What Is Central Depository System

What is Central Depository System ? The main function of CDC is to operate and maintain the Central Depository System (CDS), drawing guidance from a well-defined legal framework laid down by Securities & Exchange Commission of Pakistan (SECP). Installed by an IBM-led consortium, CDS is an electronic book-entry system used to record and maintain securities and to register the transfer of securities. The system changes the ownership of securities without any physical movement or endorsement of certificates and execution of transfer instruments. CDS facilitates equity, debt and other financial instruments in the Pakistani Capital Market. It manages Ordinary & Preference shares, TFCs, WAPDA Bonds, Sukuk, Open-End & Closed-End funds and Modaraba Certificates. Benefits of Electronic Settlement through CDS. Following are some of the benefits of electronic settlement of securities through CDS: • • • • • • • • • • •

Reduced workload and manpower requirements due to paperless settlement. Instantaneous transfer of ownership. No stamp duty on transfers in CDS. No risk of damaged, lost, forged or duplicate certificates. No impact in case of sudden increase of settlement volumes. Instant credit of corporate entitlements (bonus, rights and new issues). Paperless environment (no traditional vaults). Secure custody of securities. Substantial reduction of paperwork during book closure. Convenient pledging of securities. Substantial reduction in time & capital investments.

CDS Elements The Elements of CDS are: • Participants / Account Holders • Issuers • Eligible Pledgee These elements have a defined role in the Central Depository System as the system is driven by them without direct involvement of CDC on a day-to-day basis. CDC, however, keeps the system under its surveillance to ensure its smooth functioning and confidentiality. Account Holders in CDS are divided in two categories:

1. Participants: are allowed to keep their beneficially owned securities in CDS and provide custody services to their clients as well.

2. Account Holders: are only allowed to keep their beneficially owned securities in CDS.

All the members of Stock Exchanges, Banks (Both Commercial and Investment), and DFIs can open their account as a Participant whereas, Corporate Bodies and Qualified Private Investors can open their account as an Account Holder. The companies or Issuers of capital whose securities (both equity & debt) are converted from physical to electronic securities play a significant role in CDS. The physical securities are converted into electronic book entry securities only after proper verification and approval by these Issuers in CDS. This process eliminates the problem of fake certificates as securities are thoroughly checked by the Issuers before approval for CDS. Financial institutions that lend against securities can join CDC in the capacity of Eligible Pledgees. Transactions handled by CDS • • • • • • •

Deposit of Securities Transfer of Securities Pledging of Securities Pledge Release Pledge Call Withdrawal of Securities Corporate Action

The term ‘Free Delivery’ applies to all book-entry delivery of securities, which takes place without any corresponding movement of cash in the system. Once the securities are deposited in CDS, they become available for delivery from one CDS account to another. If the transfer of securities is within the account family of a Participant, it is called Intra-Participant Free Delivery. Similarly, if securities are transferred from one Participant to another, the transaction is called Inter-Participant Free Delivery. An Account Holder or a Participant can place securities under pledge in favor of an eligible pledgee. Placing securities under pledge results in the securities being flagged as no longer available for delivery until released from pledge. The beneficial owner however continues to get the corporate benefits (dividends, etc.) on flagged securities. Only eligible pledgees can release securities, which have been placed under pledge. As soon as securities are released from pledge, they become available to the Pledgor for further transactions such as a delivery, withdrawal or another pledge. Eligible pledgees can call pledged securities in their own account or in any other account in CDS. Securities can be withdrawn in the form of physical certificates from CDS through withdrawal transaction. This facility is provided to cater for those investors who prefer to keep physical security certificates. At the time of book closure for corporate action, the records of the depository are considered as an extension of the Members’ Register maintained by the Issuer or Registrar / Transfer Agent on behalf of issuer. In other words, the detailed break-up of the CDC’s nominee shareholding is obtained from the records of the depository and shareholder entitlements like bonus, dividends etc. are distributed on the basis of the list of beneficial owners provided by the CDC. CDS also facilitates the

processes of Merger, Demerger and Consolidation / Sub-Division in an efficient manner. Investors can have their securities, subscribed in IPOs, directly credited to their accounts in electronic form. With this feature, they can save costs and hassles involved in obtaining physical certificates and then getting them deposited in electronic form. Transaction is a series of actions through which physical certificates are converted into electronic book entry securities in CDS. The deposit request transaction is initiated by Participants either on behalf of their client or on their own behalf. It is after the approval of the relevant Issuer that the physical securities become available for electronic settlement. Technical Info

CDS Network CDC's network is spread across the main trade hub cities of Pakistan. The sites are interconnected through highly reliable WAN links. The reliability of links is backed up with multiple levels of redundancy. In case of a link failure, the fallback to backup link is completely unnoticeable. Along with reliability and redundancy, security is one of the most important concerns for CDC. Confidentiality and authenticity are ensured for all transactions that are carried over the network. Stock users are connected through resilient and dedicated links while clients other than stock users (external clients) connect to the CDC network through dial-in to our local point of presence by using Pakistan Telecommunication Corporation Limited’s Public Switched Telecommunication Network (PSTN). Sufficient numbers of simultaneous dial-in lines are maintained at various sites to allow first call connection. We also have reliable and high bandwidth metro fiber connectivity for external clients. CDS Software CDS is a menu-driven client/server application system. The Graphic User Interface based proprietary client runs on a Microsoft Windows based PC. The Client neither stores users’ data nor executes the application logic; instead the customer data as well as application logic resides on the central server managed by CDC. The installation and set-up of the proprietary CDS Client at customer site is supported by the Customer Network Support Services. The application is being continuously enhanced in-house to include more functions and features. Standards based Software Engineering process is being implemented to ensure uninterrupted availability of the system and the integrity of the data. The software updates for CDS Client are delivered over the CDC network for efficient configuration management. CDS Hardware CDS Client is an Intel based PC with a LAN card for the users at local stock exchange LAN and a standard modem for the remote users. Minimum hardware Configuration for CDS Applications

Component Processor RAM Hard Disk Serial Port/USB for External Modem Printer Mouse Keyboard Keyboard Interface on Motherboard Monitor VGA Card CD ROM Brand

Requirement Intel Pentium IV 3GHz or above 512 MB or above Atleast 5 GB Free 1 at least High quality/speed Laser printer 2/3 Buttons (PS1 or PS2 connector type) 101/104 Keys (PS1 or PS2 connector type only) PS1/ PS2 15” SVGA Color Monitor with 1024x768 Display Resolution 16MB or above Graphics Card on AGP/PCI slot 50 x or above Branded PC

Operating

System Configuration

Minimum Requirement Microsoft Windows 2000 Professional/ Windows XP Professional (Licensed) with latest Service Pack & p Internet Explorer version 6.0 or above Acrobat Reader 7.0 Connectivity Option (NIC for Stock Exchange Users) Manufacturer Any Brand Modem for Remote Users/ Dialup Users

Type RJ-45 Connector Type (10/100 Mbps)

Minimum Requirement US Robotic / Zoltrix 56 Kbps (Internal or External)/ ISDN Modem / ISDN BRI Security Measures To ensure utmost security of information, multiple levels of protection have been deployed to create an impregnable system for hackers and unauthorized users. Some of the major security measures include:      

Terminal Authentication – A dual factor authentication protocol comprising of a 4 digit pin number and a 6 digit automatically generated RSA passcode) Virtual Private Network (VPN) Various Firewalls Segregated User Level Authorities CLI binding Servers - The central servers comprise of powerful, fault tolerant and redundant servers with large storage devices and fast archival systems at the primary site.

Email Integration

CDC E-mail Facility provides CDC the capability to send encrypted emails with digital signatures to its Elements in Karachi, Lahore and Islamabad. With this facility in place, CDC can correspond with its clients in an effective and cost efficient manner. Users can open the received e-mail by clicking 'Outlook Express' option from the 'Programs' sub menu of the MS-Windows 'Start' menu. The same operation can be executed by clicking MS-Outlook Express icon in the Task Bar. Once the Outlook Express main screen appears, user would be able to Receive, Read and Delete e-mails. Deployment of this E-mail service reflects CDC's efforts toward its customer centric focus and providing quality service and satisfaction to its clients. Account Holder

Account Holders are allowed to keep their beneficially owned securities into CDS. Eligibility

Criteria:

As per CDCPLR, any person, company, corporation or institution in such class as the Board may, from time to time, determine in this behalf, may apply to the CDC for admission to the CDS as an Account Holder. Account

Opening

Procedure:

A) The applicant initiates a written request for the account-opening package. B) An account-opening package containing the following original/specimen documents is sent to the applicant. Account Opening Package contains the following documents and request for other required documents:

Documents Admission Form: General information about the client is obtained on this form. Admission Form (Individual) Admission Form (Corporate) Agreement: The agreement states terms and conditions agreed upon by both parties for opening an account with CDC. Specimen Signature Card: Name & signatures of authorized signatories are obtained on this card. Specimen Undertaking: confirmation regarding not maintaining an Investor Account with CDC. Specimen Board Resolution: Certified true copy of the Board Resolution authorizing the company to enter into an agreement with CDC and nominating signatories on behalf of the company is required. OTHER REQUIRED DOCUMENTS

Individual Account

Corporate Account

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Power of Attorney in case of an agent (if applicable)

Yes

No

Attested copy of Passport of Joint holder (if applicable)

Yes

No

Attested copy of NIC/Passport of Nominee Certified true copy of Stock Exchange Registration Certificate (if applicable) Attested copy of NIC of the applicant

Yes

No

Yes

Yes

Yes

No

Certified true copy of Memorandum & Articles of Association

No

Yes

Certified true copy of certificate of incorporation Certified true copy of Certificate of Commencement of Business (if applicable) Security Deposit & Documentation Fee

No

Yes

No

Yes

Yes

Yes

Certified true copy of Banking License(if applicable)

No

Yes

Certified true copy of NBFC License(if applicable)

No

Yes

Certified true copy of SECP Brokerage Certificate (if applicable) Certified true copy of Notification by Stock Exchange(if applicable) Certified true copy of Minimum Subscription Certificate and Prospectus (if applicable)

Yes

Yes

Yes

Yes

No

Yes

C) The applicant submits the above-mentioned documents (complete in all respect) to CDC. D) Upon receipt of the documents, CDS software is installed at the premises of the applicant. E) A comprehensive training session is conducted to train the users of the CDS to their satisfaction. The session explains in detail the concept & workings of the CDS. F) As soon as the account is activated, following Ids and passwords are sent to the Applicants: •

•

CDS Dialup

ID

User

&

IDs & Password (If

Passwords Applicable)

It is also to be noted that it takes three working days to open an account after submission of documents (provided the documents are complete in every respect). Tariff

S.No

SCHEDULE OF FEES RATE BASIS

NAME

1.

Initial Deposit Fee - for Shares - for TFCs* - for WAPDA Bonds ** - for Units ***

Re. 0.01 Nil Nil Re. 0.01

2.

Transaction Fee - for Shares - for TFCs* - for WAPDA Bonds ** - for Units ***

Re. Re. Re. Re.

0.0020 0.0020 0.0020 0.0020

(Note 1) Per share deposited Per Unit deposited (Note 2) Per share Per Unit* Per WAPDA Bond** Per Unit***

3.

Custody Fee - for Shares - for TFCs* - for WAPDA Bonds ** - for Units *** - On Blocked Securities - For Major Shareholders

0.015% p.a. 0.0125% p.a. 0.0125% p.a. 0.0125% p.a. 0.00675% p.a. 0.00675% p.a.

(Note 3) Market value Market value Market value Quoted or offer price -

4.

CDS Connection Fee - Account holder/ Participant - Eligible pledgee

5.

Additional CDS Connection Fee

6.

7.

8.

Rs. 500 p.m. Rs. 10,000 p.m. Rs. 10,000 p.m.

Annual Fee for Eligible Security Issued Amount (Face Value) For Shares & Long-term TFCs -Upto Rs. 50m -Above Rs. 50m to Rs. 200m Rs. 16,875 p.a. -Above Rs. 200m Rs. 33,750 p.a. Rs. 67,500 p.a. For Short-term TFCs -Upto Rs. 50m Rs. 5,000 p.a. -Above Rs. 50m to Rs. 7,500 p.a. Rs. 200m Rs. 12,500 p.a. -Above Rs. 200m For WAPDA Bonds** -Upto Rs. 50m Rs. 18,750 p.a. -Above Rs. 50m to Rs. 37,500 p.a. Rs. 200m Rs. 75,000 p.a. -Above Rs. 200m Annual Fee on CDS Eligibility of Units of open-end mutual Rs. 67,500 p.a. funds Redemption Fee Nil Pledge Call Fee - for Shares Re. 0.005 - for TFCs* Re. 0.005 - for WAPDA Bonds ** Re. 0.005 - for Units *** Re. 0.005

Fixed monthly per CDS connection (Note 4) Fixed monthly per CDS additional connection

Fixed annually per eligible security

LEVIED ON

Participant/ Account Holder

COLLECTION WHEN MODE

Month end Month end

P.O./Draft/ Cheque P.O./Draft/ Cheque

Participant/ Account Holder

Month end (calculated on daily basis)

P.O./Draft/ Cheque

Participant/ Account Holder

Month end (calculated on daily basis)

P.O./Draft/ Cheque

CDS Elements

Monthly in advance

P.O./Draft/ Cheque

CDS Elements

Monthly in advance

P.O./Draft/ Cheque

Issuer/Asset Management Companies

Annually in advance

P.O./Draft/ Cheque

-

-

-

Eligible Pledgor/Pledgee

Month end

P.O./Draft/ Cheque

(Note 5)

Units*** Per share Per Unit* Per WAPDA Bond** Per Unit***