4th Asian Roundtable on Corporate Governance Maria Helena Santana São Paulo Stock Exchange - BOVESPA Using the Stock Exchange to Speed Reform: Lessons from Brazil's Novo Mercado November 2002

BOVESPA An Overview  Brazil’s only stock exchange  Established in 1890  Entity owned by the member brokerage firms  Self-regulatory organization under the supervision of the Brazilian Securities and Exchange Commission (CVM)

BOVESPA An Overview  406 listed companies  Market capitalization of listed companies (October/2002): US$ 114 BI  Trading value (October/2002): US$ 3.28 BI

Novo Mercado Commitment with good corporate governance  Private sector initiative, based on and enforced through a contract with BOVESPA  Adhesion is voluntary and market driven  Companies committed to the highest standards of corporate governance  Set of rules over and above the Corporations Law reflecting market demands and requirements

 Vast majority of public companies have a defined controlling shareholder. Usually this shareholder is a family or a family group  The Brazilian law allows companies to issue up to 2/3 of non-voting shares (called preferred shares)  Many sales of control have resulted in large premiums for the sellers (no tag along rights)  Tender offers to delist companies can be made at unfair prices Brazilian market reality Focus on different issues

Novo Mercado Commitment with good corporate governance  Only voting shares: one share, one vote  Full tag along rights  Delisting: public tender offer at the economic value  Board of Directors: 1 year terms and a minimum of 5 members  25% minimum free float  Much higher standards of disclosure, including: –Improved quarterly reports –Annual balance sheet in USGAAP or IAS

Novo Mercado Enforcement  Surveillance and enforcement by BOVESPA  Sanctions for breach of contract can include fines, delisting and other legal measures  Mandatory use of arbitration for shareholder/company disputes

Market Arbitration Panel  Established in July, 2001  Resolve conflicts between shareholders, companies and their management, controlling shareholders and BOVESPA  Field of action: Corporations Law, capital markets’ regulations, listing rules and companies bylaws  Award can not be resort to the Court  Advantages: –Greater agility and economy –Highly specialized arbitrators –Confidentiality

 More Disclosure  Rights to Investors  More Disclosure  Only Voting Shares  Rights to Investors  More Disclosure

IGC x Ibovespa Compared Performance until 10/31/2002

Trading value Participation of the corporate governance segments # of companies

Market capitalization Participation of the corporate governance segments # of companies

Novo Mercado BOVESPA’s Perception  The standard is set: –the only model for new listings that is being accepted by the market (domestic and international investors, underwriters) is the Novo Mercado –only very specific IPO cases will come to the Level 2 –Level 1 and Level 2 are real market requirements for the companies already listed  Minimum listing standard for the BOVESPA main board (2002): Level 1