Debt capital markets in Brazil: regulatory overview
A Q&A guide to debt capital markets law in Brazil.
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.
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This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
Under Law 6385/1976, as amended (Law 6385 Capital Markets Law), any public offering in the Brazilian territory must be registered with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM), which is responsible for monitoring and supervising the activities and services of the capital markets. On 29 December 2003, the CVM enacted Instruction No 400 (CVM Instruction 400), which establishes the requirements for the registration of any public offering, including any debt security, in the primary and secondary markets in Brazil. Some years later, once the market was more established and had adapted to the new regulatory system, the CVM enacted Instruction No 476 (CVM Instruction 476) on 16 January 2009, which exempts the public offering of certain securities from registration before the CVM when they are offered on the market under certain conditions (initially, the exemption applied principally for debt securities). The CVM further amended CVM Instruction 476 in December 2014 to permit equity offerings under this new regime. Public offerings which are made in accordance with CVM Instruction 476 are much faster than those made under CVM Instruction 400.
Restrictions for offers to the public or professional investors
The general rule is that all public offerings must be registered before the CVM, unless all of the following requirements are met:
The offering is offered to a maximum of 75 professional investors.
The offering is subscribed to by a maximum of 50 professional investors.
A four-month black-out period applies (except for offerings structured under other regimes, such as CVM Instruction 400).
A 90-day lock-up period applies to the investors that have subscribed to the securities offered in the offering.
The offering is not made by means of any "public offering act", as defined under CVM Instruction 400.
A "public offering act" is defined by CVM Instruction 400, and involves any of the following:
The use of sales or subscription lists or bulletins, leaflets, a prospectus or advertisements addressed to the public by any means.
The complete or partial search for undetermined subscribers or purchasers (even if attempted through standard communications directed to individually identified addressees), through employees, representatives, agents, or any individual or legal entity (whether they take part in the securities distribution system or not), or the consultation on the offering feasibility or the collection of an investment commitment with subscribers or undetermined purchasers if not conducted in compliance with the provisions of CVM Instruction 400.
Negotiations made in stores, offices or branches open to the public and addressed, in whole or in part, to undetermined subscribers or purchasers.
The use of oral or written marketing, letters, advertisements or notices, especially through mass or electronic media (pages or documents on the internet or other open computer networks and email), which contain any communication addressed to the general public aimed at promoting (directly or through third parties acting on behalf of the offerer or the issuer) the subscription or disposal of securities.
All of the following are considered to be professional investors:
Financial institutions and other institutions authorised to operate by the Brazilian Central Bank.
Insurance companies and market capitalisation organisations.
Private welfare capital organisations.
Individuals or legal entities that hold financial investments amounting to more than BRL10 million.
Investment clubs, provided that they have the portfolio managed by an asset manager authorised by the CVM.
Autonomous investment agents and asset managers, analysts and consultants authorised by the CVM.
Market activity and deals
According to the January 2016 report prepared by the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA), in 2015 there were:
180 public offerings of debentures, accounting for BRL57.942 million.
89 public offerings of commercial papers, accounting for BRL12.012 million.
116 public offerings of certificates of real estate receivables, accounting for BRL8.542 million.
The Brazilian fixed-income market comprises mainly debentures issuances, which represented approximately 70% of all fixed-income offerings in the year 2015. The following segments accounted for approximately 81.5% of all debentures issuances in the year 2015:
Holding companies (16.4%).
Transport and logistics (16%).
Banking and finance (10.9%).
Chemicals and petrochemicals (7.5%).
Medical assistance and pharmaceutical products (4.5%).
Structuring a debt securities issue
Public offerings that are conducted under CVM Instruction 476 are solely driven to professional investors (see Question 1).
The CVM Instruction 476 regime for public offerings is less complex than the regime under CVM Instruction 400 in terms of timing, documentation and interaction with the regulatory authority. While an offering under CVM Instruction 476 takes around two months, an offering under CVM Instruction 400 usually takes three to four months, depending on the complexity of the case.
CVM Instruction 400 offerings must be registered with the CVM (while CVM Instruction 476 offerings are exempt from this requirement), and require the publishing of prospectuses and announcements to the markets to protect the general public against irregular offerings.
Main debt capital markets/exchanges
Main debt markets/exchanges
The main debt securities markets/exchanges in Brazil are as follows:
São Paulo Stock Exchange (Bolsa de Valores, Mercadorias e Futuros) (BM&FBOVESPA) (www.bmfbovespa.com.br/en_us/).
Central Custody and Settlement of Securities (CETIP SA – Mercados Organizados) (www.cetip.com.br/?lang=en-us).
Approximate total issuance on each market
In 2015, the trading volume of BM&FBOVESPA's secondary market for fixed income was BRL437.27 million, against BRL283.15 million in 2014. These were the result of businesses with certificates of real estate receivables, debentures, receivables investment funds and agribusiness certificates.
The trading volume of CETIP's secondary market for debentures and commercial papers in 2015 was BRL752 billion.
The Brazilian financial system, including the capital markets, is overseen by the following:
National Monetary Council (Conselho Monetario Nacional) (CMN), responsible for setting monetary and credit policies.
Brazilian Central Bank (Banco Central do Brasil) (BACEN), the monetary authority of the country responsible for the implementation of monetary and credit policies enacted by the CMN.
Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM), the federal agency responsible for monitoring the activities and services performed in the capital markets.
There are also self-regulatory authorities that contribute to a stabler and more confident environment for trading activities in the capital markets, which are the:
São Paulo Stock Exchange (Bolsa de Valores, Mercadorias e Futuros) (BM&FBOVESPA) (the main equity market in Brazil).
Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA), that oversees the capital markets intermediaries' financial and ancillary institutions and self-regulate their products, activities and best practices.
Central Custody and Settlement of Securities (CETIP SA – Mercados Organizados), the over-the-counter market for fixed assets.
The legislative framework applicable to the capital markets in general are:
Law 6385/1976, as amended (Law 6385 Capital Markets Law), regulates the market and creates the CVM.
Law 6404/1976, as amended (Law 6404 Corporation Law), that regulates the structure, organisation and responsibilities of corporations in general (whether or not they are publicly-held companies).
In 2011, the Brazilian Government enacted federal Law No 12,431/11 to stimulate fundraising for infrastructure projects through infrastructure debentures.
Regulations issued by the CVM, called as "Instructions", applicable to the debt capital markets are:
Instruction No 400, enacted by the CVM on 29 December 2003, as amended (CVM Instruction 400), which regulates securities offerings and their registration.
Instruction No 404/2004 (CVM Instruction 404), which regulates the terms and conditions for the trading of debentures in the special corporate governance segment of the stock exchanges and the over-the-counter market.
Instruction No 476, enacted by the CVM on 16 January 2009, as amended (CVM Instruction 476), that regulates public offerings on a restricted effort basis.
Instruction No 480, enacted by the CVM on 7 December 2009, as amended (CVM Instruction 480), that regulates the registration of issuers of securities traded in regulated securities markets, such as the BM&FBOVESPA stock exchange.
Instruction No 554/2014 (CVM Instruction 554), that defines, among other things, "professional investor".
Furthermore, in addition to the legal framework transcribed above, ANBIMA frequently issues certain deliberations and letters which are applicable to transactions carried out in the capital markets (such as the Code for Public Offerings), along with BM&FBOVESPA and the CETIP.
Listing debt securities
Under CVM Instruction 400, any publicly-held company that has already conducted a public offering can submit a debt security distribution programme for filing with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM), in order to obtain prior approval for future public offerings for any debt securities listed in that programme.
The issuers, along with the underwriters, must present the distribution programme request to the CVM together with all the documents that are usually presented in a public offering procedure.
Recently, the CVM presented a draft of a new regulation that intends to alter the dispositions contained in CVM Instruction 400 in connection with the distribution programme, which is to be discussed with the general public through a public auction procedure. Generally, the CVM intends to speed up the process of analysis and registration of such programmes in line with what exists in other jurisdictions.
The proposed amendments are:
The programme will be initially applicable to debentures.
The supplements filed before the CVM under the programme will be automatically registered within five businesses-days.
The programme will be valid for three years.
The public auction is open to receive comments from the public in general until 30 July 2016. The CVM has no deadline to enact the definitive instruction.
Minimum size requirements
There are no minimum size requirements to file a distribution programme with the CVM, or to issue debt securities in Brazil.
In accordance with the proposed amendments to the dispositions of distribution programmes contained in CVM Instruction 400, issuers must comply with either:
Public offerings of debentures in the minimum amount of BRL600 million in the period of 48 months prior to the registration request of the distribution programme.
Market cap of equal to, or more than, BRL2 billion according to the issuer's trading share price in the BM&FBOVESPA in the last business day of the preceding quarter prior to the registration request of the distribution programme.
There is no guarantee that these requirements will be drafted in the final version of the new regulation when it is finally approved by the CVM.
Trading record and accounts
There are no especial trading records requirements for any debt issuance or registration programme in Brazil.
Financial statements for listed companies must be prepared according to the International Financial Reporting Standards (IFRS), which are the accounting principles accepted in Brazil.
There are no minimum denomination requirements to issue debt securities in Brazil.
Continuing obligations: debt securities
In Brazil, publicly-held companies with listed debt securities principally observe Law 6404 Corporation Law and the rules issued by the CVM.
The issuers of listed debt securities must:
Disclose certain information to the market (that is, they must disclose the occurrence of any material facts).
Publish their financial statements (as well as interim financial information) and have them audited by independent auditors registered before the CVM.
Annually publish the reference form (formulário de referência), and update it whenever this is necessary.
In the case of issuers of debt securities placed and offered under CVM Instruction 476, and admitted for trading on the over-the-counter market, the issuer must:
Prepare and release financial statements duly audited by independent auditors registered with the CVM.
Keep the financial statements posted on their website for three years.
Release any information concerning the occurrence of any material facts.
Publish information on the occurrence of any material facts on the issuer's websites.
Deliver to the CVM any requested information upon receipt of that request.
Securities placed and offered under CVM Instruction 476 can only be traded in the stock exchange if the issuer is listed before the CVM and the BM&FBOVESPA as a publicly-held company.
Foreign issuers must disclose to the market the same documents and information as required for domestic companies (see Question 9). They must also inform the CVM of the following matters which concern the rules of the country in which the foreign issuer is incorporated (where the securities are held in custody):
Restrictions on the exercise of political and economic rights in connection with the securities issued by the foreign issuer.
Restrictions on the transfer of those securities.
Rules regarding the cancelation of registration, as well as the rights of holders of securities in this situation.
Rules on whether or not the securities holders have preferential rights to subscribe for shares, securities backed by shares or securities convertible into shares, as well as the conditions for the exercise of such rights, or cases in which this right is not guaranteed (if applicable).
The penalties for breaching the continuing obligations can include:
Suspension of the right to act as a director, officer or member of the fiscal council.
Temporary prohibition (up to 20 years) from exercising the role of a director, officer or member of the fiscal council.
If the issuer is a publicly-held company, suspension or cancelation of the registration as a publicly-held company.
Temporary suspension (from ten to 20 years) from conducting activities in the capital markets.
Fines imposed by CVM cannot exceed whichever is the highest of the following amounts:
50% of the amount of the issued securities or of the irregular transaction.
Three times the amount of the economic advantage gained (or the loss avoided) as a result of the violation.
Advisers and documents: debt securities issue
As a general rule, in a public offering of debt securities four different advisers are used:
CVM Instruction 400 requires that a lead underwriter is responsible before the CVM and the investors for the offering. The lead underwriter must undertake specific obligations, such as:
Organising a plan of distribution for the offering.
Filling the documentation required for the registration of the offering with the CVM.
Suspending the offering where it discovers that any illegal act or fact has occurred.
Along with the lead underwriter, other underwriters can join the syndicate to help structure the offering.
Lawyers are responsible for advising on the structuring of the offering in connection with its legal aspects. Lawyers also are responsible for performing legal due diligence.
Lawyers are divided into issuer's counsel and underwriter's counsel, with all of them responsible for drafting all documents related to the offering.
Issuer's counsel are responsible for drafting all documents related to matters with respect to the issuer, such as completing the reference form (Formulário de Referência), representing the issuer before the CVM and the Sao Paulo Stock Exchange (Bolsa de Valores, Mercadorias e Futuros) (BM&FBOVESPA) in connection with the registrations with those organisations, and reviewing the offering documents prepared by the underwriter's counsel.
Underwriter's counsel are generally responsible for drafting the offering documents, representing the underwriters in the syndicate (and the lead underwriter before the CVM and the BM&FBOVESPA), and reviewing the issuer's documents prepared by its counsel.
The auditors' role is to confirm that the financial data provided by the issuer is accurate, and that there is no substantial or unpredictable change in the issuer's circumstances from the last publication of the standardised financial statement form.
The fiduciary agent is hired to act on behalf of the security holders' interests, verifying compliance with all the issuer's obligations set out in the offering documents. It is not an adviser in the way that the underwriters, lawyers and auditors act as advisers. Law 6404 Corporation Law establishes that the appointment of a fiduciary agent is a mandatory requirement for all public offerings of certain types of debt securities (such as debentures).
Debt prospectus/main offering document
A prospectus is required for all public offerings registered with the CVM under CVM Instruction 400, which are addressed to the general public.
Usually, in a registered offering, there are two prospectuses:
The preliminary prospectus, similar to the "red herring" offering document, delivered upon the publication of the announcement to the market (Aviso ao Mercado).
The definitive prospectus, delivered upon the registration of the offering by the CVM.
Under CVM Instruction 476, no offering document is required to be delivered to investors in connection with that offering.
Additionally, CVM Instruction 400 foresees some exceptions to the requirement to prepare and publish a prospectus, depending on the amount of the offering, the plan of distribution and the target public for the offering. Nevertheless, whether or not these exceptions apply will be analysed on a case-by-case basis by the CVM.
CVM Instruction 400 sets out the disclosure requirements for the prospectus, which must disclose complete, precise, truthful, current, clear, objective and necessary information, in understandable language, so that investors can form their investment decisions, which basically includes:
Summary and description of the offering, including features and deadlines.
Identification of managers, consultants and auditors.
Risk factors relating to the offering, including risks related to:
the business and industry;
the Brazilian market.
Use of proceeds.
Other information deemed necessary by the CVM and the BM&FBOVESPA.
In most cases, the reference form (Formulário de Referência), as well as the financial statements of the issuer, are incorporated by reference in the prospectus.
The prospectus is drafted by the issuer (or the selling shareholder, where applicable) along with the underwriters. Both the issuer and the lead underwriter are responsible for the accuracy, consistency and quality of information contained in the prospectus.
Where a prospectus contains misleading information, the CVM can impose penalties against the issuer and the lead underwriter, which can vary from a warning and fines to cancellation of the registration or the authorisation to carry out activities in the capital markets.
Furthermore, under Brazilian laws and regulations, the management of the issuer (company and/or selling shareholder, where applicable) and of the underwriters can incur:
Civil liability in the case of negligent or imprudent actions or omissions that violate rights and cause damages to a third party.
Criminal liability, usually for actions or omissions which have a fraudulent element.
Timetable: debt securities issue
The timing of the registration process with the CVM for a public offering can vary from three to four months. If the offering is registered under the fasttrack procedure established by CVM Instruction 471, or if the issuer is an issuer with high market exposure (emissor com grande exposição ao mercado) (EGEM), the registration process may be expedited with the offering being registered within two months.
Because offerings placed in connection with CVM Instruction 476 do not require any registration before the CVM, these offerings usually are placed within up to eight weeks.
Tax: debt securities issue
Financial expenses incurred with the issuing of debt securities can be treated as deductible expenses for corporate income taxes purposes (that is, corporate income tax (Imposto de Renda sobre Pessoa Jurídica) (IRPJ) and the social contribution on net profits (Contribuição Social sobre o Lucro Líquido) (CSLL)), provided that both:
Remuneration is based on a market basis.
Those expenses can be considered as usual and necessary for the maintenance of the company's activities.
The rules concerning financial transfer pricing and the thin capitalisation rules may apply to foreign investors, depending on who they are, the tax regime they are subject to and their country of residence (for example, related parties as defined by the Brazilian tax legislation or foreign holders residing in tax havens or privileged tax regimes).
For local investors, any income arising from debt securities will be treated as income arising from fixed-yield investments, which is subject to withholding income tax (IRFonte) at rates that vary from 22.5% to 15% based on the period that the investor holds the investment, as follows:
22.5% for fixed-yield investments with a term of up to 180 days from the date of the principal disbursement.
20% for fixed-yield investments with a term between 181 and 360 days from the date of the principal disbursement.
17.5% for fixed-yield investments with a term between 361 and 720 days from the date of the principal disbursement.
15% for fixed-yield investments with a term of more than 720 days after the date of the principal disbursement.
IRFonte (withholding tax)
Foreign investors are, in general, subject to the same taxation applicable to Brazilian individuals, unless a foreign investor has registered with the Brazilian Central Bank (Banco Central do Brasil) (BACEN) and the CVM as foreign investor in the Brazilian financial and capital markets (that is, a foreign investor that invests in Brazil through BACEN Resolution 4,373/2014). Any income arising from fixed-yield investments paid to a foreign investor that invests through BACEN Resolution 4,373/2014 will be subject to IRFonte at a rate of 15%.
The Tax on Bonds and Securities Transactions (IOF/Securities) is levied on any issuance, purchase, sale, redemption or liquidation of securities, including quotas of funds or bonds. The calculation basis of IOF/Securities is the amount involved in the relevant transaction. Currently, the IOF/Securities rate on debt transactions is reduced to zero in most transactions, including transactions involving debt securities or bonds (except in the case of fixed-yield investments that last for less than 30 days, including bonds).
Clearing and settlement of debt securities
Brazilian debt securities are issued in the local currency, Brazilian Reais (BRL). Usually, the Central Custody and Settlement of Securities (CETIP SA – Mercados Organizados) and/or the BM&FBOVESPA) are able to settle Brazilian debt instruments denominated in BRL.
Under certain strict circumstances, Brazilian issuers can issue debt instruments in foreign currency. However, Brazilian securities denominated in foreign currency cannot be cleared in Brazil.
The CVM presented a draft of a new regulation that intends to alter the dispositions contained in CVM Instruction 400 in connection with the distribution programme, which is to be discussed with the general public through a public auction procedure (see Question 7).
Palácio do Planalto
Description. Official website maintained by the federal executive branch, which contains up-to-date texts of laws.
Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM)
Description. Official website maintained by the CVM, which contains up-to-date texts of laws and regulations related to the capital markets.
CVM (English language translations)
Description. Official website maintained by the CVM, which contains free translations into English (those these may potentially be out of date) of the main laws and regulations related to the capital markets.
Brazilian Central Bank (Banco Central do Brasil) (BACEN)
Description. Official website maintained by the BACEN, which contains up-to-date texts of laws and regulations related to the Brazilian financial system.
BACEN (English language translations)
Description. Official website maintained by the BACEN, which contains free translations into English (though these may potentially be out of date) of the main laws and regulations related to the Brazilian financial system.
Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA)
Description. Official website maintained by the ANBIMA, which contains self-regulatory dispositions and regulations related to the Brazilian financial and capital markets.
Central Custody and Settlement of Securities (CETIP SA – Mercados Organizados)
Description. Official website maintained by CETIP, which contains information about custody and settlement of securities, notably fixed-income securities, and other related matters.
CETIP (English language translations)
Description. Official website maintained by the CETIP, which contains free translations into English (though these may potentially be out of date) of information about custody and settlement of securities, notably fixed-income securities, and other related matters.
Alexei Bonamin, Partner
Professional qualifications. Advogados, Brazil
Areas of practice. Banking & finance; capital markets; corporate finance; investment funds; project finance; private equity & venture capital.
Non-professional qualifications. LL.M. degree in Banking and Finance from The London School of Economics and Political Science, England; Graduate of the Law School of Pontifícia Universidade Católica de São Paulo.
Fabíola Cavalcanti, Partner
Professional qualifications. Advogados, Brazil
Areas of practice. Banking & finance; capital markets; corporate law and foreign investment; mergers and acquisitions.
Non-professional qualifications. MBA in Corporate Law, IBMEC; Graduate of the Law School of Universidade do Estado do Rio de Janeiro (UERJ).
Kenneth Antunes Ferreira, Partner
Professional qualifications. Advogados, Brazil.
Areas of practice. Capital markets; corporate finance.
Non-professional qualifications. Master in Commercial Law from Pontifícia Universidade Católica de São Paulo (PUC-SP); Executive MBA in Corporate Finance from the Instituto Brasileiro de Mercado de Capitais de São Paulo (Ibemec-SP); Advanced Business Law and International Business Law from Mt San Antônio College, USA; Graduated from the Law School of Universidade Paulista.
Rodrigo de Campos Vieira, Partner
Professional qualifications. Advogados, Brazil.
Areas of practice. Banking & finance; capital markets; corporate finance; investment funds; project finance; private equity & venture capital; infrastructure.
Non-professional qualifications. Specialised in Business Management from the Fundação Dom Cabral (FDC); specialised in Business Management from the Business School São Paulo; Graduate of the Law School of Faculdade Milton Campos.