| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 3 | Resolution 470 of June 2005 entered into effect in 2006, allowing for the establishment of closed funds (fondos de capital privado) that invest in unlisted companies or in mixed portfolios. One fund was established in 2006 under the framework, administered by the Superintendency of Finance, another was close to becoming registered at end-2006 and another five were seeking registration. An area being considered for reform of Resolution 470 is the current restriction on fund administrators operating both foreign investment funds and closed funds (local funds need to have a broker or fiduciary under Resolution 470). Closed funds' inability to invest abroad, and thus to create regional funds, remains problematic under the legislation. Resolution 470 also set up a framework to attract private equity to projects, by providing investors with a secondary market for liquidity. An investor is required to register equity fund rights with the National Securities Registry (Registro Nacional de Valores) and with the stock exchange. This allows investors to negotiate rights in the secondary market. (January 2007 interview; EIU, Country Finance 2006). |
| Tax treatment of VC/PE funds & investments | 2 | Foreign investment funds are generally exempt from income and related taxes, but there are no special tax exemptions or incentives for the new closed funds. Colombian corporations with foreign investment and wholly owned foreign firms are taxed at a rate of 38.5% on both local and foreign revenue. A financial transactions (0.4%) tax is in place through 2008, though electronic transactions, including those on the stockmarket, are exempt. Capital gains are assessed as part of normal corporate income on an inflation-adjusted basis, and capital losses may be deducted and carried forward up to five years. A 7% tax on the dividends of foreign companies not registered in Colombia or non-resident foreigners is deferred as long as they are reinvested in the country, and are forgiven after six years. There is a 35% withholding tax on interest paid to foreign individuals or entities, and a 7% remittance tax on net transfer. Deals must be structured carefully to avoid double taxation. (November 2005 and January 2007 interviews; EIU, Country Finance 2006) |
| Protection of minority shareholder rights | 2 | No single shareholder may vote more than 25% of the total shares represented at a meeting, except as otherwise provided in corporate bylaws. For most decisions, a 51% majority suffices. Bylaw changes require a 75% majority. Discussions continue for a voluntary nationwide code of corporate governance. Although board disclosure requirements remain weak in the World Bank's estimation, director liability and the ability of minority to bring suits and force audits have been strengthened. (November 2005 and January 2007 interviews; World Bank, Doing Business 2006: OECD, Latin American CG Roundtable 2005). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | Under Resolution 275 of 2001 and modifications made to it in more recent years, pension funds may invest up to 20% of their portfolios in private equity, so legal restrictions have not been a obstacle. Restrictions are greater for insurance companies, in terms of the reserve and solvency requirements they must meet. Resolution 470 of 2005 allows institutional investors to invest in private equity funds, which are registered in the national securities registry and listed on the stockmarket, though it remains untested in practice. (EIU, Country Finance 5/06; January 2007 interview). |
| Protection of intellectual property rights | 2 | EIU Risk Briefing score. Protection of intellectual property rights is enshrined in the legal code, but enforcement is patchy and infringements are common. This is particularly the case with unauthorized use of trademarks, but all forms of infringement of intellectual property rights are widespread. The Uribe government is tightening enforcement, particularly following the agreement of an FTA with the US, but businesses should be alert to infringements and seek to pursue violations using the available enforcement procedures. Contracting local specialized legal services is highly recommended, not only where rights have been infringed but also before vulnerable product lines are launched in the local market. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 2 | Bankruptcy laws have been seen as adequate but enforceability as problematic. A new bankruptcy law was created at the very end of 2006, in order to shore up existing restructuring mechanisms that seek to make liquidation a last resort. The new law says nothing specific about minority liability, and its impact remains unclear. Creditor rights were rated very weak by an IDB international study in 2005. |
| Capital markets development and feasibility of exits (ie, local IPOs) | 1 | Average of three EIU Risk Briefing scores. The financial sector is still affected by distortions such as compulsory lending to favored sectors, special deposits, surcharges and a tax on financial transactions. The rate on the financial transactions tax has been increased from 0.3% to 0.4% for the period 2004-07. Following the crisis of 1998-99 regulatory changes have been made and supervision has improved. Banks have returned to profitability and are fully provisioned against bad loans, but their heavy holdings of government debt are a concern. The stockmarket boomed in 2003-05 and is vulnerable to a fall. Firms fear enhanced tax scrutiny that a listing brings; while demand from local private pension funds is restricted. The local-currency bond market is dominated by public-sector debt, leaving little room for corporate issues. |
| Registration/reserve requirements on inward investments | 3 | As of December 14th 2004 all foreign portfolio investments must stay in Colombia for at least one year (Decree 4210), excluding investments in depositary receipts (DR) programs. The local administrators of foreign-investment funds (and now fondos de capital privado) are required to register flows by filing fund-transfer forms with the central bank. They are also responsible for submitting registration forms to the capital-markets regulator, the Superintendency of Finance. The Superintendency carries out spot checks on the local administrators. Documents no longer need to be translated or authorized by a Colombian consulate, and applications must be approved or rejected within ten days. There are no reserve requirements. (EIU, Country Finance 2006; January 2007 interview). |
| Corporate governance requirements | 2 | A 2004 IDB survey of 43 Colombian non-financial companies (published in 2005) showed "slow and poor" implementation of good governance. But Law 964 of 2005 required listed companies to have 25% independent directors by mid-2006; implementing regulations subsequently required firms to have at least one independent director by that date, and to reach the 20% threshold by 2007. There are unspecified sanctions applicable by the Superintendency of Finance if firms do not meet that timetable. By October 2006, the Superintendency reported that only 5% of listed firms lacked independent directors (down from 29% in its own survey four months earlier), while 45% of companies had 26% or more of independents, 12% had a quarter, and 4% had 15-24% independents (34% of firms were non-reporting). Although there are no norms for unlisted firms, discussions continue on a voluntary national corporate code of conduct, and a first draft is expected in early 2007. Universal standards (on tender offers, related party transactions, audit committees, etc) would be contemplated by such a code. Law 795 of January 2001 limits financial sector participation on corporate boards. (November 2005 and January 2007 interviews; OECD Roundtable 2005; Diario La Republica 2005) |
| Strength of the judicial system | 1 | EIU Risk Briefing score. Although the Supreme Court and attorney general's office are held in high regard, the same is not true for the lower levels of the judiciary. Delays in the legal process and perversions of justice are commonplace. This is partly because judges are frequently subject to intimidation and partly because a heavy workload has overstretched the legal system's resources. Satisfactory resolution of legal disputes is lengthy and expensive as a result. Public arbitration systems short of ordinary courts exist as an alternative mechanism, but there is no relevant experience with international arbitration in private equity investments. |
| Perceived corruption | 1 | EIU Risk Briefing score. Business groups and criminal organizations seek to gain influence in politics and the judicial process in Colombia through the use of bribery, while lack of accountability makes it possible for public officials to demand favors or divert public funds for private gain. This is more prevalent away from the main cities and in the provinces. Although Mr Uribe’s determination to streamline ministries and adopt a pragmatic approach to policymaking should help reduce red tape and hence the scope for corruption, firms should insist at all times that negotiations with government officials are held in an open and formal manner. They should press for similar standards in the official dealings of their competitors. |
| Quality of local accounting industry/use of international standards | 2 | International accounting firms are present, but this remains a problem area. Efforts to transition to international standards have been met with continued delays and roadblocks. Inflation-adjusted accounting for tax purposes persists. EIU Risk Briefing scores Colombia low on integrity of accounting practices. |