Out of Chaos, Order

Ever since the 19th century days of Emperor Dom Pedro II, the Brazilian stock market has been a scene of chaos. The coun try's major stock exchange in Rio de Janeiro has been presided over by a closed group of 40 brokers who passed their seats on the bolsa down through their families, collected such lucrative commis sions on currency-exchange transactions that they have had little incentive to push stock purchases. Long confined to only two hours a day, the trading sessions usually took place amid such bedlam that little serious business was ever ac complished. In recent years, taxes of up to 85% on dividends and Brazil's runaway inflation have made the stock market less and less attractive to investors. Only three months ago, daily trading volume on the Rio exchange fell to practically zero for many leading companies. Then came a sudden and dramatic change. Last week, having broken all records in July, daily trading volume advanced to 1,626,447 shares, and daily sales topped $1,000,000 for the first time in history. Main reason: a new capital-market reform bill that Brazilian President Humberto Castello Branco signed into law last month. The law sets up an equivalent of the Securities and Exchange Commission by empowering the central bank to discipline the market, allows new brokers to enter the previously closed exchange, requires firms trading on the market to publish regular and reliable financial statements, and cuts dividend taxes to 25% . Schooled in Scandal. Besides reform ing the chaotic stock market, the law will also rid Brazil by 1967 of its greatest source of recent financial scandals: the so-called parallel market, which deals in short-term, high-yield (up to 6% a month) promissory notes backed only by the reputation of the companies that issue them. Investors have snapped them up anyway, built the parallel market into a flourishing $250 million-a-year business that has supported much of the country's economic growth over the last five years. When the Castello Branco regime began putting the brakes on inflation a year ago, Brazilians discovered just how precarious much of that growth had been. Since the downhold began, several hard-pressed companies have moved to delay payment of or renege on their outstanding debts on the parallel market, leaving thousands of investors holding $37 million in unredeemed notes. By now schooled in scandal, Brazilian investors have pulled out of the parallel market in great numbers, resumed investing heavily in stocks. The Big Bust. The biggest scandal of the parallel market involved the Brazilian subsidiary of Germany's huge Mannesmann steel company, which two months ago, to the shock of stockholders, repudiated more than $14 million worth of outstanding notes, claiming that two former directors had issued them without authorization. An gry investors took the company to court, and a legal bankruptcy action is under way. The government has placed responsibility for the notes squarely on Mannesmann, arrested one of the former directors, brought in President Sigmund Weiss for questioning. It is pushing for complete reorganization of the company's board of directors. Brazil's central bank is expected to ask holders of Mannesmann notes to register them, may reach a settlement this week whereby note holders would be issued debentures convertible to Mannesmann stock.

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