THE BENEFITS OF THE UPCOMING CDC
Deliveries and settlements will be more efficiently handled
By S.M. SHAFI AZAM,
Head of Marketing, CDC
Nov 16 - 22, 1996
The growth in the number of listed companies at the Stock Exchanges during the last few years has been unprecedented. The number of listed companies increased from 37S companies in l988 to 791 by 1996 for KSE. Market value of listed capital increased from Rs. 50 billion in 1991 to more than Rs. 400 billion in 1996.
In recent years, the volume of shares traded at KSE has grown from 14 million in 1988 to more than 2.0 billion in 1996. The highest daily turnover recorded has now exceeded 100 million shares compared to less than one million) five years ago. The securities market was opened to foreigners in 1991 through reforms in the exchange control regime and foreign investment has grown significantly. A member of funds targeted for investment in the Stock exchange of Pakistan were established and major foreign brokerage houses directly invested at the Stock Exchanges.
Problems and risks
The increase in volume of transactions has increased the delivery and settlements of shares which is causing problems such as:
Physical Handling of Share; Loss and Damage; Robbery and Theft; Forgery; Heavy work load; Preparation of Transfer Deeds; Verification of Signatures to sell shares; Delayed delivery of Shares to investors; Inefficient postal and courier services... And many more.
In order to eliminate these problems and risks and to facilitate the growth of the capital markets of Pakistan the three stock exchanges in collaborations with IFCs Citibank, Overseas Investment Corporation, MCB, HBL, ICP, NIT and PICIC have established the Central Depository Company of Pakistan Limited to implement the Central Depository System.
The Central Depository Company System (CDS) will introduce electronic Book entry system to record and transfer securities in Pakistan. CDC will computerize the entire delivery and settlement system for debt and equity instruments used in the capital markets. This (CDS) will give an absolutely new dimension to the securities industry of Pakistan.
The salient feature of CDC are the following:
Introduction of electronic Book entry settlements; Maximum security; Strict confidentiality; Ability to Handle Corporate Actions; Immobilization of Certificates.
The main operations performed by the Central Depository System consist of the following:
Deposit of existing and new securities into the depository. Withdrawal of securities in the form of certificates from the depository to cater for investors who prefer to have physical possession of certificates. Free transfer book entry transfer of securities without am associated cash movement. Pledge/Release/Call placing a lien on securities in favor of a letter? which can only be released by the lender. Stock borrowing or lending through the mechanism of transfer with or without associated money movement through the depository system. Corporate action bonus issued rights entitlement subdivision consolidation and any other action that changes the number of securities held in a participant s account or involves the determination of entitlement to beneficial owners. Delivery vs. Payment book entry transfer of ownership of a security in exchange for payment to settle a transaction. Clash only movement movement of cash from one account to another without any associated securities movement.
The Central Depository System works similar to a bank. Just as cash is deposited in a bank, all debt: equity, and other financial instruments will be deposited in the CUS. An investor cello wishes to Fade in ally of the stock exchanges of Pakistan win have a client account with the CDC through his stock broker or a financial institution. The account will have all the security features like that of a bank account when the investor deposits his shares in the system his investment account will be credited with the scrip after authentication. Once it has been deposited in the system He scrip can be transferred from one participant to the another instantaneously.
With the advent of CDC the securities industry in Pakistan will transform from the current manual and laborious setup to a simple modern and efficient system of deliveries and settlement. The current system of trading will not be affected. Only the delivery, settlement, and transfer of securities will be changed. Investors will still trade through their brokers who will have access to the C1::>S anal the entries will be made by the participants and not the CDC staff.
The increase in efficiency in the present system will become evident after the implementation of CDC which will fulfill the vision of a scripless securities delivery and settlement system in Pakistan. It is expected Mat the capital market of Pakistan will gain new momentum as CDC will have the capacity to handle larger volumes of delivery awl settlements. The CDC project has become a necessity for the capital market as It will enhance and restore the Required confidence to foreign and local investors.