Not long ago the São Paulo Stock Exchange (Bovespa) was a sleepy backwater, much like any other stock exchanges in Latin America. In 2002, average daily trading was worth R$558m, the equivalent at the time of just $198m.

Since then, things have changed. By 2006, average daily trading had risen to R$2.4bn ($1.1bn). Last month it was R$6.7bn ($3.7bn). The Bovespa’s extraordinary initial public offering on October 26 shot it into the top rank of world capital markets.

A number of factors lie behind this astonishing ascension. They include global liquidity, commodity prices and the expectation that next year Brazil will be given an investment grade rating by the big ratings agencies – in recognition of the macro-economic stability and improvements in Brazil’s debt profile that have helped spur investor interest in the country.

But it is unlikely the Bovespa would have come so far so quickly had it not been for a fundamental change in attitudes to corporate governance, nor that changes in those attitudes would have come about without a powerful stimulus from the Bovespa itself.

Brazilian companies have no great tradition of taking themselves public and even less tradition of caring about minority shareholders. Authorities were finally spurred into action after JC Penney, a US retailer, bought Lojas Renner, a Brazilian retailer, in 1998, forcing holders of non-voting preferential shares to sell at a rock-bottom price.

Congress enacted a law giving a modicum of protection to minority shareholders in the event of a change of control. (Lojas Renner went on to become the first significant Brazilian company to have no controlling shareholder and is regarded as a model of good governance.)

Then in 2001 the Bovespa created the Novo Mercado, a voluntary listings segment demanding much higher standards of governance than legally required, and two other, less demanding segments, known as Level 1 and Level 2.

The Novo Mercado’s biggest advance is to do away with the non-voting shares that have caused so much controversy. By law, Brazilian companies may issue up to two-thirds of their capital in non-voting stock, meaning that in the simplest ownership structure a company can be controlled with just one sixth of its capital. Using layered structures, control can be exercised with an insignificant capital stake.

Companies listed on the Novo Mercado have one vote per share. In the event of a change of control, minority shareholders must be offered the same price for their shares as controlling shareholders.

These and a series of other advantages have made the Novo Mercado hugely popular with investors and, consequently, with companies coming to market. After a slow start, and with the expansion of global liquidity over the past few years, the Novo Mercado has taken off. As of November 2, there were 89 companies on the Novo Mercado and 62 on Levels 1 and 2. This year, 59 companies have come to market, all on the new listings segments.

“Good governance has been one of the main reasons why the market has developed in recent years,” says Andre Esteves, head of Latin American operations at UBS Pactual, an investment bank. “The Novo Mercado sets very high standards, higher than those in the US.”

At the same time the central bank and the CVM, Brazil’s securities commission, have made significant advances in the standard of market oversight. The combination of better regulation and better self-regulation has provided the environment for investor confidence to flourish.

But not all controlling shareholders have become angels overnight. Among recent episodes to upset regulators and investors is that of Cosan, Brazil’s biggest sugar and ethanol group.

Cosan listed on the Novo Mercado and attracted much investor interest based on a business plan that included expansion in Brazil and overseas. But in August this year its controlling shareholder created a Bermuda-registered holding company, Cosan Limited, and floated it on the New York Stock Exchange.

Investors were encouraged to swap shares in the original Cosan for those in Cosan Limited at a rate of one for one.

The plan has caused concern for two reasons. First, that it is now Cosan Limited, rather than the original company, that will make investments outside Brazil, denying shareholders in the original Cosan an opportunity they had been told would be theirs.

Second, the controller of Cosan Limited has special Class B shares with 10 votes each. This will allow him to control 84 per cent of Cosan Limited’s voting stock with just 35 per cent of its capital.

“This is clearly against the Novo Mercado’s principles of self-regulation,” says one investment banker. “They have done nothing illegal but they have gone against the principles of good governance.”

While regulators have been largely unable to prevent Cosan’s plans from going ahead, shareholders have registered their objection. Cosan’s shares lost 8.4 per cent the day after the plan was announced in June.

Cosan is not the only company to have raised eyebrows in what has otherwise been a period of great advances in corporate governance. In a period of transition, such exceptions are to be expected.

But the success of the Novo Mercado seems almost certain to ensure that there will now be no going back.

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