Brazil: Foreign Equity Investments In Microfinance Institutions In Brazil*

Last Updated: 12 May 2011
Article by Walter Stuber

A Brazilian Microfinance Institution (MFI) must be set up as a Sociedade de Crédito ao Microempreendedor e à Empresa de Pequeno Porte (SCMEPP), a company governed by CMN Resolution nº 3.567, of May 29, 2008, issued by the Brazilian Monetary Council (Conselho Monetário Nacional - CMN), which is a legal entity subject to the authorization and supervision of the Central Bank of Brazil (Banco Central do Brasil - Bacen).

This type of company can be incorporated either in the form of a closely-held company (companhia fechada), pursuant to the terms of the Brazilian Corporation Law (Law nº 6.404, of December 15, 1976, as subsequently amended), or as a limited liability company (sociedade limitada).

A Brazilian MFI is eligible to lend resources to micro and small entrepreneurs, but cannot take deposits from the public or from institutional investors, except for specific purposes defined by the Brazilian applicable law and regulations.

Under Brazilian law, any foreign organization can make an equity investment at a MFI or in any other legal entity subject to the authorization and supervision of Bacen, provided that such investment is duly authorized in accordance with the procedure outlined herein.

Article 52 of the Transitory Provisions to the 1988 Federal Constitution established that any investment by foreign individuals or corporate entities in Brazilian financial institutions, including setting up new, foreign-controlled institutions and the purchase of any interest, controlling or otherwise, in existing institutions, will be permitted only if authorized by the Brazilian government as a consequence of international treaties or reciprocal treatment, or because the investment is of interest to the Brazilian government.

The government has delegated to CMN the responsibility for analyzing and making recommendations regarding applications for foreign investment in the sector. As a result, a substantial number of investments by foreign investors in Brazilian financial institutions, most involving the control of such institutions, have been approved on a case-by-case basis and authorized by Presidential Decree. All these cases have been considered "investment of interest to the Brazilian government".

Once authorization has been granted, foreign investors and Brazilian investors will receive equal treatment unless express provisions of applicable law determine otherwise. Foreign investment in financial institutions must be registered with Bacen in the same manner as foreign investment in other sectors of the economy.

The same requirements applied to foreign investments in Brazilian financial institutions must also be observed in the case of an investment in a MFI, which is a legal entity subject to the authorization and supervision of Bacen.

Therefore, in order to make an equity investment at a Brazilian MFI, a foreign investor will have to obtain the Presidential Decree authorization. The application for this purpose will be made through Bacen at the time that the project will be submitted to Bacen´s approval by the founding partners of the MFI. Then Bacen will present this application to CMN, which is composed by three persons: (a) the Minister of Finance, as the chair; (b) the Minister of Planning, Budget and Management; and (c) the President of Bacen. After reviewing the merit of the case, CMN will recommend the issue of the Presidential Decree authorizing the investment as a matter of interest to the Brazilian government. This authorization process should take approximately from 90 to 180 days as from the date the application is presented to Bacen.

In summary, the government agency which will give the permission for the foreign investor to make an equity investment in the MFI is Bacen, and for this purpose the Presidential Decree authorization must be issued, and the process to obtain such authorization usually takes 90 to 180 days.

The fact that the foreign legal entity willing to make the investment is not a financial institution supervised by a central bank will not affect the granting of the authorization. The foreign investor will be qualified to own shares (quotas) in a Brazilian MFI to the extent that it is possible to demonstrate to Bacen that the foreign investor is duly authorized by the laws of the place of its incorporation to make this type of investment in the domestic market and in other important financial centers.

To achieve this goal, the following documents must be presented to Bacen: (i) the articles of incorporation or bylaws of the foreign legal entity, evidencing the types of activities carried out by it; (ii) the legislation that supports that the foreign legal entity is entitled to invest in MFIs in other countries; and (iii) a legal opinion issued by lawyers duly licensed in the place of its incorporation, confirming the foreign investor´s ability to make such investments in other countries. In order to produce legal effects in Brazil, all these documents must be: (a) certified by a local Notary Public and subsequently legalized at the nearest Brazilian Consulate or Embassy; (b) sent to Brazil to be translated into Portuguese by a sworn translator admitted as such by the Commercial Registry of the State of São Paulo; and (c) duly registered with the Registry of Titles and Deeds of the City of São Paulo.

Other commercial activities or private businesses, such as the acquisition of shares or quotas of small and medium enterprises (SMEs) to increase the production capacity of the Brazilian recipient companies, do not require any prior governmental authorization, and can be made by a foreign investor without any restriction whatsoever.

There are no limitations on selling stakes or repatriating capital or on the collection and transfer of dividends in both common and preferred shares, nor regulations creating any such restrictions. Obviously, if the foreign investor decides to sell to another foreign investor part or all of its equity investment in a Brazilian MFI or any other company which is subject to the authorization and control of Bacen, then the transaction will have to be previously approved by Bacen and the Presidential Decree authorization will also be required from the prospective buyer.


* This article has been prepared for the annual conference edition of the International Bar Association (IBA) Banking Law Newsletter to be published prior to the IBA 2011 Annual Conference in Dubai on 31 October - 4 November.

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.

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Walter Stuber
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