Explanatory Note to CVM Instruction 56

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 56.
Ref.: CVM INSTRUCTION NO. 56, of December 1, 1986, which provides for the minimum nominal value and grouping of shares issued by open companies, as well as for the standardization of share certificates.

INTRODUCTION
The monetary reform implemented in February of this year, in addition to the important consequences it determined for the stabilization of price levels and for the future development of the country, affected in various ways the lives of companies in their relationship with the stock market.

One of the immediate effects of the change in the monetary standard was the modification of the way shares were quoted on Stock Exchanges. Due to the low unit price in cruzeiros of the vast majority of shares traded, it was not possible to express them in the new monetary unit instituted. Stock Exchanges then began to express quotes not per share, but rather in lots of one thousand shares.

Although this situation did not bring major operational problems, it cannot be regarded as permanent.

Furthermore, the expression of capital in companies in the new monetary standard, and given the number of shares existing in each company, brings, independently of issues related to negotiation on the Stock Exchange or in the over-the-counter market, the inconvenience of having shares with a unit value lower than the smallest fraction of the new currency.

In the case of companies whose shares have a nominal value, the issue was aggravated, since, typically, such value does not find expression in cruzados either.

The need to resolve these issues and the discussions that were established regarding this between the CVM and the various segments of the market pointed to the opportunity to take another measure that, over the last few years and on several occasions, has been requested; that of standardizing the certificates representing shares and multiples of shares.

In the search for the best market ordering, CVM INSTRUCTION NO. 56/86 thus deals with the establishment of a minimum nominal value for shares, the grouping of shares, and the standardization of certificates.

MINIMUM NOMINAL VALUE AND GROUPING OF SHARES
The new minimum nominal value will be Cz$1.00 (one cruzado).

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Additionally, the Instruction determines that open companies carry out a grouping of their shares, on the basis of one new share for every one thousand existing shares. Such grouping, uniform in its proportion and to be carried out by all companies on the same date, will not only bring as a consequence greater ease of understanding by the market of the new quotes that will be established, but will also avoid having ungrouped shares - in lots of one thousand - and already grouped shares - which will be traded in smaller lots to be established by the Stock Exchange - quoted simultaneously.

Some companies may, naturally, and given the fixed proportion of the grouping to be carried out, decide to carry out a stock split. Such splits, which have been practiced with excessive intensity and often without technical reasons to justify them, are not considered a healthy practice by the CVM.

In the present situation, and in view of the same need for market ordering that inspires these measures, the CVM recommends that not only splits be avoided but also that, if there is a real need to carry them out, companies abstain from doing so between March 1 and August 31, 1987.

The establishment of the date for the simultaneous grouping by all companies took into account not only the necessary period for internal measures and for the establishment of procedures to be adopted in accordance with Article 3 of the Instruction, but also the greater convenience it would represent, for most companies, to make the necessary changes at the time of holding the General Meeting to approve the financial statements of the 1986 fiscal year.

Thus, regardless of the date on which the General Meeting is held, the decision taken therein regarding the grouping will always set, as the date for its implementation, June 1, 1987.

The same Article 3 refers to securities that ensure the right to conversion into shares, which are convertible debentures, and to those that ensure the right to subscribe for shares, such as subscription warrants and stock purchase options, regulated in LAW NO. 6.404/76. The change in nominal value will be reflected in the conversion or subscription bases, which must be re-examined and redefined. Similarly, the conditions for the redemption of shares must be clearly defined by the company. This information and more the treatment to be given to the fractions of shares resulting from the grouping process, and the procedures for substitution and splitting of certificates and issuance of new shares are considered "relevant" to the market by allowing investors to take a coherent position with the safeguarding of their interests. Therefore, they must be expressly communicated to the market according to the guidance contained in CVM INSTRUCTION NO. 31, of February 8, 1984.

No mention was made of the eventual capital increase in progress, since the same rules that serve to define the grouping will serve for the readjustment of the subscription, which must, in any case, undergo a procedure of ratification of the assembly resolution.

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Exclusively to facilitate the treatment of the fractions of shares that result from the grouping, the restrictions provided for in CVM INSTRUCTION NO. 10/80, for the acquisition by open companies of their own issued shares, are waived until May 31, 1988. The existence of profits or reserves for the execution of these operations is not dispensed with, nor is it permitted that the price of the acquisition of shares may be higher than their market value. Even so, they will be facilitated by the removal of formalities such as assembly authorization and alienation on the Stock Exchange or over-the-counter, allowing private negotiations.

As a consequence of the measures provided for in the Instruction, changes must be made to the records of book-entry shares and to the registers of registered and endorsable shares; therefore, it is determined that such changes be made by June 10, 1987, taking as a basis the records existing on June 1.

The modifications ordered by the Instruction will require the issuance of complementary norms by the Stock Exchanges, within the scope of their regulatory competence. Such rules should cover, in particular, the sizing of the minimum lot of shares admitted to trading on their floors, observing, for this purpose, criteria that promote and preserve the liquidity of operations.

We count on the interest of companies in adapting to the norms of the Instruction, given the negotiations with their shares in the market and the regularity of their financial statements. Failure to adapt within the regulatory deadline will result in serious damage to the reliability and regular development of the market. For this reason, it is determined that the Stock Exchanges take special measures regarding the trading of shares of companies that, on June 1, 1987, have not carried out the grouping provided for in the Instruction.

On the other hand, it will be up to the CVM, upon verification of non-compliance with the obligation, to issue an order determining a deadline for the company's adjustment under penalty of a daily fine. The company's default may also lead to the suspension of the trading of its shares, without excluding the possibility of the institution of an inquiry by this Authority, if applicable, and the consequent application of penalties provided by law.

STANDARDIZATION OF CERTIFICATES
Once the shares are grouped, companies will have a new physical phase to represent them, namely, the new certificates whose form is being established by the CVM, in the Regulation annexed to the Instruction.

Regarding this subject, the fruitful discussions that, as already pointed out, were held with various segments of the market led to the conclusion that, in addition to standardizing the traditional model with coupons, for bearer shares, it should be allowed, to companies that wished it, the adoption of an alternative model, only possible thanks to the evolution observed in the country, in the field of electronics.

This is a certificate without coupons, with electronic markings that allow extreme agility in the data entry process in the computers of companies and agents issuing certificates that

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may come to use them. As a consequence, the processes of payment of rights will be cheaper and safer, with benefits for shareholders, directly, and for entities that provide custody services, which handle large quantities of securities.

To better visualize the state of rights of the shares represented by such certificates, they will be marked, in a specific field, each time they are presented to the company for the exercise of a right.

It is important to emphasize that the new certificates can only be used by companies after the grouping has been carried out, on June 1, 1987. That is, the quantities of shares represented in them must be those already resulting from said grouping.

While a company is using the old certificates it has in stock - which it may do until May 31, 1988, at the latest - it must represent quantities of shares in them as if the grouping had not occurred. If such stocks are exhausted before June 1, 1987, it will be necessary to replenish them, in the usual standard adopted by the company.

The reason for this is, once again, the need for good market ordering, since there would be no other practical and secure way to be certain, upon sight of a certificate, that the shares represented in it are already grouped shares, or pre-grouping shares. The new form, that is, the standardized certificates, will give such certainty to the investor, provided it is clear, as the Instruction determines, that in this new form the quantities of shares expressed will always and exclusively refer to already grouped shares.

Similarly, upon encountering, after the grouping, a certificate of the old model, traditionally used by the company, the investor can be certain that, regardless of its date of issuance, it will represent quantities of shares in the old expression, that is, to arrive at the effective number of shares represented, post-grouping, it will suffice to divide that quantity by one thousand.

From the moment companies begin to use the standardized certificates, the old ones will no longer be accepted for the settlement of operations. The start of the issuance of standardized certificates must be preceded by the publication of a notice to shareholders, so as to allow investors who wish to take measures aimed at their substitution, with the aim of reducing to a minimum the liquidity period to which they may be subject.

The CVM believes that companies will strive to make the substitution of certificates as agile as possible and recommends to investors the use of fungible custodies, as this could completely avoid the aforementioned liquidity period.

For the manufacture of standardized certificates, precise indications have been established regarding the positioning of information, in order to facilitate the identification of the declarations required by art. 24 of LAW NO. 6.404/76. Note, however, that in the lower area of the certificates with coupons, space has been reserved for the inclusion of information regarding the quantity, type, and class of shares for optical or magnetic reading purposes. In the case of certificates without coupons, on the contrary, this information must, obligatorily, appear on the certificates.

The standardization of certificates did not make the use of distinct printing colors for each type and class of shares a rule, thereby providing freedom to companies to adopt differentiated colors or a single color for all certificates, regardless of the type or class they represent. Nevertheless, the CVM suggests that companies whose shares are heavily traded adopt the practice of differentiating the various types and classes of shares with distinct colors in order to facilitate their separation in custodies that handle large volumes of shares.

Finally, the deadline established for the adoption of the new certificates is sufficiently long for companies to arrange, without haste, their manufacture with their suppliers.

Special cases, such as those of companies that carried out the grouping of their shares prior to the issuance of the Instruction, will be examined individually with the aim of finding, for each case, a solution capable of reconciling the interests of the company with the imperative purposes of the Commission to provide visibility and security to transactions carried out within the scope of the securities market.

Signed original
LUIS OCTÁVIO DA MOTTA VEIGA
President