The above creates a downward spiral.

It starts by deterring institutional investors

and the general public from investing in the local equity market, which creates a small-
er number of BNV participants and decreases demand, thus lowering the price of the
listed shares. Ultimately, this has created what has been called a “Golden Cage” effect.
The large shareholders, who are not active in the market, are sitting on net worth that
is, by financial analysts’ predictions, much higher than the “market price” of the small
quantity of stocks being transacted through the local stock exchange. In the absence of
other active buyers, however, the holders of smaller equity stakes will have to sell at
whatever price they can get in an illiquid market. In short, these artificially lower prices
hurt mainly the small investors. This is the case of Atlas’s shares, where the small quan-
tities of shares are sold as much as 25% below book value.
An alternative to creating liquidity would exist if the companies could buy-back
shares in the market, but they have not been able to do so because of rulings created by
SUGEVAL severely limiting that possibility. Thus far, SUGEVAL has refused to repeal
its controversial rulings, claiming that moving away from those rulings could subject the
companies to investigations for trying to manipulate the equity market. Even though the
Cámara de Emisores (the Chamber of Listed Companies) has tried to negotiate modifi-
cations to those rulings for the past four years, it has been an uphill battle to no avail.
Both the CONASSIF and SUGEVAL rulings and the way changes to these regula-
tions were made without constructive negotiations with the listed companies, shed light
on the local market credibility issues. These issues have damaged communications and
relations among the two sectors, namely the regulatory sector and the private sector
(listed companies). Because of this reality, the BNV with the help of some listed com-
panies, among them Atlas, has started three initiatives. The first is to develop and
adhere to voluntary corporate governance guidelines (comply-or-explain), similar to the
ones in use in the United Kingdom and Hong Kong. If successful, this voluntary com-
pliance approach could eventually replace the CONASSIF rulings under challenge in
the Constitutional Court. Second, an initiative to develop voluntary guidelines for
investor relations programs is being undertaken to increase transparency of the market.
The third initiative, also a first in Costa Rica, is a “market makers” mechanism using
Atlas’s shares. To be able to do this, three brokerage houses were brought on board for
a three-month pilot plan, and were granted “safe harbor” provisions by SUGEVAL.
The idea is to allow investors an alternative to be able to sell or buy Atlas’s shares any-
time with these brokerage houses. Each brokerage house in the pilot plan has commit-
ted and guaranteed to the market that they will always have a certain number of shares
in their inventory that they would be willing to sell or otherwise buy. This eliminates
the risk factor to the investors that is brought on by the uncertainty of not knowing if
there will be a prospective buyer (seller) of Atlas’s shares. The results in the first two
months have been a less volatile market price for the small amount of Atlas’s shares
traded, though still below book value.

Case Studies 5