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An interview with Najam Ali, Chief Executive Officer, Central Depository Company

By SHABBIR H. KAZMI
Feb 07 - 13, 2000

The Central Depository System (CDS) has resulted in efficient delivery, settlement and transfer of securities. It has helped in changing the outlook of local capital market. The investors have been freed from the hassle of physical trading of certificates and paperwork. This has minimized the chances of manual errors and omission and commission, reduced costs and risks, by providing instantaneous transfer. These were the expressions of Najam Ali, Chief Executive Officer, Central Depository Company (CDC) while talking to PAGE. Following are excerpts of an exclusive interview.

As a result of aggressive induction of securities into the CDS, nearly 97 per cent of the total settlements taking place at all the three stock exchanges operating in the country are held through CDS. The CDC has also introduced 'Investor Account' facility in August last year. While the level of interest was much below the expectations, the value of securities through these accounts exceeds Rs 3 billion. At present there are two types of investor accounts, institutional and individual. The largest percentage of account holders belongs to institutions. In the past both the individuals and the institutions were maintaining sub-accounts with the participants. The number of accounts is expected to increase further with the revival of investors confidence in the capital market.

Having the advantage of technology base, the CDC plans to enter into two other activities, establishment of National clearing & settlement system (NCSS) and custodial service. NCSS project is being supported by all the three stock exchanges of the country and the work has already started. Additional hardware and software are being installed. This project will be partly financed by the Asian Development Bank and partly from CDC's internal resources. This will not only reduce the settlement risk but transactions will because more efficient.

CDC had declared June 30, 1999 as the last date for making all the securities eligible. However, only 306 securities have become 'live' on CDS till recently. The largest number of companies still not live belong to textile sector — including spinning, weaving and composite units. However, with the recent change in prudential laws by the State Bank of Pakistan, regarding lending by the financial institutions against the shares of listed companies, all the listed companies are expected to make their securities live. According to the recent amendment, now financial institutions will lend only against shares of those companies which are live on CDS. This amendment will also apply on the renewal of existing borrowings.

As regards the operational efficiency, over the last two years CDC has been able to cut down its losses despite reduction in transaction charges. In 1998-99, CDC generated enough revenue to almost cover its depreciation expenses as well as curtail financial charges. In 1997-98 it had posted loss before depreciation and amortization of Rs 14.7 million but posted a profit of Rs 67.8 million in 1998-99. However, in accounting terms, CDC is still posting a loss due to heavy depreciation charge.

With a large number of securities becoming live, the total long-term deposit nearly doubled — from Rs 74 million in the previous year to Rs 140 million as at June 30, 1999. Another important feature was reduction in current liabilities and increase in current assets during this period. While the current liabilities came down from Rs 75 million to Rs 22 million, the current assets increased from Rs 42 million to Rs 76 million as at June 30, 1999.

It is important to note the CDS uses state-of-the-art hardware and software which needs constant upgrading as well. This is the reason that depreciation charges will always be high. While depreciation charges for the year 1997-98 were Rs 28 million, the expense under this head was Rs 62 million for 1998-99. However, it is heartening to note the CDC was able to reduce the financial charges to nearly half as compared to the previous year.

Another important development is the induction of term finance certificates (TFCs) of Dewan Salman Fibres. It will pave the way for induction of other debt instruments into the CDS. TFCs worth Rs 3 billion are expected to be floated in the year 2000. This will allow the investors to reap benefits of convenient and cost effective settlement. This will lead to the development of secondary market for debt instruments in the country.