By:
Miguel Estrada Marta
Mexico City
Pursuant to a Decree published in the Diario Oficial on February 15, 1995 (the "Reforms"), the Financial Groups Law, the Banking Law and the Stock Market Law were amended to increase the percentage of capital that foreign investors may own of Mexican financial holding companies, commercial banks, and broker/dealers. The Reforms cap a process of radical reform in Mexico with respect to the rules governing foreign investment in the financial services sector and are viewed as a direct response to the economic and financial crisis now facing Mexico. In addition, the Reforms go beyond the liberalization commitments that Mexico agreed to under the North American Free Trade Agreement ("NAFTA").
NAFTA and prior reforms created two different investment regimes potentially applicable to foreign investors. The first regime limited aggregate foreign investment in financial holding companies, commercial banks and broker/dealers to 30%. The Reforms increased the permissible aggregate holding to 49% for foreign investors. The second regime permitted an Institucion Financiera del Exterior, or a Foreign Financial Institution, to own, either directly or indirectly, no less than 99% of financial holding companies, commercial banks and broker/dealers. The Reforms now allow a Foreign Financial Institution to own any amount between 51% and 99% of these institutions, thereby allowing foreign investors to be the controlling party in a joint venture.
In order for a foreign investor to qualify as a Foreign Financial Institution, the investor must be established in a country with which Mexico has entered into an international treaty, such as NAFTA, permitting the establishment in Mexico of financial Filiales, or Affiliates. Pursuant to NAFTA, in order for an investor to qualify as a Foreign Financial Institution and, therefore, for the benefits of this regime, the foreign investor must be incorporated as a financial institution in the United States or Canada and must engage in substantive operations in these countries. Interestingly, no ultimate control test is applied to determine whether an investor qualifies under NAFTA for special treatment under Mexican law. As a result, several U.S. subsidiaries of European and Japanese financial institutions have entered the Mexican market under this regime and have acquired or established financial holding companies, banks or broker/dealers.
Foreign Investment in a Financial Holding Company. Unlike in the United States, Mexican law permits investors to form financial groups that may own various types of financial institutions held by a financial holding company. Under Mexican law, a financial group may be formed if the group controls, through a financial holding company, either three of the following types of institutions - a bank, broker/dealer, insurance company, general deposit warehouse, financial leasing company, factoring company, exchange office, bond company or limited purpose financial company - or two of the following types of financial institutions - a bank, a broker/dealer or an insurance company.
Foreign investors may invest in financial groups under two different regimes. A financial holding company must normally issue at least 51% of its total ordinary capital as "A" shares, which only Mexicans may own. Of the remaining 49% of the financial holding company's ordinary capital, the holding company may issue either "B" shares, which bestow upon the holder the same corporate rights as "A" shares but may be owned by foreigners, or "A" shares. In addition, a financial holding company may issue up to 40% of the total number of "A" and "B" shares as "L" shares, representing "additional social capital," which bestow on the holder limited rights to participate in corporate governance and also may be owned by foreigners.
In addition to caps on aggregate foreign investment, under this regime individual investors, whether Mexican or foreign, are limited to holding no more than 5% of the total amount of "A" and "B" shares, unless specially authorized by the Secretaria de Hacienda y Credito Publico ("Hacienda"). Yet, even with the special authorization of Hacienda, no investor, whether Mexican or foreign, may control more than 20% of the "A" or "B" shares of a financial holding company.
Under the second regime, Foreign Financial Institutions are given special treatment under Mexican law. Pursuant to Article 27 of the Financial Groups Law, a Foreign Financial Institution may establish or acquire a financial holding company, a so-called Sociedad Controladora Filial, or Affiliate Financial Holding Company. If a Foreign Financial Institution establishes or acquires an Affiliate Financial Holding Company, at least 51%, but not more than 99%, of the Affiliate Financial Holding Company's shares must be owned by the Foreign Financial Institution and issued as "F" shares. All the remaining shares must be "B" shares.
Foreign Investment in Commercial Banks. Paralleling the rules for financial holding companies, a foreign investor may participate either as a minority or a majority shareholder in a Mexican commercial bank, depending on the regime under which it invests. Normally, a Mexican commercial bank must issue at least 51% of its ordinary capital as "A" shares, which only may be held by Mexicans, and no more than 49% of its ordinary capital as "B" shares, which have the same corporate rights as "A" shares. In addition, a commercial bank may issue up to 40% of the total number of "A" and "B" shares as "L" shares representing "additional social capital," which have limited voting rights. The "B" and "L" shares may be owned by foreign individuals or entities. Under this regime, the aggregate amount of "A" or "B" shares that any single investor (except a holding company) may normally own is 5%, although Hacienda may increase that amount up to 20%.
Alternatively, a Foreign Financial Institution may establish or acquire, directly or indirectly - through an Affiliate Financial Holding Company or an Affiliate that is a commercial bank - a commercial bank in Mexico. The Foreign Financial Institution must hold at least 51%, but no more than 99%, of the ordinary capital of the commercial bank. An Affiliate commercial bank must issue at least 51% of its shares as "F" shares; only a Foreign Financial Institution may acquire, either directly or indirectly, these shares. The remaining shares must be "B" shares, which may be owned by either foreigners or Mexicans. The 20% capital limitation generally applicable to investors does not apply to shares owned by a Foreign Financial Institution.
Foreign Investment in Broker/Dealers. Similar rules govern investments in Mexican broker/dealers. A foreign investor may invest in a broker/dealer under two different regimes. Just as for financial holding companies and banks, a Mexican broker/dealer must issue at least 51% of its ordinary capital as "A" shares, which only Mexicans may own. The remaining 49% of its ordinary capital may be issued as "B" shares, which may be owned by foreigners. In addition, "L" shares, representing "additional social capital" with limited voting rights, may be issued. Under this regime, the aggregate amount of "A" and "B" shares that any single investor (except for a financial holding company) may own is 10%, although the Comision Nacional Bancaria y de Valores may authorize holdings by a single investor of up to 20% of the ordinary shares.
Under the second regime, a Foreign Financial Institution may establish or acquire, directly or indirectly, through an Affiliate Financial Holding Company or an Affiliate that is a broker/dealer, a broker/dealer in Mexico. The Foreign Financial Institution must hold at least 51%, but no more than 99%, of the broker/dealer in the form of "F" shares. The remaining shares must be "B" shares. The aggregate capital limits applicable to individual investors under the first investment regime do not apply to Foreign Financial Affiliates.
