CDC: HOW IT WORKS

The Central Depository Company is now fully operational at the Karachi Stock Market. This is a great step forward for the exchange and can be expected to have a tremendous impact on its future growth.

Nov 03 - 09, 1997

PAGE had a talk with Ejaz Ali Shah, the head of marketing at the CDC to get his views on the impact of this on the capital markets. Here are some excerpts from the interview.

Question: Why do you think the CDC is important for the stock market?

Answer: The Central Depository Company of Pakistan Limited is the need of the hour for equity markets of Pakistan as they have registered exceptional growth in the last few years, and trading volumes are likely to increase even further in future. With the passage of time, physical handling of shares will not only become more cumbersome and time consuming, it will also circumvent the growth potential of our equity markets. Moreover, the current procedure of delivery, settlement & transfer are plagued by lengthy delays, risk of damage, loss, forgeries, duplication and considerable investment in time and capital. Central Depository System will provide a fast, cost effective and efficient solution to these problems.

Question: With the CDC and the KATS, how would you rate the KSE with leading international exchanges?

Answer: CDC & KATS are steps in the right direction to catch up with the rest of the developed markets of the world. They will definitely bring the equity markets of Pakistan at par with other developed markets of the region. However, the development of Central Clearing System will be another major development. Complete automation of trading, settlement and clearing will make our equity markets compatible with the leading international exchanges.

Question: CDC is up and running, although it is still in its infancy. Why immediate effects on settlement and transfers have you noticed?

Answer: We have been operational for about two months only and are accepting deposits in four securities out of more than seven hundred eighty securities listed on KSE at the moment. The volumes settled in CDS are insignificant in this context. However, we have noticed that the users are gaining more confidence in CDS everyday.

Question: What will be the most significant effects with the CDC on line?

Answer: Most significant effects will be instantaneous transfer of ownership, elimination of fake certificates and convenience/savings to investors.

Question: What long term impact on trends and investments patterns do you see in the future, keeping in view technical advancements like the CDC?

Answer: We expect the market turnover to increase substantially as we take all the listed companies into Central Depository System. The Central Depository System will help regain the confidence of foreign & local investors by reducing the transaction risk and providing transparency of transactions. Fund managers around the world will feel more comfortable as the Central Depository System will standarize the settlement procedures and reduce associated inherent risks. Immediate transfer of ownership, reduced paperwork, shorter workforce requirement, safety against fake shares, reduced cost of storage and substantial savings in stamp duty will also help to increase the daily turnover.

Question: There is a general impression that CDC will help prevent short selling and speculation. Is this a misconception or not? In either case, why is this the general impression?

Answer: CDC is purely a settlement vehicle and it will not affect the trading in any manner whatsoever. CDC will not affect short selling or speculation directly. This misconception is due to lack of understanding of CDS and we are trying our best to educate the market through training and print media. However, CDC can be used to regulate the short selling activity by facilitating the users to borrow securities to settle their transactions.

Question: People also say that the CDC is proving expensive for the shareholders. What can you say about this?

Answer: Firstly, I would like to make it clear that we are not profit motivated. We intend to generate enough revenue to cover our costs and keep some for further developments. Our charges are closely monitored and approved by Corporate Law Authority. Secondly, our charges are very low as compared to the costs associated with physical handling of securities. There are substantial savings for the Account Holders in terms of shorter work force, overheads, elimination of risk of loss from fake share certificates and stamp duty charges.

Question: Can you give us a brief idea about how soon will all the scrips be transferred to the CDC and in how many steps you plan to do this?

Answer: We are following a very aggressive plan to induct all the listed securities into CDS within two years. Initially, we are targetting to induct fifty top companies into CDS by June 1998.

Question: How is the acceptance of the CDC by investors in general and do you think acceptance will increase?

Answer: The acceptance of CDC by the investors is very encouraging and we expect it to improve even further as they learn more about Central Depository System. More and more people are now showing confidence in the Central Depository System. We have conducted training sessions for all the members of Karachi, Lahore & Islamabad stock exchanges, as well as for financial institutions, and the response has been very positive. Since, brokerage houses, custodian banks and financial institutions spend a lot of their time on physical handling and keeping records of the certificates, they are more than willing to convert to this system.

Question: With the CDC now in place, what technological advancements or administrative developments do you foresee for the market for instance a Central Clearing Corporation?

Establishment of a Central Clearing Corporation is already on cards and we are working on induction of debt securities into Central Depository System. We are also looking into the possibility of CDC being the lender of securities to its account holders.