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