Capital Flows and Investments A.

Investment scenario in stock exchanges

The Mexican Stock Exchange (Spanish: Bolsa Mexicana de Valores, BMV; BMV: BOLSA) is Mexico's only stock exchange. It is situated onPaseo de la Reforma, a important avenue in central Mexico City. The total value of the Domestic Market Capitalization of the BMV was calculated at US$409 billion at the end of 2010, and raised to US$460 billion by the end of June 2011, making it the second largest stock exchange in Latin America] and the fifth largest in the Americas. BMV is now a public company following its IPO in June 2008, and its shares are traded on the BMV equities market. it also trades stocks, debentures, mutual fund shares, and warrants. Trading is conducted electronically through the BMV-SENTRA Equities System. Settlement is T+3, and trading hours are 8:30 a.m. to 3 p.m. for the capital markets and 8 a.m. to 2:30 p.m. for debt instruments (Monday through Friday).

Supervisory Body
1. SHCP - Secretaria de Hacienda y CrditoPublico (Ministry of Finance and Public Credit) 2. CNBV Commission Nacional Bancaria y de Valores (National Banking and Securities Commission) 3. BANXICO - Banco de Mxico (Central Bank) The main laws and regulations governing the offering and trading of securities in Mexico are 1. The Securities Market Law (the Securities Market Law) 2. The Credit Institutions Law (the Banking Law) 3. The Investment Funds Law

4. The banking regulations 5. The broker dealer regulations 6. The issuers regulations

Securities offer to the Public

Only authorized broker dealers established in Mexico (and to a limited extent, Mexican banks), may perform securities intermediation in Mexico. An authorisation from the CNBV is required in order to incorporate and operate a broker dealer. Only corporations incorporated in Mexico may be authorized as broker dealers or banks. Currently, Mexican affiliates of foreign financial institutions may be registered as banks, broker dealers or other financial entities, as long as such foreign financial institutions are organized under the laws of a country member of the North America Free Trade Agreement, the European Union or Japan. Securities intermediation is defined as the regular and professional performance of the following activities: execution of transactions with the purpose of facilitating the contact between offer and demand of securities: execution of transactions with securities on behalf of third parties as agent, representative or with any other authority acting in such activities in its behalf or on behalf of third parties; and negotiation of securities on its behalf with the public or with other intermediaries that act in the same way or on behalf of third parties. A public offering of securities in Mexico is defined as the offering, with or without price, in Mexico using an extensive means of communication and addressed to undetermined persons to subscribe purchase, sell or transfer securities. Generally, the use of written selling material or efforts to contact undetermined potential investors within a group of persons is considered to be a public offering.

Any public offering of securities in Mexico (namely, indiscriminate mailing or distribution) requires the prior approval of the CNBV and may only be made by authorised intermediaries. Additionally, only securities registered with the RNV may be publicly offered. Mexican issued securities, securities issued by multilateral banks and securities issued by foreign issuers may be registered at present. In order to register any Mexican or foreign securities with the RNV and therefore, be able to offer them to the public, it would be necessary to file an application with the CNBV, which should include among other things, a prospectus, legal and financial information of the issuer prepared in accordance with Mexican or international accounting principles and credit ratings from recognised credit rating agencies that must be obtained. A Mexican broker dealer must act as underwriter. The Securities Market Law provides that: securities listed in the International Quotation System (SIC) maintained by the Mexican Stock Exchange are not required to be registered with the RNV; and any other securities not registered with the RNV may be offered privately by non-local banks and broker dealers to institutional or qualified investors (as defined below). The securities that may be listed in the SIC include foreign issued securities that are registered, authorised or regulated, for sale to the general public, by a securities regulatory agency that is established in a country that is a member of the technical committee of the International Organisation of Securities Commissions (IOSCO), or that is part of the European Union and distributed in countries that are members of the technical committee of IOSCO. The National Banking and Securities Commission (the CNBV) has authority to supervise and regulate, among other matters: securities offers; financial intermediaries; stock and derivatives exchange; and

trading of securities.

RULES
A Mexican bank or broker-dealer must act as sponsor of a security for the purposes of listing on the International Trading System. Before listing, the Mexican Stock Exchange must check that the issuers apply adequate accounting standards, such as the Mexican GAAP, US GAAP, International Accounting Standards, or local standards used in the country of the issuer or in the country where its securities are principally traded. In this case, a note describing the differences between these standards and Mexican GAAP, US GAAP or International Accounting Standards is required. The sponsor must also disclose any information relating to the issuer which is publicly available in the country of the issuer or in the country where the issuer's securities are principally traded (sponsors can comply with this requirement by notifying the site or web page where this information can be obtained) Commissions on Transactions levied by Exchange The Mexican Stock Exchange does not charge directly a fee per transaction in capital market or debt market. Instead of, the Mexican Stock Exchange levy to its members a monthly fee based on value traded according to a two predefined tables (one for the capital market and the other for the debt market). According with the Securities Market Law (Article 239) : No person or group of persons will be able to acquire direct or indirectly, by means of one orseveral operations of any nature, simultaneously or successively for more than 10% of the total shares of the Stock Exchange paid in Capital. The Ministry of Finance could exceptionally authorize a major percentage. In addition, according with the By Laws of the Mexican Stock Exchange there is a measure to prevent acquires direct or indirectly, the control of the 5% or more of the shares representative the Mexican Stock Exchange's capital. Taxes on Dividends, Interest

Capital Gains: none Dividends: none Capital Financial Operation: None Interest: To Mexican Nationals: 0.6 % on paid interests To Foreigners: 4.9 % on paid interests* Entities or Individuals with enterprise activity: No withholding. Individual residents: Withholding of 25% on the monthly net gain. Foreigners - non-residents: No withholding Entities or Individuals with enterprise activity: Tax exempt. Individual residents: No withholding. Foreigners - non-resident: Tax exempt Whenever the beneficiary resides in a member country of the OECD, in which the income tax is equivalent to that applied in Mexico or in acountry with which Mexico has a tax treaty. The Securities Market Law provides that the persons who, directly or indirectly, participate in securities market transactions may not: Engage in market manipulation transactions, which are defined as those acts that interfere with the free offer and supply, by artificially affecting the trading volume or the price of securities, with the intent of obtaining a benefit or the benefit of a third party. Please note that stabilization transactions in public offerings are not considered market manipulation; enter into simulated transactions; enter into transactions when there is a conflict of interest; enter into transactions that do not comply with the market good practices; or

 Order or participate in transactions for its own benefit or the benefit of third parties, with knowledge that a third party has or will enter into a transaction with respect of the same securities.

B.Investment scenario through FDI

The 1994 North American Free Trade Agreement (NAFTA) capped Mexicos ten -year transformation from one of the most closed to one of the most open economies in the world. The hope was that economic integration would stimulate large inflows of foreign direct investment (FDI) in manufacturing, especially by North American corporations looking for a low-wage export platform. By expanding exports, FDI would alleviate Mexicos debt overhang, create high-productivity manufacturing jobs, and fuel economic growth. FDI was also expected to cure environmental and social problems. New manufacturing jobs would absorb the urban poor and farmers displaced by NAFTA, allowing Mexico, in the words of President Carlos Salinas to export goods, not people. Ten years after the passage of NAFTA, it is clear that the operation was successful FDI inflows and exports boomed. Foreign direct investment (FDI) has been of particular relevance to enhance Mexicos competitiveness by allowing the transfer of resources, knowledge, technology and best practices to national companies. FDI has also operated as catalyst for economic growth and development of the Mexican economy In this way, Mexico has negotiated several bilateral investment treaties (BITs) with countries in Latin America, Europe and Asia. As a result, today Mexico enjoys preferential access to the most important markets in the World. These Treaties represent a legal framework that has granted certainty to investors and has bolstered the attraction of foreign direct investment into Mexico.

In 2010, Mexico positioned itself as the 18th largest recipient of FDI worldwide with US$ 19 billion.

Moreover, from January 2000 to June 2011, the total value of accumulated FDI exceeded US$259 billion. (Source: Ministry of the Economy of Mexico). These figures consolidate Mxico as one of the largest recipients of FDI among emerging economies.

From 2000 to June 2011, the accumulated FDI in Mexico was of US$259 billion dollars. During this period, the four largest investors were: the USA with a share of 51.4%, Spain (15%), the Netherlands (14.1%), and Canada (4%).

In a sector level, between January 2000 and June 2011, the main destination for FDI was the manufacturing sector, capturing nearly half (42%) of the inflows during this period, followed by financial services (22.5%), and the wholesale and retail sector (8.5%).

Manufacturing Foreign investment is particularly important to Mexico because of the maquiladora sector, or manufacturing plants that assemble goods for export. These manufactured exports are critical to Mexicos position in the global economy. With 12 free trade agreements signed with 44 countries, Mexico is one of the most trade-liberalized countries in the world. More than 90% of Mexican trade flows under free trade agreements. As an example of their market strength, when considering U.S. imports of textiles and apparel, Mexico ranks as the third largest supplier behind Vietnam and India. It is revealing to look at which economic sectors foreign investors most prefer in Mexico. The order of investment can be seen in the adjacent doughnut graph. Manufacturing is the clearly preferred sector, receiving 30% of FDI. Considering the historical importance of Mexicos gold and silver industries, it might be surprising to see that financial services rank second (20%), ahead of mining and extractive industries (19%). Agricultural falls last claiming less than 1% of FDI. The principal corporate strategies of foreign investors in Mexico can be summarized as follows The creation of continent-wide systems of integrated production, to improve efficiency and competitiveness in the export of manufactures to the US. This strategy tends to take the form of the creation of new assets in the apparel (Burlington, DuPont), electronics (Compaq, Daewoo, Sony) and automotive (Chrysler, Ford, GM, VW, Nissan) industries. Key ingredients of the strategy are relatively low wages and preferential access to the US market under HTS 9802 or NAFTA arrangements. This strategy is used particularly by US companies under pressure from Asian competitors in the US market itself. A new or expanded presence in the Mexican market for manufactures. This strategy is common among US companies in food (PepsiCo), beverages (Anheuser Busch, Labatt. PepsiCo, Coca Cola) new globalizing services, such as telecommunications (Bell

Atlantic, Bell Canada, Lorel, Hughes) and finance (HSBC, BBV, Santander). It is also evident in the retail trade (Wal-Mart). Some FDI is used to open up previously restricted sectors. Again, the strategic behavior of firms in the internal market often determines FDI initiatives.

Crisis in Mexico
FDI also conveys an important aspect of how the global financial crisis impacted Mexico. The global crisis negatively impacted Mexico in three distinct, but equally potent, ways: the fall in consumer demand in the U.S. for Mexican exports, the drop in migrant incomes in the U.S. and subsequent decline of remittances to Mexico, and the global drop in the price of oil. This crisis is most easily seen in the sharp contraction of the growth rate of Mexicos economy. The global financial crisis also affected FDI to Mexico, as investors scrambled to cover their losses. From 2007-2009, Mexico experienced an overall 50% decrease in foreign investment totaling $14.6 billion dollars. The greatest change was from 2008 2009 when FDI decreased 41%. This trend reflects a few things
1.

FDI encompasses investments that are long-term, the larger the investment, the more difficult it is to liquidate. FDI often reflects what economists call economies of scale, the fact that as the size of production or economic activity increases, efficiency increases and marginal costs of operation decrease.

2.

C.Rules & Regulations

NEW GENERAL RULE MAKING IT EAISER TO SET UP AGENCIES AND SUBISIDIARIES OF FOREIGN BUSINESS ENTITIES IN MEXICO (Entered into effect on August 9th, 2012) On August 8, 2012, the "General Resolution establishing the criteria for the application of Article 17 of the Foreign Investment Law with respect to the establishment of foreign business entities in Mexico" was published in the Federal Daily Gazette of Mexico.

Article 17 of the Federal Foreign Investment Law refers to foreign business entities seeking to establish agencies or subsidiaries in Mexico to carry out business activities in Mexico be required, among other, to obtain authorization from the Federal Ministry of Foreign Affairs. This includes the foreign business entities that want to setup an "office of representation" that will not be receiving or producing income in Mexico. As part of the requirement, they are to register with the Public Registry of Commerce, just like all the Mexican business entities, in order to legally transact business in Mexico (the new criteria stipulates that, for purposes of registration with the Public Registry of Commerce, if the entity will regularly carry out business activities, filing the written statement with an acknowledgment of receipt will be sufficient). This General Resolution does away the need to acquire the authorization mentioned under Article 17 and in its place the applicant is to present a prior written statement in which they state, under oath: (i) that the company's incorporation documents are not contrary to the public policy (of Mexico) and that the activities it is going to perform are legally permitted under the laws of Mexico for foreign entities (in Mexico) (ii) that the entity has been duly formed in accordance with the laws of the country of origin (iii)that the company will establish an agency or subsidiary (identifying which one) in Mexico and then it states its domicile is abroad (iv)that the foreign company (agency or subsidiary) will have a representative domiciled in Mexico, authorizing this person (individual) to be responsible for any obligations of the foreign company in Mexico in the case necessary. It is important to note the

importance of carefully evaluating the different options available for establishing and commencing operations in Mexico, along with the risks and benefits that each provides.