Latin American Roundtable

Patrícia Pellini – Issuer Regulation and Guidance Manager

November 30th, 2011

Stock exchanges as an engine for corporate governance improvements:

Reaching out to non-listed companies

2

Largest stock and derivatives exchange in Latin America

3th largest listed exchange in the world (Nov/11)

Important capital market:

The world’s 3rd largest market in terms of capital raising activities (Jan-

Sep/11)*

467 listed companies / USD 1,55 trillion in terms of market

capitalization (Jul/11)

Broad range of sectors: financial (26%), basic material (16%), oil & gas

(15%), consumer non-cyclical (15%), utilities (10%) and telecom (7%) as

the main sectors

Equity markets with USD 3,9 billion in terms of average daily traded

volume (Jan-Oct/11)

Equity markets in terms of financial value: foreign investors (36%),

mutual funds (33%), retail investors (20%), financial institutions and

others (9%)

BM&FBOVESPA – brief overview

Source: * WFE and IOMA

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Initiatives with non-listed companies

Fully dedicated area for non-listed companies that promotes

Contact with companies: visits and meetings in regular basis

Educational activities for companies and entrepreneurs: provide knowledge and increase familiarity with corporate governance principles and regulatory environment

Connection between companies and investors: agreement with governmental agent, FINEP

Visibility: sponsor S&MEs ranking

Road shows with partners (banks, legal consultants, industrial and commercial associations): spread the concepts of capital market and IPO process

Partnership with private equity and venture capital entity, ABVCAP – a natural new listing supplier due to complementary businesses

Contact with investment banks and investors: presentation and discussion about the access segment called Bovespa Mais

Gradual access segment for companies, especially S&MEs – Bovespa Mais based on Novo Mercado

Listing Advisory Committee to discuss alternatives applied to non-listed companies, especially S&MEs

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Programs for Companies and Entrepreneurs

BM&FBOVESPA Educational Institute

São Paulo

Legislation applied to

the capital markets

AUGUST

Belo Horizonte

Capital and Growth: how to

measure capital costs, risks and

opportunities

SEPTEMBER OCTOBER NOVEMBER

São Paulo

Investors Relation

São Paulo

Internal Controls

DECEMBER

São Paulo

Capital and Growth: how to

measure capital costs, risks and

opportunities

Rio de Janeiro

Investors Relation

São Paulo

Hedge and Risks for non

financial companies

São Paulo

IPO Immersion

MARCH APRIL MAY JUNE

March 1st

The Stock Exchange and

the capital markets

March 15th

Transition in family-

owned companies

March 18th

Corporate Governance

March 23th to April 29th

Growth and High Performance

Management

June 6th

Legislation applied to the

capital markets

May 16th and 17th

Investors Relation

May 11th, 18th and 25th

Capital and Growth

May 23th and 24th

Accountancy

(convergence to IFRS)

SÃO PAULO

Accountancy

(convergence to IFRS)

São Paulo

Corporate

Governance

Calendar 2011

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Agreement with FINEP*

Connection between companies and investors

Pre-IPO Stage

Meetings among investors and companies that could possibly make an IPO or receive venture capital/private equity investments

Scope: coaching by hired consultant in structuring the business plan of the non-listed

companies. Executives from these companies are be trained to make presentation to

institutional investors, banks, brokers and managers of venture capital and private

equity

6 forums were promoted between 2002 and 2011 with 25 companies

6 of these companies became listed in Novo Mercado

* Research and Project Financing, also known as the Brazilian Innovation Agency, is a publicly owned company subordinated to the Ministry of Science and Technology – MCT

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The Exchange as sponsor of S&MEs Ranking

(Valor Econômico)

Ranking 2011 2.000 companies with annual revenues between R$ 18 million and R$ 300 million in 2010

Ranking 2010 1.000 companies with annual revenue between R$ 62 million and R$ 230 million in 2009

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Novo Mercado

• Launched in December 2000, it is a special listing segment based on corporate governance best practices over and above the Brazilian Corporate Law and the capital market regulation

• It is a private initiative, based on the self-regulation power of the Exchange, in order to improve the quality of public companies and the credibility of capital market . Or, in other words, to create a receptive environment for public offerings

• The main problem identified by the Stock Exchange

The lacking of suitable protection for minority shareholders

Agency conflict: controlling shareholder (majority) versus minority shareholders

• As a consequence, the Brazilian securities market – especially its equities market – became irrelevant

Very few new companies applied to list on the Stock Exchange

Almost no initial public offerings (IPOs) neither follow on offerings

The equity market was not a fund rising alternative for companies

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Novo Mercado

• Relation between regulation, corporate governance and market

Regulation based on corporate governance practices can provide the alignment of interests between investors and companies

For investors – it implies risk mitigation

For companies – it implies better valuation and, therefore, lower costs

For market – it implies efficient allocation of resources

• The entering in Novo Mercado is voluntary but based on an agreement between company, controlling shareholders, senior managers and the Stock Exchange (contractual obligation)

• Bylaws must be amended to insert shareholders’ rights (for example – full tag along rights and arbitration panel to solve conflicts)

• The enforcement is based on contract’s and bylaw’s provisions

• An arbitration chamber was created in order to enhance the enforcement process, considering the necessity of an appropriate forum for the solution of issues related to the capital markets

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Dispersion

Shareholders’ rights

• Minimum free float of 25%

• Procedures in public offerings to enhance the dispersion of the company shares

Transparency (monitoring)

• Only voting shares

Alignment between economic exposure and voting rights

Brazilian Corporate Law allows non-voting shares – 2/3 (until 2001) and 1/2(after 2001) of the total

capital

• Full tag-along rights extend to all shareholders in case of change of control

• Public tender offering at economic value in case of delisting

• Arbitration panel to solve conflicts

• Disclose of additional information (for example: security transactions by the controlling shareholders)

• Board of directors with at least 5 members being 20% of them independent ones

Main requirements

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Five-tiered regime of listing

• Standard (minimum legal requirements)

• Corporate governance listing segments

Nível 1 (Level 1)

Nível 2 (Level 2)

Novo Mercado (New Market)

Bovespa Mais (Bovespa Plus)

Standard

Comply with the regulation

+ better disclosure and free float

+ shareholder rights and arbitration

+ only voting shares

organized OTC gradual access to the main market

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19 24 31 33 37 36 44 43 35 37 380 3 3 7 10 1420 18

19 18 19

02 2

718

44

92 99 105 112125

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 aug/11

Novo Mercado

Nível 2

Nível 1

Corporate governance as the norm for local companies

IPOs by Listing Segment* Participation of listing segments at the exchange (Sep/11)

• 39% of total listed companies • 65% of market capitalization • 84% of traded value

Source: BM&FBOVESPA. (*) Data from 2004 to August 2011.

182 companies

Novo Mercado 74%

Nível 2 14%

Nível 1 6%

BDR 6%

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Evolution of IPOs

Source: BM&FBOVESPA. .

2 1 1 1 1 7 9

26

64

4 6 11 11

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 aug/11

Initial Public Offerings (Number of IPOs) (from 1995 to Aug/11)

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Capital raised in public offerings (US$ billion)

Foreign investors represented around 67% of the offerings

1

3

Capital raised (US$ billion)

(from 2004 to Aug/11)

4.5 5.4 15.4

55.6

7.5

23.7

11.2 7.4 4.3 8.5 15.1 14.5

26.8 22.2

138.0

9.1

2004 2005 2006 2007 2008 2009 2010 aug/11

IPO

Follow-On

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Evolution of the IPOs (from 1995 to July-01- 2011)

Average capital raised by offering

(2008-2009): BRL 3,13 billion Average capital

raised by offering (2004-2007):

BRL 764 million

Minimum ticket for public offerings

very high, becoming almost

impracticable small offerings

After international

financial crisis

intensification

Source: BM&FBOVESPA

Average capital raised by offering (by nov/2010):

BRL 1 billion

Size of public offerings in the Brazilian market

2 1 1 1 1 7 9

26

64

4 611 11

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 julho-11

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The Exchange works to make the market viable...

BOVESPA MAIS

An alternative for a great number of companies, for all sizes and with gradual strategy of market access, especially S&MEs

Characteristics of companies

seeking gradual access to the

market

+ =

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Raising smaller volumes of capital

Lower than usually raised by companies listed in Novo Mercado

Enough to finance their projects

More concentrated distribution Among investors with better understanding about companies and business cycle

Focus on small number of institutional investors with medium/long term horizon

Building a strong record of value creation

Companies that intend to increase their exposure along the market and build a history of relationship

Adoption of better corporate governance practices

Possibility of an initial public offering after the listing (until seven years later) in order to acquire trust and make the investors interested

Potential stimulator of the VC&PE industry, enabling listing in more initial stages of the investment and even gradual way out with more visibility

Exposure and disclosure as positive impact on pricing process

...for all sizes of companies

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Bovespa Mais – main requirements

• Issue only common shares: in case of existing preferred non voting shares issued, these will not be traded and must be converted to common shares

• The Board of Directors formed by at least 3 members, according to the Corporate Law

• Tag-along of 100% in the case of disposal of company’s control

• Mandatory offering in case of delisting from Bovespa Mais or going private, for, at least, the economic value of the shares

• Bylaws have been amended to insert the BOVESPA MAIS’ required clauses – especially the Arbitration Clause (additional enforcement by CVM)

Shareholder’s rights

• Free float of 25% until the seventh year of listing

• Lock-up restrictions: for the period of 6 months after the Company’s first public offering, the controlling shareholder and the senior managers shall not sell and/or offer to sell any company’s shares and derivatives which were held by them immediately after such public offering

Dispersion and lock-up

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Comparison of Novo Mercado vs. Bovespa Mais

Similarities Differences

• Existing preferred shares are not

allowed to be traded and must be

convertible into common shares

• Board of Directors must have at

least three members

• Mandatory listing application

• Free float of at least 25% until the

seventh year after listing

• Exemption from dispersion in

public offerings

• Listed companies is allowed to issue

only common shares

• Full tag-along rights

• Delisting with mandatory offering at

least economic value

• Adoption of the Market Arbitration

Panel for conflict resolution

• 180-day IPO lock-up for controlling

shareholders and senior managers

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AIM Market

Created in 1995 by London Stock Exchange

Number of listed companies (May/11): 1.155

Daily Average Volume (2010): £ 186.7 millions or USD 113,39 millions

Market Capitalization (May/11): £ 77,7 billions or USD 47,19 billions

57 companies migrated from AIM to London Stock Exchange (Jan/2001 to Dec/2010)

Number of listed companies in main market of LSE (May/11): 1.398

TSX Venture

Created in 2002 by Toronto Stock Exchange

Number of listed companies (May/11): 2.397

Daily Average Volume (May/11): USD 268,71 millions

Market Capitalization (May/11): USD 74,17 billions

470 companies migrated from TSX Venture to Toronto Stock Exchange (Jan/2001 to Dec/2010)

Number of listed companies in main market of TSE (May/11): 1.541

GEM

Created in 1999 by Hong Kong Stock Exchange

Number of listed companies

(May/11): 168

Daily Average Volume

(May/11): USD 47,9 millions

Market Capitalization

(Dec/11): USD 17,201 billions

52 companies migrated from

GEM to HKEx (Jan/2001 to

Dec/2010)

Number of listed companies

in main market of HKEx

(May/11): 1.269

Access Market - international examples

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MAB

Empresas en Expansión

Created in 2008 by BME –

Bolsas y Mercados Españoles

Number of listed companies (Dec/10): 12

Daily Average Volume (2010): € 16,2 millions or USD 21,66 millions

Market Capitalization (Dec/10): €295 millions USD 394,4 millions

S&ME Segment at Shenzhen Exchange

Created in 2004 by Shenzhen Stock Exchange

Same rules of main market for the listing

Number of listed companies (Dec/10): 531

Daily Average Volume (Dec/10): USD 226,5 millions

Market Capitalization (Dec/10): USD 535,26 billions

Number of listed companies in the main market of Shenzhen (Dec/10): 485

ChiNext

Created in 2009 by Shenzhen Stock Exchange

Number of listed companies (Dec/10): 153

Daily Average Volume (2010): USD 39 millions

Market Capitalization (Dec/10): USD 111,47 billions

Access Market – international examples

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Regulatory issues

Bovespa Mais

Created in 2005 by Bovespa, there are 2 companies listed

Why it has not taken off? Why it has not made feasible S&ME financing until the moment?

Possible perceptions: lack of understanding, lack of interest by players (investment banks, legal consultants, companies, investors), lack of liquidity due the size of potential offerings, similarity with Novo Mercado, market conditions (liquidity and risk aversion)?

How balance requirements (costs) and risk mitigation factors (better price due lower discounts) for S&ME listing?

SM&E financing: all type of investors or qualified ones?

Qualified investors could imply regulatory discounts?

Corporate governance and regulatory discounts are compatible?

BM&FBOVESPA has created the Listing Advisory Committee to discuss alternatives applied to non-listed companies, especially S&MEs

Practical and regulatory issues

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www.bmfbovespa.com.br

United States 61 Broadway, 26th Floor, Suite 2605 New York, NY 10006-2828 USA Phone: 1-212-750-4197

China 200 Yincheng (M) Rd, Suite 404 Pudong New Area Shanghai 200120 China Phone: 86-21-5037-2886

United Kingdom 88 Wood St., 12th floor EC2V 7RS London Phone: 44-208-528-1072

São Paulo Praça Antonio Prado, 48 Rua XV de Novembro, 275 Centro – São Paulo (SP) Fone: 55 11 2565-4000

Thank you

Issuer Regulation and Guidance Manager

Patrícia Pellini

(ppellini@bvmf.com.br)

(55 11) 2565-7003/7360