By Homnath Gaire
In a nut shell, Central Depository System (CDS) is an electronic book entry system to record and maintain securities and to register their transfer. In CDS, ownership will be changed without physical movements of securities or execution of transfer deeds. The ownership will be transferred as soon as securities move from one account to another. CDS is purely a settlement vehicle and will not affect the trading in any manner whatsoever. It is expected that the CDS will bring tremendous efficiency and growth in the capital market of Nepal. It will also enhance the image of Nepal's capital market globally.
Participants of CDS:Account Holders
Account holders are divided into two categories - account holders and participants. Both account holders and participants will have direct access to the CDS. Account holders will be allowed to have a main account and a house account for their beneficially owned securities. Participants, however, will be entitled to have client accounting facilities within the CDS. In addition to main account and house account, participants will be allowed to have sub accounts and group client accounts. In short, the participants can provide custody services to their clients whereas account holders can keep only their beneficially owned securities in CDS.
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"Beneficial Owner" means the person who have opened their Beneficial Owner Account with Central Depository Company for depositing their securities or instruments and who have held the securities and instruments which are capable of being deposited in de-mat form.
All the members of stock exchanges, banks (both commercial and investment), and development financial institutions (DFIs) are allowed to open their account as participants whereas corporate bodies such as leasing companies, investment companies and insurance companies can open their account as account holders.
Issuers/Registrars
The issuers of capital whose securities are converted from physical to electronic book entry system play a significant role in CDS. They will also have direct access to the CDS. After a security is declared eligible for the purpose of CDS, necessary software is provided to that particular issuer upon signing the issuer's agreement with central depository company (CDC). The shares are entered into CDS only after proper verification by these issuers or their registrar. This process eliminates the problem of fake/duplicate/lost/stolen share certificates as issuers thoroughly check them before approving for CDS.
Eligible Pledge
Financial institutions that lend against securities will have their account with CDS in the capacity of eligible pledges. These institutions will also have direct access to CDS and will be provided with necessary connection in this regard upon signing the pledge agreement with CDC. Their clients will be able to pledge their electronic book based securities in CDS. Once the securities are pledged in the CDS, the control over those securities is transferred to the eligible pledgee in the form of pledge release/call. Nevertheless, the beneficial owner will continue to get the benefits of corporate action on pledged securities.
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CDS Account Structure:
The account holders of CDC will be able to settle their transactions within the CDS through five types of accounts, namely:
Main Account: Each account holder in the system will be allocated a main account by virtue of being an account holder in the CDS. This account will mainly be used as a transit account for movement of securities. Any security coming in or moving out of an account holder's family of accounts will pass through this account.
House Account: Used for securities owned beneficially by account holders. "Beneficial Owner Account" means De-mat Account (electronic account) opened with Central Depository Company through Depository Participant in order to deposit securities by the Beneficial Owner and which is distinguished by a unique account number.
Sub-account (Client Account): This account is used for keeping securities belonging individually to each of the clients of an account holder. An account holder may open and maintain any number of sub-accounts he requires on behalf of his clients.
Group Client Account: This account is used for keeping securities which are beneficially owned by the account holder's client. It will be used for clients who are not willing to utilize the facility of opening separate sub-accounts. The account holder will group all such clients in his/her group account. The detailed break-up of the securities held by each client of a group account will be held by the account holder and no such record will be maintained by CDC.
Cash Account: Each account holder in the system who opts to avail the Delivery vs Payment (DVP) facility will be required to deposit relevant amount to be used for the settlement of DVP obligations.
CDS-Operation
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The main operations performed in the CDS are as follows:
Deposit of existing and new securities in the CDS. Once a security is declared eligible by CDC, the physical certificates of that security will be deposited in the CDS for conversion after which they will be available for further transfers within the system. Following is the procedure to deposit securities in the CDS:
To begin with account holder will initiate the deposit request by entering the details of share certificates into the system, and securities deposit form (SDF). CDS will generate computer printouts of the transaction. Transfer deed will be executed in favor of CDC. Account holder will then send the relevant share certificates, transfer deeds, SDF and the computer printouts to the relevant registrar. The registrar after verification will either approve or reject the transaction within five days from the receipt of the documents. Registrar will update CDC nominee share holding in the member's register, cancel share certificates and transfer deeds, and return the relevant documents (other then canceled share certificates and transfer deeds) to applicant account holder.
Withdrawal of securities
from the CDS:
from the CDS:
The account holder will initiate the withdrawal request by entering the relevant details into the system, and securities withdrawal form (SWF). CDS will generate computer printouts of the transaction. Account holder will then send the SWF and the computer printouts to the relevant registrar.
The registrar after verification of the balance will either approve or reject the transaction within five days from the receipt of the documents and update CDC nominee share holding in the member's register. Registrar will return the relevant documents and share certificates to the applicant.
Prepare share certificate (Jumbo certificate):
Free Transfer - Book entry transfer of securities without any associated cash movement. This is a unilateral transaction in which an account holder can deliver securities to any other account holder in CDS. Although the beneficial ownership of securities changes as securities move from one account to another, there is no stamp duty involved and the transfer is on the spot.
Pledge/Release/Call - Pledging securities in favor of a lender which can only be released or called by the lender. This function will greatly benefit the financial institutions by reducing risk of fake share certificates and paperwork to a great extent.
Stock Borrowing or Lending through the CDS:
Corporate Action - In case of bonus issues, rights issues, sub-division, 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, CDC shall provide relevant details of account holders and sub-account holders to the issuer. The CDC will also provide details for the purpose of notice of general meetings and other notices/communications.
Delivery Versus Payment (DVP) - DVP is a bilateral transaction or book entry transfer of ownership of a security in exchange for payment to settle a transaction. The deliverer of the securities will initiate the DVP request on CDS specifying the details of securities and payment.
Upon acceptance of the receiver, CDS will debit deliverer's securities account and credit receiver's securities account. Likewise, CDS will debit receiver's cash account and credit deliverer's cash account. Cash only moves from one account to another without any associated securities movement.
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