From the mid 1990's until 2000 the Brazilian equity market was characterized by poor corporate governance, weak enforcement, little minority investor protection, shallow liquidity and low valuations. This challenging situation provoked de-listings and forced a migration of companies seeking the greater protection that the NYSE could offer. Fast-forward to the period between 2004 and 2007 and the scenario had changed completely, with a record number of IPO's coming to the market raising a total of US$45 billion from foreign and domestic investors. So how can such a turnaround be explained? Alternative Latin Investor was fortunate to attend the recent alternative investment summit in Sao Paulo, Brazil and Jose Luis Osorio from Jardim Botanico Partners shed some light on how investor protection legislation has evolved in the recent past.

A significant reform took place in Brazil in 2001, when two 1976 corporate laws no. 6404 and 6385 were updated leading to amongst other things an improvement in shareholders rights and their enforcement and importantly a granting of independence to the CVM (the Securities and Exchange Commission of Brazil). Jose Luis Osorio went on to explain that at the same time the BOVESPA (the Sao Paulo Stock Exchange) created three new listing levels for issuing companies, each with increasing better corporate governance requirements. These three levels were voluntary and contained the following elements; Level I, required and improvement in quarterly reports and the disclosure of an annual calendar of corporate events; Level II, looked for the elements of Level I as well as Tag along rights (80%) and voting rights granted to preferred shares in transactions between related parties; The highest and final level was called "Novo Mercado", which incorporated the elements of levels I & II but in addition had Tag along rights (100%) and one share one vote. Mr. Osorio, a former President of the CVM concluded his brief historical summary by mentioning that the CVM and the Central Bank of Brazil oversee the Brazilian fund industry.

Mr. Osorio then highlighted some of the more recent developments aimed at providing greater investor protection and transparency in Brazil. Some of the more significant actions have included; better enforcement against Insider Trading through a 2005 agreement with the Brazilian Public Prosecutors office; a convergence of Brazilian GAAP accounting to IFRS; the introduction of the possibility of on-line voting and a CVM guideline no.35 on mergers between companies with the same controlling shareholder. Jose Luis Osorio then spoke of how the financial crisis was shaping debate for new rules and regulations currently being considered. In November of last year, BOVESPA created a committee, headed by a former head of CVM, to conduct a review of the Novo Mercado rules mentioned earlier. The consultation process with market participants involves the following aspects that Mr. Osorio highlighted; 1. Poison Pills; 2. Board member participation and 3. Corporate restructurings - Tag Along Rights.

In concluding his presentation Jose Luis Osorio posed the question "how has the BOVESPA's Novo Mercado performed?" He said that if measured in terms of the number of new companies that accessed the equity market and the volume of money raised that the success of the Novo Mercado is unquestionable. Osorio also thought that it is indisputable that Novo Mercado companies can now boast better governance standards than those in the traditional market. Finally and perhaps most importantly the question was asked as to if better corporate governance had led to better performance? Osorio compared the performance of the IBOVESPA with the IGC (special governance stock index) since 2001, and he illustrated that the IGC has consistently performed better than the Ibovespa.

The Alternative Latin Investor staff is comprised of finance and journalism professionals who create articles through a process of research, data gathering, and industry interviews in order to provide unique content regarding alternative asset investment within the Latin American region.