On May 11, 2011 the Brazilian Securities and Exchange Commission (Comisso de Valores Mobilirios – CVM) enacted CVM Instruction No. 496 (CVM Instr. 496/2011), that amended CVM Instruction No. 391, of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, operation and administration of Private Equity Investment Funds (Fundos de Investimento em Participates – FIPs) in Brazil.
FIPs are closed-end investment funds created with the purpose of acquiring shares, debentures, subscription bonuses and other securities convertible into or exchangeable for shares issued by publicly or privately held corporations (the target companies).1
The FIP must participate in the decision-making process of the companies in which it invests, typically through one of the following ways: (i) by participating in the controlling group; (ii) by entering into shareholder agreements; or (iii) by entering into any other agreement or adopting procedures that ensure the participation of the FIP in defining the strategic and management policies of the target company(ies).
In the case that the target company is a privately-held corporation, the target company must: (i) not issue founders shares; (ii) establish a joint term of office of one year for the members of their board of directors2; (iii) disclose all related-party agreements, shareholder agreements, stock option plans and share buyback plans; (iv) adhere to an arbitration chamber for resolution of corporate disputes; (v) undertake to adhere, in the event of going public, to a special segment of the stock exchange or entity supporting a regulated over-the-counter market that ensures, at least, the differentiated levels of corporate governance described in items (i) to (iv) above; and (vi) have their annual financial statements audited by independent auditors registered with CVM.
The main change introduced by CVM Instr. 496/2011 is to oblige the new FIPs incorporated after May 12, 2011 or the existing FIPs that decide to increase their capital after May 12, 2011 to maintain, at least, 90% of their assets invested in shares, debentures, subscription bonus or other securities convertible into or exchangeable for shares issued by publicly or privately held corporations, pursuant to the terms of article 2 of CVM Instr. 391/2003.
It is expected that the remaining 10%, if not invested in the same assets, be used for cash purposes or to acquire instruments of low risk and high liquidity, such as public debt instruments.
Furthermore, FIPs can only perform operations with derivatives for asset protection.
According to CVM Instr. 496/2011, the deadline for payment of capital calls made by the FIP as from May 12, 2011 shall not exceed the last day of the 2nd month following the initial date for payment of units of the FIP.
The purpose of CVM Instr. 496/2011 is to avoid that the FIP may be used as a vehicle to circumvent the current tax regulations, i.e. for investments in securities whose tax regime is less advantageous than the one applied to the units of the FIP. This possibility arises as a result of the changes made by Decree No. 7.412, of December 30, 2010 (Decree 7.412/2010), in the rates of the tax on credit and exchange transactions, insurance and securities (Imposto sobre Operaes de Crdito, Cmbio e Seguro, ou relativas a Ttulos ou Valores Mobilirios – IOF), which is due upon the entry of financial resources in Brazil.
Decree 7.412/2010 provides that the entry of funds for the acquisition of units in FIPs or in investment funds that are unitholders of FIPs is subject to the IOF at the rate of 2%, which is lower than the 6% rate applicable to investments made in fixed income instruments. FIPs are benefited from this more favorable tax rate (2%), because they are considered important in financing small businesses, including those engaged in the infrastructure sector.