Circular No. 1302 — Conversion of External Debt into Investment: Criteria for Auction-Subject Conversions under Article Two of Resolution 1460 and Non-Auction Conversions

CIRCULAR NO. 001302

We communicate that the Board of Directors of the Central Bank of Brazil, in view of the provisions of Resolution No. 1,460, of 01.02.88, of the Monetary National Council, has decided to establish the criteria specified below for conversions into investment subject to auction as provided for in Art. 2 of the Regulation approved by said Resolution.

2. The auctions for conversion of debt into investment will be carried out periodically on Stock Exchanges. The Central Bank of Brazil will establish, by edict, the date, time, and location for the holding of each auction, the minimum discount, if any, the conversion caps, as well as the order in which the auctions shall be held, according to the area of application of the resources.

3. The aforementioned edict mentioned in the previous item shall be published with a minimum advance notice of 10 (ten) days, except for the first auction, for which a minimum period of 5 (five) days shall be observed. Complying with the provision in item 17, the aforementioned edict may be published by the organizing Stock Exchange.

4. Participation in the auctions shall be made through Brokerage Companies; interested parties must observe the conditions contained in the annexed Regulation of Conversion Auctions.

5. By 12 (twelve) hours on the next business day following the holding of the auctions, the respective Stock Exchange shall present to the Central Bank of Brazil notification of the results, indicating the winning proposals and forwarding the information provided by the Brokerage Companies necessary for the perfect identification of the investment corresponding to each of those proposals.

6. The investor and/or recipient of the investment must also comply with the following deadlines, counted from the date of the holding of the auctions:

a) two business days to present to the Central Bank of Brazil notification from the investor authorizing the immediate blocking of deposits, as well as the debit of the respective discount value;

b) ten business days to present to the Central Bank of Brazil the documentation established by it, necessary for the examination of the conversion request.

7. Failure to comply with the provisions in items 5 and 6, regarding any of the winning proposals, will imply their automatic disqualification, without prejudice to an applicable fine to the corresponding Brokerage Company, when applicable, in accordance with the annexed Regulation of Conversion Auctions.

8. In the event that the conversion request is rejected by the Central Bank of Brazil due to eventual incompatibility with current regulations, of the project to be executed or of the branch of activity of the recipient of the investment, the necessary reversals shall be promoted in the investor's accounts, with a view to unblocking the resources and annulling the debit of the discount values.

9. The conversions are subject to authorization by the Central Bank of Brazil/Department of Supervision and Registration of Foreign Capital (FIRCE), in accordance with current legislation.

10. Once the conversion is authorized, the investor will have a period of 30 (thirty) days to withdraw the funds deposited with the Central Bank of Brazil, which will be released at their net value, already deducting the respective discounts.

11. If the withdrawal of the funds is not realized within the period indicated in the previous item, the right to conversion will be automatically extinguished.

12. The withdrawal of the contractually owed resources by the Central Bank of Brazil or deposited with it shall be processed by banking establishments authorized to operate in foreign exchange, observing the following procedure:

a) by the values and in the currencies of purchases made to clients each day, through simultaneous foreign exchange sale operations to the Central Bank of Brazil;

b) the foreign exchange sale operations to the Central Bank of Brazil shall be concluded at the pass-through exchange rate fixed for the currency on the date of its contracting, and cannot be settled prior to the settlement of the client purchases to which they are linked.

13. The resources related to the already authorized conversion may be subject to non-remunerated deposits in foreign currency with the Central Bank of Brazil, as provided for in article 19 of the Regulation annexed to Resolution No. 1,460, this option being usable only once, before or after its capitalization, observing the following:

a) the deposits must be made within 30 (thirty) days from the date of authorization for the conversion of credits or their capitalization;

b) in any case, the withdrawal of the deposits will be carried out according to a schedule to be adjusted with the Central Bank of Brazil/Exchange Department, and in the case of deposits of resources not yet capitalized, their withdrawal can only occur for the specific purpose of capitalization.

14. The foreign currency deposits, carried out in consonance with the provision of Art. 14 of the Regulation annexed to Resolution No. 1,460, will also not be remunerated.

15. The deposits referred to in this Circular are subject to the provisions of Circular No. 349, of 23.06.77.

16. The registration of the investment will be effected at the value effectively released in accordance with item 10 of this Circular.

17. The Central Bank of Brazil may enter into an agreement with the Stock Exchanges, for the holding, in their premises, of the auctions referred to in this Circular.

Brasília-DF, March 18, 1988

Arnim Lore
Director

REGULATION ANNEXED TO CIRCULAR NO. 1,302, OF 18.03.88, WHICH ESTABLISHES THE RULES OF CONVERSION AUCTIONS

THE CENTRAL BANK OF BRAZIL and the SECURITIES AND EXCHANGE COMMISSION, in view of the provisions of Resolution No. 1,460, of 01.02.88, have decided to approve the following regulation:

I - The bidding Brokerage Companies that offer the highest discount rates during the auction will have their bids considered winners and, consequently, their principals will be enabled to convert into investment the amount of debt deducted of discount.

II - The discount rates will be informed by the Auction Director, at intervals of 0.5% (five tenths percent), with the operator bidding solely for the quantity of net dollars of the discount he wishes to acquire at the rate indicated by the Auction Director.

III - The bids given during the course of the auction, at a certain discount rate, will be considered firm and the Brokerage Companies will not be able to withdraw them.

IV - When the total of bids exceeds the quantity offered, at a certain rate, this will be increased, with the Auction Director announcing the new rate. If the sum of bids at this new rate equals or does not reach the total quantity offered, the auction will be closed as follows:

a) offers relating to the highest discount rate are satisfied first;

b) the balance will be prorated among the other Brokerage Companies, who had made bids at the immediately preceding rate and in proportion to those bids;

c) should the Brokerage Company not be interested in the amount allocated to it by such proration, it may withdraw from its lot, which will be included in the remaining ones for the purpose of a new proration at the same rate mentioned in clause "b";

d) the manifestation, by the Brokerage Company, of the withdrawal referred to in clause "c", will have irrevocable character.

V - At the end of the auction, the organizing Stock Exchange will provide the Brokerage Companies and the Central Bank of Brazil with a declaration informing the lots awarded and the respective discount rates.

VI - The Brokerage Companies whose bids are winners of the auction will present to the organizing Stock Exchange, by 12 (twelve) hours on the next business day following the holding of the conversion auctions, information necessary for the perfect identification of the principal and the investment corresponding to each winning proposal, which will be immediately delivered to the Central Bank of Brazil.

VII - The Brokerage Company that fails to comply with the provision in the previous item will be subject, cumulatively, to the application of a fine of 0.1% (one tenth of one percent) on the value of the operation and to suspension from participating in subsequent conversion auctions, up to 6 (six) subsequent edicts.

VIII - The value of the operation referred to in item VII will be the amount in cruzados equivalent to the foreign exchange to be converted, net of the discount verified, this calculated at the exchange rate of the day of the holding of the auction, by the purchase rate contained in the Opening Bulletin of the Central Bank of Brazil.

IX - The fine stipulated in item VII will be collected directly by the Central Bank of Brazil from the defaulting Brokerage Company, which will reimburse the principal, when this latter caused the infraction.

Brasília-DF, March 18, 1988

Elmo de Araújo Camões Arnoldo Wald President of President of CENTRAL BANK OF BRAZIL SECURITIES AND EXCHANGE COMMISSION