| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 3 | This score enjoyed an upward adjustment from 2005: All funds have been offshore until very recently; NAFTA rules permit establishment in Canada. December 2005 changes, which went into effect in the second quarter of 2006, created an improved trust (fideicomiso de inversión de capital privado—FICAP) vehicle for venture capital funds and allowed SMEs for first time to accept investments from them. At least two mid-sized regional FICAPs were set up in 2006, and a few others were in the works, suggesting a positive impact of the new framework. But high management fees charged by the banks and brokerage houses that administer the trust remain a problem, and still limit the minimum viable size of FICAPs at present. (January 2007 interview; El Economista). |
| Tax treatment of VC/PE funds & investments | 3 | This score was adjusted upward from 2005. The 2005 reforms to the income tax law, which came into effect in the 2nd quarter of 2006, eliminated double taxation for the new FICAP equity capital trusts; a May 2005 regulation did the same for offshore funds. Investments in PE/VC funds still are not eligible for the same type of tax incentives and exemption that investments in listed firms are. Dividends paid to a company's own (non-resident or resident) shareholders are not taxable if paid out of net after-tax profits. Corporate tax dropped to 29% on January 1st 2006, down from 30% in 2005. The rate will move to 28% in 2007 and remain there. Previously, the corporate income tax rate had totalled nearly 40%, with a 5% withholding tax on dividends and 35% on profits. Firms making investments or incurring expenses in technological R&D are eligible for a 30% tax credit (and those engaged exclusively in agriculture, livestock-raising, forestry and fishing enjoy a 50% reduction), though many restrictions apply. (EIU, Country Commerce 2006; November 2005 and January 2007 interviews). |
| Protection of minority shareholder rights | 3 | This score enjoyed an upward adjustment from 2005. Under a corporation (sociedad anónima), a minority that holds 25% or more of shares (10% if company shares are traded on Mexico’s stock exchange) has the right to appoint one director; a 25% minority can appoint additional examiners at shareholders' meetings. The Securities Markets Law (Ley de Mercado de Valores—LMV) of 2005, effective 2006, increases guarantees for minority shareholders. Companies must provide full access to information, introduce independent board members, comply with requirements for general offers, and limit the amount of voting and non-voting restricted stock. Under a newly created special corporate category provided for by the LMV, the Sociedad Anónima Promotora de Inversión (SAPI), a company that registers as a SAPI can avoid some of requirements of the conventional corporation, at least for three years, in return for adopting the “Best Practices of Corporate Governance” code and conceding more power to minority shareholders (to call extraordinary meetings, have access to information, etc). This follows earlier legal improvements in minority rights for publicly traded firms (Securities Commission regulations of tender offers to prevent exclusion of minorities, right of 15% of voting or non-voting shares to sue board or auditors on fiduciary issues, restrictions on non-common share issuance, prohibition on "stapled shares," ability of minority to appoint directors). Lingering concerns for all these reforms continue to be enforceability and prevalence of family and other ties that dilute minority shareholder voice. (EIU, Country Finance 2007; OECD, Latin American Corporate Governance Roundtable 2005; January 2007 and November 2005 interviews). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | New rules, which took effect in January 2005, allow pension funds to invest up to 15% of their assets in stock-related instruments outside of Mexico, yet they remain unable to invest in domestic equities. Insurers are not permitted to use assets in venture capital to cover solvency margins and face tight restrictions on the share of their investments allocated to such risk, so their presence in equity investing remains small. (EIU, Country Finance 2007; January 2007 and November 2005 interviews; World Trade Executive, August 2006). |
| Protection of intellectual property rights | 2 | EIU Risk Briefing score. Mexico has put in place comprehensive legal protection of intellectual property rights. Penalties for contravention of these laws have been tightened during the past five years, most recently in May 2004 when Congress implemented a reform to the Federal Law Against Organized Crime (Ley Federal Contra el Crimen Organizado), which categorizes copyright infringement as a punishable crime. However, enforcement of these rules is weak and inconsistent. The courts often fail to take cases of intellectual property rights abuse seriously, as evidenced by the low number of convictions. These have, in fact, been declining despite the tougher standards. The Business Software Alliance, a private industry group, released a report in 2006 that found that Mexico had a software piracy rate of 65% in 2005, only marginally below the Latin American average of 68% and an increase from 55% a few years earlier. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 1 | Bankruptcy reforms of 2000 established clearer criteria, shorter time limits, greater ability to use and take collateral, and greater judicial power for restructuring or liquidating firms through a special institution to oversee bankruptcy proceedings, directed by private specialists in the field. The legislation eliminated the need to establish a creditor board, which in the past was seen as an impediment to proceedings. Yet problems remain—legal delays/weak enforcement, backlog of payments, and creditors often obliged to accept devalued payments in order not to send debtor companies into bankruptcy. Partner liability a legal gray area, and varies (from greatest to least) from sociedad anónima (SA), to sociedad anónima de capital variado (SA de CV), to sociedad de responsabilidad limitada (SRL). (EIU, Country Commerce 2006; November 2005 and January 2007 interviews). Mexico was given the lowest possible ranking on "credit rights" and "effective creditor rights" in the 2005 IDB study. |
| Capital markets development and feasibility of exits (ie, local IPOs) | 2 | Average of three EIU Risk Briefing scores. The Bolsa Mexicana de Valores (BMV, the Mexican Stock Exchange) is Latin America’s second-largest exchange after Brazil’s, and has recorded an impressive performance in recent years. The BMV index has risen by an annual average 45% in US dollar terms in the past three years, and closed 2006 at 26,448. Market capitalisation rose by an average of 42% per year in the same period, to US$347bn. Growth is mostly attributable to better earnings, the country’s elevation to investment-grade status in 2001 (which has helped to expand the investor base), greater international liquidity and, as in other emerging markets, a growing thirst for non-US-dollar markets. However, despite strong growth, the stock exchange remains fairly small relative to the size of the economy. At 42% of GDP in 2006, market capitalisation is slightly above Brazil (35% of GDP), but well below Chile (over 100% of GDP) and developed-economy markets. There are 132 listed companies, but just four stocks dominate the Indice de Precios y Cotizaciones (IPC, the general equities index), accounting for almost 50% of the index. These are America Telecom, the holding company for Latin America’s largest mobile company, América Movíl; Telmex, Mexico’s largest telephone company; Grupo Bimbo, Mexico and Latin America’s biggest baker; and Wal-Mart de México (Walmex), a subsidiary of the US retail giant. |
| Registration/reserve requirements on inward investments | 3 | Registration (under money laundering regulations) is easy and straightforward, and there are no reserve requirements (EIU, Country Finance 2006; November 2005 and January 2007 interviews). |
| Corporate governance requirements | 3 | This score was adjusted upward from 2005. The Securities Markets Law (Ley del Mercado de Valores) of 2005, effective 2006, increases guarantees for minority shareholders. Companies must provide full access to information, introduce independent board members, comply with requirements for general offers, and limit the amount of voting and non-voting restricted stock. Under a newly created special corporate category provided for by the LMV, the sociedad anónima promotora de inversión (SAPI), a company that registers as a SAPI can avoid some of the requirements of the conventional corporation, at least for three years, in return for adopting the “Best Practices of Corporate Governance” code and conceding more power to minority shareholders. This follows on legal improvements in recent years for publicly traded firms (25% independent directors, ability of majority of independent directors to form audit committee, some violations now criminal offences, and strengthened minority rights). Lingering concerns remain weak oversight and reporting requirements (firms must report annually on non-compliance but no clear penalties) and prevalence of tight family and personal networks in running business. (November 2005 and January 2007 interviews; EIU, Country Finance 2006; OECD, Latin American Corporate Governance Roundtable 2005). |
| Strength of the judicial system | 2 | EIU Risk Briefing score. Although the Fox administration made judicial reform a priority there was little progress. The process remains slow and bureaucratic, and sometimes corrupt. The judiciary in Mexico is independent to the point that it can uphold many government decisions. Because of the separation of powers, the government cannot directly fire corrupt judges. Contractual agreements are generally upheld in Mexico. However, the slow and cumbersome legal system means that securing a judgement that enforces a contract can be a prohibitively lengthy process, as well as expensive in terms of litigation and opportunity costs. This is especially so for small or recently formed companies. Also, a January 2007 interview underlines that conflicts between investors and invested companies rarely reach courts or even arbitration. |
| Perceived corruption | 1 | EIU Risk Briefing score. Excessive regulation, often masking official corruption, is widespread. A number of measures have simplified procedures facing foreign businesses in the past decade. The Fox administration pledged to slash red tape connected with business operations and in early 2002 the authorities introduced a fast-track system allowing for a “low public impact” business (mostly commercial and professional services, but also some manufacturing activities) to be registered in one business day and a three-month grace period for operation while handling remaining federal requirements. However according to the World Bank’s latest estimates, in Mexico it still takes on average 58 days to complete the paperwork necessary to open a business (compared to 27 days in Chile and 5 in the US). |
| Quality of local accounting industry/use of international standards | 3 | Converging toward international standards but still some use of inflation accounting and standards are different for publicly traded and non-traded firms. International auditors are present and competent. (EIU, Country Finance 2006; IASPLUS 2005; November 2005 and January 2007 interviews). |