
As a way to foster foreign investment in the country, Brazilian tax regulations have since the 1990s4 provided a favourable regime to non-resident investors that carry out investments in the Brazilian financial and capital markets.
On 6 May 2016, the tax authorities issued regulations5 introducing an ancillary obligation whereby certain entities must indicate the ultimate beneficial owner (UBO) connected to each Brazilian corporate taxpayer number (CNPJ).
Prior to 6 May 2016, Brazilian regulations did not provide a specific 'look-through' rule to reach the party deemed to be the beneficial owner of a given investment structure and, therefore, entities that were required to have CNPJ registration did not have to disclose any information on the ultimate beneficial owner of the investment.
While these UBO rules relate mainly to the disclosure of information, after they came into force, the tax authorities began to dedicate significant efforts to auditing local custodians and fund administrators6 to verify the identity of the UBO of a number of investment structures and ascertain whether the 4,373 investors who had been benefiting from the favourable tax treatment in fact complied with the requirements stipulated in the tax legislation.
Potential changes in taxation applicable to investment funds
While neither of the draft bills proposing changes to the taxation of investment funds (PL 10,638/18 and PL 336/18) has made any significant progress in Congress, on 3 March 2020, Congress inserted into a new provisional measure – Provisional Measure No. 898 of 15 October 2019 (MP 898/19) – provisions previously proposed in Provisional Measure No. 806/17.
In general, MP 898/19 had as its primary goal an unrelated matter, which was to introduce changes to the Bolsa Familia financial assistance programme for low-income families. In reviewing these changes, Congress sought to also change the taxation of Brazilian investment funds, to create a potential additional source of tax revenues to help the government fund the changes to Bolsa Familia.
MP 898/19 substantially amends the rules for the deferral of taxation applicable to closed-end investment funds in an attempt by the government to eliminate the tax deferral regime for these legal entities. According to the draft bill, investment funds would be taxed under the rules currently applicable to open-end funds.
Among the main changes that would be brought about by the proposed legislation, the following are of particular note:
- automatic taxation of investment fund gains (the come cotas regime);
- retroactive taxation of all gains accrued by closed-end funds up to May 2019; and
- taxation of spin-off, merger and transformation transactions of closed-end funds made as of 1 January 2019.
Ultimately, however, MP 898/19 was not voted on by Congress within the statutory deadline provided in the Constitution, therefore the potential effects discussed above will only assume significance if another bill of law or provisional measure with similar contents is raised, which may or may not happen in the near future.
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 for 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 local companies with better access to the capital and financial markets, and detailed guidance and transparency to local and foreign investors who are willing to acquire securities issued in Brazil.
This effort – evidenced in recent years in the enactment of the rules described in this chapter and of others in previous years – is recognised by market participants. In fact, its results have been verified in practical terms: in spite of the current economic and political crisis affecting Brazil, a significant number of debt and equity securities public offerings have been observed in the local market in recent months, showing that both investors and issuing companies increasingly rely on the capital markets for their (short- as well as long-term) funding and capital needs. Also noteworthy is the timely response of local regulators to mitigate the effects and distortions caused by the covid-19 pandemic, by enacting rules and regulations that permitted the proper functioning of the Brazilian capital markets in 2020.
1 Ricardo Simões Russo is a partner and Marcello Pompilio, Felipe Assunção and Vinícius Pimenta Seixas are associates at Pinheiro Neto Advogados.
2 For further information, refer to the ANBIMA Capital Markets Bulletin of August 2020, available at: https://www.anbima.com.br/pt_br/informar/relatorios/mercado-de-capitais/boletim-de-mercado-de-capitais/mercado-de-capitais-registra-volume-de-r-213-3-bilhoes-no-ano-com-destaque-para-a-renda-
variavel.htm (last accessed 17 September 2020).
3 Law No. 6,385, of 7 December 1976, as amended.
4 Article 81 of Law No. 8,981 of 20 January 1995 and Article 88 et seq. of Normative Ruling No. 1,585 of 31 August 2015.
5 Normative Ruling No. 1,634, effective as of 1 January 2017, amending the regulations applicable to the CNPJ.
6 As a rule, local custodians and fund administrators are held liable for collecting taxes on behalf of the foreign investor, as provided in Article 16 of Provisional Measure No. 2,189-49, of 2001, and Article 85, Paragraph 2, and Article 100, Paragraph 1 of Normative Ruling No. 1,585, of 2015.