Latin American Capital Markets

DEVELOPING A STRATEGY FOR REFORMING CAPITAL MARKETS 21The Novo Mercado is a listing segment designed for trading shares issued bycompanies that voluntarily undertake to abide by corporate governance practices anddisclosure requirements in addition to those already requested by Brazilian legislation.The inclusion of a company in the Novo Mercado implies the company's adherenceto a series of corporate rules, known generically as "good practices of corporate governance,"which are more rigid than those required by current legislation in Brazil.These rules, consolidated in the Listing Regulation, increase the rights of shareholdersand enhance the quality of information commonly provided by companies. In addition,the creation of a Market Arbitration Chamber for conflict resolution between investorsand companies offers investors a safer, faster, and specialized alternative.Themain innovation of the Novo Mercado, compared with the current Brazilian legislation,is that nonvoting shares may not be issued. A similar initiative is under way inChile, with the Ley de Oferta Publicas de Adquisicion de Acciones (Initial Public OfferingLaw), which was approved in December 2000.The law establishes public shareoffers and corporate governance, giving stronger protection to minority shareholders.The government of Mexico has proposed legislation to allow swift action oninsider trading and greater protection for minority shareholders, based on the assumptionthat greater shareholder protection could double market capitalization andattract five times the number of companies currently listed. At the same time, thecountry is revitalizing the local bond market.The upgrade of Mexico's sovereign debtrating by a major ratings agency in August 1999 helped to increase investors' confidence,and in 2000, the Mexican government made its first privatization through thestock market. Chile is also expected to increase the corporate issuance of inflationindexedunits.Another encouraging sign is the growing amount of funds (mostly pensionfunds) managed by institutional investors. Mexico introduced the private pension systemin 1997 and already manages $28 billion, around 5 percent of GDR Argentinacreated pension funds in 1994, and they have accumulated resources totaling $21 billion(7.4 percent of GDP). Brazil, which has not yet privatized its social security system,holds more than $175 billion in mutual fund assets. Chilean institutional investors andinsurance companies hold more than $45 billion.These funds, presently mostly investedin government securities, seek diversified investment opportunities within local marketsThe situation for the smaller countries in the region is characterized by increasingcross-border intraregional activity. Countries in the subregions of Central Americaand the Caribbean have launched regional capital market development programs,which include collaboration on market infrastructure, coordination of the legal regula-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub