On March 29, 2012, the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) decided to amend the provisions of CMN Resolution No. 2723, of May 31, 2000 (CMN Res. 2723/2000), which sets forth detailed rules, conditions and procedures for installing dependencies abroad and for the direct or indirect equity interest in Brazil or abroad by financial institutions and other entities authorized to operate by the Central Bank of Brazil (Banco Central do Brasil – Bacen). The change has been introduced by means of CMN Resolution No. 4062, of March 30, 2012 (CMN Res. 4062/2012).
Formerly, according to the original wording of article 8 of CMN Res. 2723/2000, these institutions should inform Bacen, in the form and within the time established by Bacen, about any equity investments held in the capital of other companies located in Brazil, as well as the total or partial disposal of such investments.
Now, with the new wording of article 8 approved by CMN Res. 4062/2012, the applicable rules are the following:
- the participation of financial institutions and other entities authorized by Bacen either directly or indirectly in any companies headquartered in Brazil or abroad is subject to the prior authorization of Bacen, except for the typical equity investments portfolios of investments held by investment banks, development banks, development agencies (agências de fomento) and multiple-service banks with investment or development portfolios, which are expressly admitted. Any of these banks will be able to acquire a non-financial company with the aim to proceed with its corporate reorganization for later resale and this type of transaction is not subject to the prior authorization of Bacen;
- the prior authorization from Bacen applies to the initial participation, any percentage increase of such participation and the situations for which it is mandatory to draw up financial statements in a consolidated manner, as indicated below, as soon as we conclude the analysis of the new rules. This authorization is not required in the case of equity investments made in Brazil on a temporary basis, not recorded in the permanent assets and non-consolidated in accordance with the regulation in force;
- equity investments will only be admitted on companies carrying out complementary or subsidiary activities to the corporate purpose of the participating institution;
- applications for authorization to the participation (equity investment) and to the participation (equity investment) and to increase the percentage of participation should be instructed with information and detailed justifications covering at least the description of the corporate purpose and activities of the participated company, the analysis of the synergy resulting from the participation and the appropriateness of the stake (shareholding) to the business strategy of the participating institution.
Bacen may: (i) determine at any time that the financial institutions must present the above-mentioned information and justifications, as well as the implementation of adjustment measures considered appropriate; and (ii) establish the conditions for the remittance of such information and justifications
The new rules introduced by CMN Res. 4062/2012 intend to give more security to the Brazilian financial system, reducing the systemic risks that can be magnified when a financial institution whose end-activity is the financial intermediation, decides to act on another segment. To participate in a different business, the financial institution must first consult Bacen.
The justification of the CMN to adopt this measure is to give more transparency to consolidate the process of participation of financial institutions in non-financial companies, aiming to evaluate in a consolidated and systemic manner the levels of risk assumed by these financial institutions. It also falls within the context of the process of convergence of the Brazilian legislation to the international standards, in particular to the recommendations of the Bank for International Settlements (BIS), which focuses on the power of the supervisory authority to approve, reject, and impose criteria and conditions for significant shareholdings of financial institutions in non-financial companies.
The situations for which it is mandatory to draw up financial statements on a consolidated basis continue the same. Pursuant to article 3 of CMN Res. 2723/2000, financial institutions and other entities authorized to operate by Bacen must prepare their consolidated financial statements. This requirement includes participations in companies located in Brazil and abroad in which these institutions hold directly or indirectly, alone or in conjunction with other partners, including by force of the existence of voting agreements, rights of partners that provide them, individually or cumulatively, with: (i) preponderance on the social deliberations; (ii) ability to elect or dismiss most administrators; (iii) effective operational control, characterized by common management or administration; (iv) corporate control represented by the sum of the shares held by the institution, regardless of the percentage of ownership of its managers, controllers and related companies, as well as those purchased, directly or indirectly, via investment funds.
In the preparation of the consolidated financial statements, it should be included, even if there is no equity investment, the financial institutions and other entities authorized to operate by Bacen linked by effective operational control, characterized by common management or administration, or for acting in the market under the same trademark or trade name. Investments in shares held indirectly via investment funds shall also be treated as equity investments.
It must be consolidated on a pro rata basis the participation of the financial institutions and other entities authorized to operate by Bacen: (i) in companies located in Brazil, except: (a) institutions where there is a shared control with other conglomerates, financial or not; or (b) institutions belonging to the public sector; (ii) in institutions where there is a shared control with distinct institutions belonging to financial conglomerates, subject to the supervision of Bacen; and (iii) companies located abroad, where there is a shared control with other conglomerates, financial or not.
Article 4 of CMN Res. 2723/2000 clarifies that it is possible to consolidate the financial statements in proportion to the equity interest owned, in the event of absence of corporate control (as defined by article 3), provided that this possibility has been previously authorized by Bacen.
In conclusion, the need for prior authorization by Bacen established by CMN Res. 4062/2012 may reduce the agility of banks to purchase certain non-financial companies. There was no fixed deadline for Bacen to release or not such authorization. Bacen will examine the operation within the time frame and in accordance with its own criteria. This is a variable that must be inserted in the negotiations from now on. This requirement, however, applies only to permanent investments and not to temporary investments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.