Central Depository System
Introduction
What is Central Depository System?
The main function of CDC is to operate and maintain the Central Depository System (CDS), an electronic book-entry system used to record and maintain securities and to register the transfer of securities.
The system changes the ownership of securities without any physical movement or endorsement of certificates and execution of transfer instruments. CDS facilitates equity, debt and other financial instruments in the Pakistani Capital Market. It manages Ordinary & Preference shares, TFCs, WAPDA Bonds, Sukuk, Open-End & Closed-End funds and Modaraba Certificates.
Benefits of Electronic Settlement through CDS
Following are some of the benefits of electronic settlement of securities through CDS:
- Reduced workload and manpower requirements due to paperless settlement.
- Instantaneous transfer of ownership.
- No stamp duty on transfers in CDS.
- No risk of damaged, lost, forged or duplicate certificates.
- No impact in case of sudden increase of settlement volumes.
- Instant credit of corporate entitlements (bonus, rights and new issues).
- Paperless environment (no traditional vaults).
- Secure custody of securities.
- Substantial reduction of paperwork during book closure.
- Convenient pledging of securities.
- Substantial reduction in time & capital investments.
CDS Elements
The Elements of CDS are:
These elements have a defined role in the Central Depository System as the system is driven by them on a day-to-day basis without direct involvement of CDC. CDC, however, keeps the system under its surveillance to ensure its smooth functioning.
Account Holders in CDS are divided in two categories:
- Participants: They are allowed to keep their beneficially owned securities in CDS and provide custody services to their clients as well.
- Account Holders: They are only allowed to keep their beneficially owned securities in CDS.
All the members of Stock Exchanges, Banks (Both Commercial and Investment), and DFIs can open their account as a Participant whereas, Corporate Bodies and Qualified Private Investors can open their account as an Account Holder.
The companies or Issuers of capital whose securities (both equity & debt) are converted from physical to electronic securities play a significant role in CDS. The physical securities are converted into electronic book entry securities only after proper verification and approval by these Issuers in CDS. This process eliminates the problem of fake certificates as securities are thoroughly checked by the Issuers before executing deposit of securities transaction in CDS.
Financial institutions that lend against securities can join CDC in the capacity of Eligible Pledgees.
Transactions handled by CDS
- Deposit of Securities
- Transfer of Securities
- Pledging of Securities
- Pledge Release
- Pledge Call
- Withdrawal of Securities
- Corporate Action
- Partial Cancelation
The term ‘Free Delivery’ applies to all book-entry delivery of securities, which takes place without any corresponding movement of cash in the system. Once the securities are deposited in CDS, they become available for delivery from one CDS account to another. If the transfer of securities is within the account family of a Participant, it is called Intra-Participant Free Delivery. Similarly, if securities are transferred from one Participant to another, the transaction is called Inter-Participant Free Delivery.
An Account Holder or a Participant can place securities under pledge in favor of an eligible pledgee. Placing securities under pledge results in the securities being flagged as no longer available for delivery until released from pledge. The beneficial owner however continues to get the corporate benefits (dividends, etc.) on flagged securities. Only eligible pledgees can release securities, with whom such securities are pledged. As soon as securities are released from pledge, they become available to the Pledgor / Beneficial Owner for further transactions such as a delivery, withdrawal or another pledge.
Eligible pledgees can call pledged securities in their own account. Securities can be withdrawn in the form of physical certificates from CDS through withdrawal transaction. This facility is provided to cater for those investors who prefer to keep physical security certificates. At the time of book closure for corporate action, the records of the depository are considered as an extension of the Members’ Register maintained by the Issuer or Registrar / Transfer Agent on behalf of issuer. In other words, the detailed break-up of the CDC’s nominee shareholding is obtained from the records of the depository and shareholder entitlements like bonus, dividends etc. are distributed on the basis of the list of beneficial owners provided by the CDC. CDS also facilitates the processes of Merger, Demerger and Consolidation / Sub-Division in an efficient manner.
Investors can have their securities, subscribed in IPOs, directly credited to their accounts in electronic form. With this feature, they can save costs and hassles involved in obtaining physical certificates and then getting them deposited in electronic form.
Transaction is a series of actions through which physical certificates are converted into electronic book entry securities in CDS. The deposit request transaction is initiated by Participants either on behalf of their client or on their own behalf. It is after the approval of the relevant Issuer that the physical securities become available for electronic settlement.