Latin American Capital Markets

444 MIKE LUBRANOthere to adopt the Mexican code of best practices in an effort to turn around its reputationfor trampling on minority shareholder rights.The less resistant firms typicallyexpect heavy capital raising requirements in the short to medium term and hence aremore willing to accommodate market expectations.In the end, the final measures approved by the respective legislatures andsigned into law in Latin America were more or less watered-down versions of what wasinitially proposed. Chile's reformers were perhaps the most successful, but even there,majority shareholders were permitted to suspend the application of the law's mandatorytender offer provisions for three years. Mexico's legislation delegated authority forsetting the parameters of the mandatory tender offer rule to the banking and securitiesregulator, which after much delay was able to issue strong mandatory bid rules inearly 2002. Brazil's comprehensive legislative initiative was the subject of extensivehorse-trading in the legislature. In the end, the mandatory tender offer requirement fornonvoting shares and the provisions that would have given minority shareholders controlover fiscal boards had to be dropped. However, the international media attentionpaid to the Enron, Global Crossing, and other corporate scandals in the United States,and the subsequent responses from the legislature and the U.S. exchanges, may yet provideimpetus for further legal reforms in the rest of the hemisphere.Early Results: MixedThe promoters of the recent legislative initiatives in Latin America, and elsewhere inemerging markets, clearly hoped that by mandating greater transparency, providingshareholders with better tools to ensure equitable treatment, and beefing up judicialenforcement, the reforms would have salutary effects on the development of capitalmarkets. In the case of the Latin American reforms, it is certainly too early to makedefinitive judgments about the long-term impact on access to and cost of capital, newofferings, liquidity, securities prices, or company performance.Two or three more yearsmust pass before there is enough solid data to test the hypothesis that the reformshelped reduce the overall "governance discounts" in the respective markets and willultimately result in more access to capital at lower cost. (One prominent analyst, however;already asserts that the Brazilian legal reform shifted the balance of power inBrazilian companies positively for minority shareholders and recommended that investorsbuy minority voting shares in Brazilian firms. 5 )Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub5 Deutsche Bank Latin America Strategy, November 5, 2001.