Tougher listing standards are drawing new capital. The program is voluntary and gaining new entrants and companies report being more visible to investors.
The creation of optional good governance segments for companies listed on Brazil's Sao Paulo Stock Exchange (Bovespa) has transformed the market, flooding it with local and foreign capital and helping to push up the value of the exchange by some 600 percent. 'In the last five years, we have had a revolution in the capital markets of Brazil,' says Geraldo Soares, Ceo of the Brazilian Institute of Investor Relations (Ibri), and head of IR for Banco Itau.
The government laid the foundation for that revolution in 1994 with the launch of the real currency and monetary policies that finally reined in the spiraling inflation that had plagued the country in the 1980s and early 1990s. But many observers credit good governance with finally drawing capital into the Bovespa, and sparking a growing number of Brazilian companies launching Ipos.
Bovespa’s three-tiered system spells out requirements on everything from disclosure to shareholder rights and board independence. The most stringent classification, called Novo Mercado, has its own index. The system was launched in 2000 and in June 2001 the first five companies signed up for level one – the least stringent – classification, says Salim Ali of Ibri. In February 2002 the first company signed up to Novo Mercado. And in June 2002 the first company adopted level two standards. Those numbers have been growing ever since, feeding trading volume and sparking new Ipos.
Cyrela, the largest home building company in North America, issued an Ipo in 2005 on the Novo Mercado. Since then, the company has seen its pre-Ipo value of R$2.5 bn almost triple to R$7 bn today. 'Part of the reason is good performance and part of it is corporate governance,’ says Luis Largman, Cyrela’s Cfo and IR manager. ‘We follow all the rules and sometimes [go beyond them]. We are a transparent firm and I think the market recognizes that.'
Cyrela is part of a flood of Ipos that seems to increase every year. Between 1995 and 2003 there were only six Ipos on the stock exchange. But there were 16 in 2004 and 2005, 26 in 2006 and Bovespa is expecting at least 30 this year. The market capitalization from 1995 to 2005, meanwhile, averaged about 33 percent of Brazil’s Gdp. In January 2007 it was at 77 percent, Soares says.
Today just over 40 percent of Bovespa’s listed companies have adopted one of the three corporate governance levels, and together they represent about 60 percent of Brazil’s total market capitalization. Daily trading volume on the exchange, meanwhile, has exploded, from $280 mn in 1995 to $1.2 bn today. In 1995 the value of companies listed on the exchange was around $150 bn; in January 2007 that had risen to $750 bn, according to Soares.
Luiz Ribeiro, manager of Hsbc’s Brazil Equity Fund, expects the trend to continue. 'The party’s not over yet,' he says. 'A healthy economy, attractive company valuations and recovering consumption and credit cycles all mean the market is well placed to make further strong progress in the years ahead.'
New standards
Of the 400 companies listed on the exchange, 36 have a level one classification, 14 have adopted level two standards, and 61 companies are on the Novo Mercado. Level one firms agree to maintain a free float of at least 25 percent of their total capital, and quarterly reports must include consolidated financial statements. They must also disclose monthly trades by controlling shareholders and management and release an annual calendar of corporate events.
Level two companies must meet the same criteria and also agree to appoint a five-person board of directors with a one-year mandate. They must file under US Gaap or international financial reporting standards, and offer specific voting rights to preferred shareholders in circumstances such as incorporation, spin-offs or mergers.
Novo Mercado companies must issue all of their capital stock in voting shares, and agree to offer common shareholders the same conditions offered to majority shareholders if the company changes hands. They also agree to a two-year unified mandate for the entire board, which must have at least five members, 20 percent of whom must be independent.
But many Novo Mercado companies go beyond these requirements – 40 percent of Cyrela’s board is independent and the firm held more than 20 shareholder events last year. Cyrela chose the highest classification because 'modern companies need modern corporate governance,' Largman says.
And it’s not just the top-tier Novo Mercado companies seeing the benefits. Duratex, which produces finishing materials for housing, adopted the level one standard in 2005, when its stock traded at R$11.50; now it trades at R$42, an increase of 360 percent.
'We needed to send a clear signal that we are committed to the capital market,' says Álvaro de Castro, Duratex’s IR manager. 'Level one was a label with a minimal range of requirements. The benefits are clear: we are a very open company and we receive more people, including big asset managers. We are more visible – and visibility is good for a company like Duratex.'