corporate governance issues brazil

8/7/2019 Corporate Governance issues Brazil

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Corporate Governance in Brazil:

A Success Story?

by

Ah La Ko

An honors thesis submitted in partial fulfillment

of the requirements for the degree of

Bachelor of Science

Undergraduate College

Leonard N. Stern School of Business

New York University

May 2006

Professor Marti G. Subrahmanyam Professor Heitor Almeida

Faculty Adviser Thesis Advisor

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Corporate Governance in Brazil: A Success Story?

Abstract

The introduction in December 2000 by Bovespa, the Sao Paulo Stock Market, of three newlisting segments, have made some analysts and policy makers point to Brazil as a corporategovernance success story. In an attempt to stimulate the market by providing higher standards ofminority shareholders protection and transparency, the Novo Mercado (New Market), theNvel 1 and the Nvel 2 (Level 1 and Level 2) require more rigorous listing requirements.This paper analyzes whether adopting stricter corporate governance requirements is indeedbeneficial. In addition, it examines some companies in the Novo Mercado that have promotedbetter governance practices.

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Table of Contents

Part I: Introduction 4

Part II: Evolution of the Brazilian Capital Markets 7II.1 Concentrated Ownership and Family-Controlled Structure 7II.2 Expropriation of Minority Shareholders 8II.3 The 2001 Reform in the Brazilian Corporate Law 11

Part III: Introduction of Novo Mercado 12

Part IV: Impact of Migrating to the Differentiate Market Segments 15Part V: Analysis of Indices 16

V.1 IBovespa 16V.2 IGC 17V.3 Average Growth Rate 18V.4 Volatility 19

Part VI: Case Analysis 20VI.1 Natura 20VI.2 Perdigao 20VI.3 Submarino 21

Part VII: Conclusion 22

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Part I: Introduction

Governance values in the corporate world are closely linked to crisis and scandals,

gaining new light whenever profound violations of sound practices take place. During the

aftermath of the stock market crash of October 1929 when stock prices on the New York Stock

Exchange collapsed and millions of investors watched their investments come to nothing,

corporate governance was one of the top priorities of the U.S. Congress when it passed the

Securities Act of 1933 and the Securities and Exchange Act of 1934. It was an effort to restore

investor confidence and force corporations to better disclose information regarding the sale of

their securities. In the early 1990s, when institutional investors were no longer willing to trade

good governance for the high premiums experienced during the wave of leveraged buyouts of the

80s, corporate boards were once again pressured to improve their governance practices.

More recently, the globalization of financial markets added significant momentum to the

topic. With the Asian crisis of 1997-2000, which devastated some of the world's most promising

economies, a prominent though controversial thesis was first proposed by leading U.S. policy

makers notably the former chairman of the U.S. Federal Reserve Alan Greenspan (1998) and

the former Treasury Secretary Larry Summers (1998)and developed further by the

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International Monetary Fund (IMF). The thesis argues that certain macroeconomic disequilibria

may have provided a trigger for the Asian crisis; nonetheless its fundamental causes lay in the

poor corporate governance and lack of competition resultant from the close relationship between

governments, business and banks in these societies1.

The most significant push for changes in the existing governance standards in recent

times came from the Sarbanes-Oxley Act of 2002, approved by the U.S. Congress in the wake of

a series of corporate financial scandals of companies like Enron and WorldCom. As companies

across nearly all sectors of the economy were found guilty of accounting fraud and

misappropriation, Sarbanes-Oxley further regulates issues such as establishing a public company

accounting oversight board, auditor independence, corporate responsibility and enhanced

financial disclosure.

Corporate governance is strongly tied to both investor confidence (pressure from

institutional investors and Sarbanes-Oxley Act) and protection against economic shocks (the

stock market crash and the Asian crisis). When these two factors are combined, we can conclude

that investors tend to prefer firms with high levels of governance, since they represent lower risk

to their invested capital. According to Nick Bradley from Standard & Poors Governance

Services,

in countries where higher investor protection measures existed, and where

corporate governance standards were higher, the impact of economic crises was,

1 See Glen and Singh (2005) for an analysis of the Greenspan-Summers-IMF thesis and the state of corporategovernance and competition in the Asian countries affected by the crisis.

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relatively speaking, less. Studies in the US have examined the depreciation of

currencies and the decline of the stock markets in a number of emerging

economies during the Asian crisis of 1997-98. The studies revealed that countries

with higher standards of investor protection were, relatively speaking, better

insulated against market turmoil than those countries where investor protection

laws were weak.

Investor protection measures not only provide better protection against macroeconomic

shocks, but also have a high correlation with better operating performance and market valuation

of individual companies. Two noteworthy studies were done in this field. First, Gompers, Ishii,

and Metrick (2003) constructed a Governance Index to connect governance mechanisms with

company success or failure. They found significant evidence to prove that governance attributes

affect stock performance and firm valuation2. In 2004, Brown and Caylors Gov-Score study

also found support for the claim that better-governed firms were more profitable, more valuable,

and paid out more dividends to their shareholders3.

The importance of corporate governance has also permeated the financial community in

emerging markets. In Brazil, it has become a constant topic in the major business newspapers,

especially after the introduction in December 2000 of three new listing segments of

differentiated corporate governance. As a part of the Sao Paulo Stock Exchange (Bovespa), the

Novo Mercado, the Nvel 1 and Nvel 2 serve as stamps of quality to show investors that

companies are committed to improving their governance practices. It has drawn attention from

domestic as well as the foreign investors as this move has been considered by many as a success

2 Gompers, Paul A., Joy L. Ishii and Andrew Metrick. Corporate Governance and Equity Prices.3 Brown, Lawrence D and Marcus L. Corporate Governance and Firm Performance.

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story of an emerging country being able to stabilize its capital markets. For example, Goldman

Sachs issued in 2003 a report which named Brazil as one of the four stand-out emerging markets,

attributing its prominence to strong industrial base, well-established capital markets and sound

banking system.

This paper first examines the foundations and the recent changes that have impacted the

Brazilian capital markets. Next, it analyzes whether exists a relationship between better

governance and stock price performance/firm valuation in the Brazilian case. Finally, it looks at

three companies that have recently adopted stricter corporate governance standards and how they

are dealing with these new market requirements.

Part II: Evolution of the Brazilian Capital Markets

II.1 Concentrated Ownership and Family-Controlled Structure

The formation of the Brazilian capital markets is largely based on a family structure. In

the turn of the last century, companies had limited capital financing and were usually managed

by their owners. The historical context in which Brazilian firms have developed, especially

public companies, is one of concentrated control in the hands of few not rarely related by

family ties.

One dimension of such concentrated ownership analyzed by La Porta et al. (1998) is the

use of pyramidal ownership structures, in which dominant shareholders and business groups

enforce their control over group firms. Pyramid ownership structures make it possible to control

some firms even with a very small share of their total capital. La Porta et al. find that controlling

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shareholders in Brazil use pyramidal ownership structures as the primary means to separate cash-

flow from control rights and gain power disproportionate to their cash flow rights. Appendix 1

shows how a Brazilian firm that has family members as their ultimate owners use pyramids in

their ownership structures.

With the expansion of businesses, there was the need for additional credit and for capital

financing that would allow for an increase in the scale of production. Because most of the

companies were controlled by small groups, they had limited capacity to invest in its growth.

However, turning to the stock market was undesirable as the issuance of securities represented

the risk of losing control of the companies.

In this context of family groups, pyramidal structure and reluctance to renounce control,

good governance is not about protecting shareholders, but rather preventing controlling

shareholders from expropriating minority owners.

II.2 Expropriation of Minority ShareholdersAs a way of circumventing this problem, legal reform allowing public companies to

expand the quota of non-voting stocks to 66% was introduced. As a result, companies that found

themselves in need of additional capital but unwilling to share controlling rights issued large

quantities of preferred shares. Table 1 illustrates the predominance of preferred stocks over

common stocks among the top ten stocks by value.

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Table 1: Abnormal quantity of preferred Stocks (2005)

Position Stock Value (USD)

1 Petrobrs preferred 13.7bn

2 Telemar preferred 11.5bn

3 Vale R Doce preferred A 10.8bn

4 Usiminas preferred A 6.4bn

5 Itaubanco preferred 5.9bn

6 Bradesco preferred 5.8bn

7 Caemi preferred 5.5bn

8 Sid Nacional common 4.8bn

9 Vale R Doce common 3.5bn

10 Gerdau preferred 3.3bn

This maneuver essentially allowed a shareholder to maintain control with as little as 17%

of the total capital invested in the company. Still today, non-voting shares represent one of the

greatest incentives of expropriation of minority shareholders because, for every $1 invested, the

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controlling party receives only 17 4, and it becomes very tempting to take companys resources

in other ways besides dividends.

As with the case of concentrated ownership, the relevant agency conflict in securities is

the one between controlling and minority shareholders. The existence of pyramid structure and

dual class stocks show that there is considerable scope for the expropriation of minority

shareholders in Brazils system of corporate governance.

Another part of the problem for minority shareholders in Brazil was due to a change in

the Corporate Law introduced by the government in order to promote the privatization of some

of the countrys main economic sectors. In the 1990s, the privatization process attracted major

European investment into the telecommunications, electric energy and banking sectors, reaching

an impressive amount of US$30 billion in 1999. Nonetheless, the legal changes that followed

had other negative consequences as well. Prior to this reform, minority shareholders with voting

shares had the right to sell their shares for the same price paid to the controlling shareholder in

the event of the sale of a company. The acquiring party was obliged to make a tender offer to

minority shareholders with voting shares under conditions similar to the deal with the party

selling the controlling shares. However, the new law allowed controlling shareholders to expand

their ability to legally expropriate minority shareholders. The new controlling shareholder, after

acquiring the company by paying the market premium for the controlling block of shares, could

make a public offer to purchase remaining shares left in the market for a much lower price, and

4 With the introduction of Law 9457, the absence of voting rights of preferred stocks is compensated by a paymentof dividends 10% higher than that paid to voting common shareholders.

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minority shareholders were forced either to accept the offer or risk being left with shares no

longer liquid in the market5.

At the turn of the century, investors became less willing to provide equity finance to

corporations and this was reflected in the low trading volume in Bovespa as well as the small

number of public offerings of securities during the late 1990s and early 2000s.

II.3 The 2001 Reform in the Brazilian Corporate Law

The reform in the Brazilian Corporate Law, approved on October 31, 2001, was

originally proposed as an effort to strengthen the capital markets by forcing companies to

provide greater transparency and credibility.

It also brought several modifications, particularly in regards to the structure of the

Comisso de Valores Mobilirios (CVM)6 to give it greater autonomy to function as the main

regulatory agency. When first instituted, the CVM power was very limited to carry on the

proposed objectives. For example, the CVM commissioners did not have predefined terms

(unlike other agencies created later) and were subject to dismissal upon the discretion of the

President of Brazil; and the agency did not have an independent budgetary system.

There were two main changes in the Corporate Law. First, the proportion of common

shares and preferred shares was established at 50% for new companies. Preferred stocks can no

longer represent 66% of the total securities issued. Second, the CVM was given financial,

5 Rabelo and Coutinho. Corporate Governance in Brazil.6 CVM is the equivalent of the American Securities and Exchange Commission (SEC).

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budgetary, and political autonomy and is no longer under the jurisdiction of other government

agencies (although still tied to the equivalent of the Department of State in Brazil).

However, the reform process left the impression that the capital markets should not rely

on the legal system for fundamental changes. It was clearly a mistake to ignore the opposition

parties and their political influence. Changes related to the governance of public corporations

generally faced strong political barriers. Obviously, the controlling groups of these companies

led the opposition, as better protection to minority shareholders meant a reduction in the value of

their position.

Although some changes brought by the Corporate Law Reform were welcomed, the slow

and inefficient Brazilian judicial system represented another problem. This fact was confirmed

by La Porta, Lopez-de-Silanes and Shleifer (1998) in their study where countries are ranked

according to the degree of protection provided to minority shareholders based on voting rights.

Brazil was the 6th

worse country in terms of efficiency of the legal system7

and a below-average

country for government corruption8. With an ineffective system, the financial community was

well aware that it would be very difficult to legally enforce the changes proposed by the new

Corporate Law.

Part III: Introduction of Novo Mercado

The Novo Mercado (New Market) has been welcomed by investors, firms, regulatory

agencies and the government. It introduces the Brazilian capital markets into a new phase in

7 The first index measured the efficiency and integrity of the judicial system, particularly in respect to foreigncompanies, and it was done by the Business International Corporation. Scores range from zero to ten and arecalculated as the average from 1980 to 1983. Brazil scored 5.75, ahead of only six other countries (Portugal,Pakistan, the Philippines, Turkey, Thailand, and Indonesia.8 The second index measured government corruption and it was done by the International Country Risk Guide.Scores range from zero to ten and are based on the April and October averages from 1982 to 1995. Brazil scored6.35 while the median was 7.27.

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which the private sector takes the lead in promoting changes. This particular initiative was

inspired in the German Neuer Markt.

The creation of the Neuer Markt did not entail legislative reforms and hence, did not

affect existing public companies listed in the traditional stock market with weaker governance

standards. As a result, it was possible to avoid the political opposition of controlling groups. To

companies that issue new securities, the Neuer Markt means considerably higher stock prices.

Companies accept the more restrictive rules, not because they are obliged by law, but because

they find it beneficial. The Neuer Markt is a mechanism that allows some companies to send

friendly signals to minority investors and thus, to set them apart from the rest of the market.

Similar to the German experience, the practices of good governance established by the

Novo Mercado are expected to increase stockholder confidence and improve the quality of

information provided by companies. For firms already listed in the traditional market, it is a

voluntary migration to signal commitment to high governance standards. The approximately

seventy companies now listed in the new listing segments find the benefits outweigh the costs 9.

It also proves that the involvement of the legislative system is not always essential and that there

is room for the private sector to act as the leading force behind the development of the capital

markets.

This so-called differentiated market segment does not require an operational system

different from the one present in the traditional market. In fact, the Novo Mercado works as a

stamp of quality whose credibility lies on the contractual obligations accepted by firms and on

9 For a more detailed study on the costs and benefits of migrating to the Novo Mercado, see Carvalho (2001).

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the Bovespas management of these contracts. Recognizing that the rules established are very

restrictive and that many companies cannot meet them, the Bovespa introduced two other levels

of governance namely Nvel 1 and Nvel 2. As a result, there are four listing segments (or

stamps of quality): the traditional market, Nvel 1, Nvel 2 and Novo Mercado.

The main requirements of disclosure and protection to shareholders are10:

Only voting shares are listed;

Minimum free float of 25% of the total capital;

The rights provided to majority shareholders in the sale of control have to be extended to

all shareholders ('tag along' rights);

Financial statements in US GAAP or following the International Accounting Standards

(IAS GAAP);

Lock-up period of six months before shareholders can sell their shares;

Minimum period of 15 days for companies to call a Shareholders' Meeting, instead of 8

days presently required in Brazilian law.

An important advantage of this model is a contractual clause that obligate companies to turn

to a chamber of arbitration, the Cmara de Arbitragem do Mercado, in case of disputes. The

decisions of the Chamber are official rules and are not subject to judicial recourse. Hence,

investors are guaranteed fast processing of their cases with the appropriate expertise, without the

traditional laggardness of the judicial system.

10A complete list of the requirements for the three new markets is included in Appendix 3.

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Part IV: Impact of Migration to the Differentiated Market Segments

When creating the Novo Mercado, Nvel 1 and Nvel 2, the Bovespa intended the stricter

governance requirements to have a strong correlation with firm valuation and stock price

volatility. The expected results of moving from the previously existing market with weaker

standards to the new levels of corporate governance are reduced volatility and returns

outperforming the market.

Two studies attempt to corroborate these results. In 2003, Carvalho performed an events

study to analyze the effects of migration on price/return, trading volume, volatility and liquidity.

It consisted in projecting returns that would have been expected at the date of migration and

comparing them to actual returns observed during a two-day window period. He found that

migrating to the Novo Mercado results in a positive effect on the market value of companies

empirical analysis shows abnormal returns of approximately 0.5% a day, an increase in the

average daily trading volume, an increase in liquidity and a decrease in the exposure of stock

price to macroeconomic factors.

Parreiras (2003) studied the impact of migration on the risk embedded in stock prices by

analyzing price variance as a proxy for risk. Using a 100-day window period before and after the

dates of migration until July 2003, he found that risk decreased for 60% of the companies.

These findings should be interpreted with caution. There are inexorable limitations that

tend to alter or at least contaminate the results. They are degree of capital pulverization, stock

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liquidity, small historical series, and imprecision around the date of migration11. In addition,

there are two additional caveats. Migrating is a commitment the company makes, but by no

means represents the adoption of the new governance practices. During the time period

considered (2001 to mid-2002), the new listing segments were fairly recent and were not yet

recognized as stamps of quality.

Part V: Analysis of Indices

In order to investigate whether stricter corporate governance standards affect stock

valuation in the short- to mid- term, we will compare the performance of the traditional market

and of the differentiated markets.

V.1 IBovespa

The Bovespa Index is the most important indicator of stock performance in the Brazilian

capital markets. It captures the behavior of the most important stocks traded in Bovespa, the Sao

Paulo Stock Exchange. It is closely watched by companies, analysts and investors alike due to

the reliability of its historical series and the consistency in methodology since first introduced in

196812

.

11 According to Carvalho (2003), there is not an exact date the migration was announced. In the majority of cases,the company did not release any official announcement. In general, the migration was announced through variousvague articles on several news sources on different dates.12 The IBovespa is a composite index (price and number of shares) calculated using a base-weighted aggregate

methodology (1968 as the base period). The formula is:

whereIbovespa t = Bovespa Index at time tn = total number of shares in the indexPit = closing price of stock "i" at time t

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The IBovespa is the current value, expressed in current reais, of a hypothetical

investment made on stocks in 1968, with no additional capital invested. Because it is designed to

represent the average performance of the market, its components are the closest possible to the

actual composition of the Bovespa13. In terms of liquidity, the IBovespa corresponds to more

than 80% of the trading volume of the overall market. In terms of market capitalization, the

companies included in the IBovespa are responsible, on average, for approximately 70% of the

Bovespas market capitalization.

V.2 IGC

The Index of Stocks with Differentiated Corporate Governance was designed to measure

the performance of companies with high levels of corporate governance14

. These companies

Qit = number of shares of stock "i" at time tIBovespa is adjusted for dividends paid out by companies that are included the index.Source:Bovespa Metodologia Completa do IBovespa

13 The inclusion of each stock in the index is directly related to the stocks representativeness of the overall market in terms trading volume and amount adjusted for the sample size. The representativeness is based on the

negotiability index, which is calculated as:

whereIN = negotiability indexni = trading volume of stock "i" in BovespaN = total trading volume of the Bovespavi = trading amount of stock "i" in BovespaV = total trading amount of the BovespaSource:Bovespa Metodologia Completa do IBovespa

14The formula to calculate the IGC is:

wherendice t = Index value at time t

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must be listed in the Novo Mercado, Nvel 1 or Nvel 2 of Bovespa. All equity securities of

companies in these markets are included, except when liquidity is highly compromised.

V.3 Average Growth Rate

Chart 1 illustrates the evolution of the IBovespa and of the IGC from June 2001 to

December 2005. On nominal terms, the IBovespa increased 165% while the IGC went up around

340%. Although a simple comparison, the indices correspond to the current value of a

hypothetical initial investment expressed in current currency. Assuming their rate of evolution

over time can be viewed as the return rate of such investment, the IGC would result in a much

higher return than the IBovespa over the same period of time. In terms of annual average growth

rate, the IGC grew at a higher rate than the IBovespa in all years since its inception. Specifically

from 2001 to 2005, the stock prices that make up the IGC grew at an average rate of 37.9% per

year while the stock prices that are part of the IBovespa grew annually 25.3% on average15

. This

is in accordance with the findings of Carvalho (2003) in which companies who migrated to the

Novo Mercado experienced higher price return.

n = total number of companies in the indexQit = number of shares of stock i at time tPit = closing price of stock i at time t = adjusting factor to base year 2001In this calculation, stocks in the Novo Mercado are multiplied by a factor of 2, stocks in Nvel 2 by a factor of 1.5,and stocks in Nvel 1 by a factor of 1 to account for relevance weight of the level of corporate governance.Source:Bovespa Metodologia Completa do IGC

15 See Appendix 5 for a complete table of the average growth rates over time.

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Chart 1: Evolution of IBovespa vs. IGC

V.4 Volatility

To estimate the volatility and risk level of the two composites, we build up a beta the IGC

relative to the overall market, the IBovespa. We used the indices annual returns for the past five

years the IGC has only 5 years worth of information16

. Both on nominal (=0.71) and

American dollars terms (= 0.796), the IGC beta was less than one. It is less volatile and carries

less risk than the IBovespa.

The results indicate that stocks of companies that have migrated to the levels of stricter

corporate governance practices are superior to the overall market. They have higher growth rate

and less risk embedded. In this analysis as well as in the studies of Carvalho (2003) and Parreiras

(2003), it is necessary to emphasize caution when drawing conclusions. Given the complexity of

the capital markets nowadays, analyzing an isolated fact such as the migration to the Novo

Mercado can produce equivocated results.

16 See Appendix 6 for data on returns.

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Part VI: Case Analysis

This section of the paper provides qualitative analysis of three companies currently listed

in the Novo Mercado. It looks especially at the degree of commitment shown to adopt the higher

standards of governance.

VI.1 Natura

Natura17, the cosmetics manufacturer and distributor, has continuously gained the

spotlight as one of the best-governed companies in Brazil. Founded in 1969, it experienced

revenue growth of over 30% throughout the 1980s. In March 2004, Natura opened its capital to

the public. It issued about 20 million common shares traded on the Novo Mercado under the

ticker symbol NATU3 since the May 26.

In March 2006, the company announced a 5-1 stock split. The objective of the split was

to lower the stock price in order to increase liquidity and allow small investors to buy shares.

Sold in lots of 100, the steady increase in price was pushing away investors who could not afford

to buy shares in sets of 100. Natura was trying to bring back the small investors and encourage

their participation in the market.

VI.2 Perdigao

Perdigao18 is one of Brazils largest food companies, whose operations include breeding,

production and sale of pork and birds (chicken, Chester, turkey, etc.), industrialization and

17 See Appendix 7 for information on ownership structure and stock performance of Nature18 See Appendix 8 for information on stock performance of Perdigao.

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commercialization of refrigerated products, pastas, frozen vegetables and soy. On June 26 th,

2001, the company moved from the traditional Bovespa market to the differentiated Nvel 1.

In February 2006, Perdigao announced it was in a transition process to migrate to the

Novo Mercado. In an effort to meet the stricter requirements, the company has converted all

preferred shares into common shares (1:1) and then split all common shares (3:1). It will result in

improved stock liquidity, extend rights to all shareholders, and attract foreign investors looking

for liquidity and good governance.

VI.3 Submarino

Founded in 1999, Submarino19

is the leader in online retail. In the beginning, the

products offered on its website ranged from CDs and books to toys. Now, the company offers

more than 700 thousand items.

In March 2005, the company made its initial public offering of common shares to be later

traded on the Novo Mercado. 52.38% of the company was still controlled by Submarino.com

LLC while the remaining was dispersed throughout other investors willing to buy the shares. In

August 2005, the controlling shareholder announced that it will convert 99.45% of its shares into

Global Depository Receipts (GDRs)20

. As a result, the stock experienced higher liquidity and

Submarino became the second the company in the country to be completely pulverized.

19 See Appendix 9 for information on ownership structure and stock performance of Submarino.20 See Appendix 10 for the presence of foreign investors in Bovespa over time.

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Natura, Perdigao and Submarino are part of the few companies that have committed

themselves to adopt stricter corporate governance practices to help develop the Brazilian capital

markets. As we can see from the recent shifts in the ownership structure of these companies, it

seems like firms aspire to be better-governed and have been taking significant moves towards

this goal.

Part VII: Conclusion

History has shown that the topic of corporate governance only becomes the object of

serious public concern and policy interest when there are crises, the example of Brazil and its

Novo Mercado has proven that this is not always the case. In an effort promoted by the private

sector, this new listing segment with higher standards of governance is a significant achievement

for the Brazilian capital markets.

As previous studies have indicated, corporate governance is highly correlated with stock

performance and firm valuation. This paper shows that companies that migrated from the

Bovespa to the Novo Mercado experience positive returns not only in the short run, but also over

a period of 5 years. In general, stock performance increase and volatility decrease.

Moreover, it is important to mention that the Novo Mercado is a voluntary model in

which companies are not obliged by regulations to adopt stricter governance practices.

Nonetheless, we see that in the Brazilian market more and more companies see the advantages of

migrating and take the initiative to promote equal treatment for all shareholders.

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Appendix 1: Concentration of Ownership in Lojas Americanas

Source: Leal, Da Silva, Valadares (2001)

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Appendix 2: Companies Listed in the New Segments of Corporate Governance

Table 2: Companies in the Novo Mercado

Name Migration Date

BCO NOSSA CAIXA S.A. 28-Oct-2005

CIA CONCESSOES RODOVIARIAS 1-Feb-2002

CIA SANEAMENTO BASICO EST SAO PAULO 24-Apr-2002

CIA SANEAMENTO DE MINAS GERAIS-COPASA MG 8-Feb-2006

COMPANY S.A. 2-Mar-2006

COSAN S.A. INDUSTRIA E COMERCIO 18-Nov-2005

CPFL ENERGIA S.A. 29-Sep-2004

CYRELA BRAZIL REALTY S.A.EMPREEND E PART 21-Sep-2005

DIAGNOSTICOS DA AMERICA S.A. 19-Nov-2004

EDP - ENERGIAS DO BRASIL S.A. 13-Jul-2005

GAFISA S.A. 17-Feb-2006GRENDENE S.A. 29-Oct-2004

LIGHT S.A. 28-Jul-2005

LOCALIZA RENT A CAR S.A. 23-May-2005

LOJAS RENNER S.A. 1-Jul-2005

NATURA COSMETICOS S.A. 26-May-2004

OBRASCON HUARTE LAIN BRASIL S.A. 15-Jul-2005

PORTO SEGURO S.A. 22-Nov-2004

RENAR MACAS S.A. 28-Feb-2005

ROSSI RESIDENCIAL S.A. 18-Jan-2006

SUBMARINO S.A. 30-Mar-2005

TOTVS S.A. 9-Mar-2006

TRACTEBEL ENERGIA S.A. 16-Nov-2005

Source: Bovespa website

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Table 3: Companies in the Nvel 2

NameMigrationDate

ALL AMERICA LATINA LOGISTICA S.A. 25-Jun-2004

CENTRAIS ELET DE SANTA CATARINA S.A. 26-Jun-2002

ELETROPAULO METROP. ELET. SAO PAULO S.A. 13-Dec-2004

ETERNIT S.A. 12-Mar-2005

GOL LINHAS AEREAS INTELIGENTES S.A. 24-Jun-2004

MARCOPOLO S.A. 3-Sep-2002

NET SERVICOS DE COMUNICACAO S.A. 27-Jun-2002

SUZANO PETROQUIMICA S.A. 25-Nov-2004

TAM S.A. 14-Jun-2005

UNIVERSO ONLINE S.A. 16-Dec-2005

VIVAX S.A. 8-Feb-2006


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Table 4: Companies in the Nvel 1

NameMigrationDate

ARACRUZ CELULOSE S.A. 16-Apr-2002

ARCELOR BRASIL S.A. 23-Dec-2005

BCO BRADESCO S.A. 26-Jun-2001

BCO ITAU HOLDING FINANCEIRA S.A. 26-Jun-2001

BRADESPAR S.A. 26-Jun-2001

BRASIL TELECOM PARTICIPACOES S.A. 9-May-2002

BRASIL TELECOM S.A. 9-May-2002

BRASKEM S.A. 13-Feb-2003

CIA BRASILEIRA DE DISTRIBUICAO 29-Apr-2003

CIA ENERGETICA DE MINAS GERAIS - CEMIG 17-Oct-2001

CIA FIACAO TECIDOS CEDRO CACHOEIRA 11-Aug-2002

CIA HERING 13-Dec-2002CIA TRANSMISSAO ENERGIA ELET PAULISTA 18-Sep-2002

CIA VALE DO RIO DOCE 12-Dec-2003

CONFAB INDUSTRIAL S.A. 19-Dec-2003

DURATEX S.A. 4-May-2005

FRAS-LE S.A. 11-Nov-2004

GERDAU S.A. 26-Jun-2001

IOCHPE MAXION S.A. 10-Nov-2005

ITAUSA INVESTIMENTOS ITAU S.A. 26-Jun-2001

KLABIN S.A. 10-Dec-2002

MANGELS INDUSTRIAL S.A. 21-Mar-2003

METALURGICA GERDAU S.A. 25-Jun-2003

PERDIGAO S.A. 26-Jun-2001

RANDON S.A. IMPLEMENTOS E PARTICIPACOES 26-Jun-2001

RIPASA S.A. CELULOSE E PAPEL 12-Nov-2001

S.A. FABRICA DE PRODS ALIMENTICIOS VIGOR 4-Oct-2001

SADIA S.A. 26-Jun-2001

SAO PAULO ALPARGATAS S.A. 15-Jul-2003

SUZANO BAHIA SUL PAPEL E CELULOSE S.A. 8-May-2003

ULTRAPAR PARTICIPACOES S.A. 27-Oct-2005

UNIBANCO HOLDINGS S.A. 26-Jun-2001

UNIBANCO UNIAO DE BCOS BRASILEIROS S.A. 26-Jun-2001

UNIPAR UNIAO DE IND PETROQ S.A. 24-Nov-2004

VOTORANTIM CELULOSE E PAPEL S.A. 14-Nov-2001

WEG S.A. 26-Jun-2001


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Appendix 3: Main Requirements of the Differentiated Market Segments

Mercado Nvel 1Companies listed in Nvel 1 are committed to the following rules:

Disclosure of quarterly financial information filing ITRs with CVM and Bovespa including consolidated and cash flow statement;

Disclosure of annual financial information filing IANs with CVM and Bovespa including information about controlling shareholders and Board of Executives;

Meetings with analysts and shareholders, at least once a year; Corporate events calendar with agenda of general meetings and earnings release; Monthly release of insider transactions of corporations stocks and derivatives;

Minimum free float of 25% of the total capital; Adoption of mechanisms that favor capital dispersion in issuance of new securities.

Mercado Nvel 2

In addition to the requirements of Nvel 1, the following rules are applicable: One-year term for all members of the Board of Executive; Financial statements in Generally Accepted Accounting Principles in the United

States (US GAAP) or following the International Financial Reporting Standards (IFRS); The rights provided to majority shareholders in the sale of control have to be extended to

all common shareholders and at 70% of the value to all preferred stockholders;

Voting rights to preferred stockholders in issues with potential conflict of interestsbetween corporation and controlling shareholders, such as mergers and acquisitions;

Offer to repurchase all shares outstanding, at the fair market price, in case of goingprivate or delisting from Bovespa;

Participation in the Cmara de Arbitragem do Mercado to solve shareholder conflict.

Novo MercadoIn addition to the requirements of Nvel 2, the following rules are applicable:

Only voting shares are listed; The rights provided to majority shareholders in the sale of control have to be extended to

all shareholders ('tag along' rights); Board of Executives composed by a minimum of five members with a maximum of two

years in term (reelection allowed). At least 20% of independent members; Lock-up period of six months before shareholders can sell their shares; Minimum period of 15 days for companies to call a Shareholders' Meeting, instead of 8

days presently required in Brazilian law.

Source: Regulamento de Listagem do Novo Mercado, Regulamento de Prticas Diferenciadas de Governana

Corporativa Nvel 2, Regulamento de Prticas Diferenciadas de Governana Corporativa Nvel 1.

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Appendix 4: Participation of the New Markets Relative to Overall Market


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Appendix 5: Indices Average Growth Rates

Table 5: IGC Average Growth Rate

Table 6: IBovespa Average Growth Rate


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Appendix 6: Indices Annual Returns

Table 7: IBovespa Returns

Year Index atClosing(Nominal)

AnnualVariance(Nominal)

Index atClosing(US$)

AnnualVariance(US$)

2001 13,577.50 -11.02 5,851.36 -25.02

2002 11,268.40 -17.00 3,189.20 -45.50

2003 22,236.30 97.33 7,696.35 141.33

2004 26,196.25 17.81 9,868.97 28.33

2005 (*) 33,455.94 27.71 14,293.12 44.83

2006 (*) 37,951.97 13.44 17,470.30 22.23*data up to March


Table 8: IGC Returns

YearIndex atClosing

(Nominal)

AnnualVariance(Nominal)

Index atClosing(US$)

AnnualVariance

(US$)2001 1,010.98 1.09 435.69 0.20

2002 1,026.90 1.57 290.63 -33.29

2003 1,845.41 79.70 638.73 119.77

2004 2,545.00 37.90 958.83 50.122005 3,658.81 43.76 1,563.13 63.02

2006 (*) 4,238.90 15.85 1,951.25 24.83*data up to March


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Appendix 7: Natura

Chart 2: Natura Ownership Structure

Shares

Outstanding

Lisis

Participacoes

Utopia

Participacoes

Passos

Participacoes

RM Futura

Participacoes

Others

Source: Infomoney

Chart 3: Natura Stock Performance Relative to IBovespa

Source: Infomoney

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Appendix 8: Perdigao

Chart 4: Perdigao Stock Performance Relative to IBovespa

Source: Infomoney

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Appendix 9: Submarino

Chart 5: Submarino Ownership Structure

Shares

Outstanding

Insiders

Submarino.com

LLC

Source: Infomoney

Chart 6: Submarino Stock Performance Relative to IBovespa

Source: Infomoney

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Appendix 10: Participation of Foreign Investors in Bovespa

Source: Bovespa Facts & Figures 2005

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