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Central Depository Act, 1997

Depository: It is a bank or Company which holds funds or securities deposited by other, and where
exchanges of these securities take place.

Central Depository Company (CDC)


Incorporated as a public limited (Unlisted) Company in 1993 Only Depository in Pakistan Regulated by The Securities and Exchange Commission of Pakistan (SECP). Purpose o Primarily established to operate Central Depository System (CDS) for equity, debt and other financial instruments traded in Capital Market Automation of Stock Exchange. o Provide services that are beyond the traditional depository services it changes the ownership of securities without any physical movement or endorsement of certificates and execution of transfer instruments. o Provides depository services to a wide range of Capital Market participants which includes Brokers, Asset Management Companies, Banks (including Custodian Banks) and general retail investors. Aims o To operate as a Central securities depository on behalf of the financial services industry o To contribute to the countrys ability to support an effective capital market system, attracting institutional and retail level investors from Pakistan and abroad.

Central Depository System


It is an electronic book-entry system used to record and maintain securities 1and to register the transfer of the securities The system changes the ownership of securities without any physical movement or endorsement of certificates and execution of transfer instruments. Facilitates equity, debt and other financial instruments in Capital Market.

Working of Stock Exchange


a) Before CDC
Company Stock Exchange

Member

b) After CDC
Member Company

Transactions only through Members.

Stock Exchange

Buyer/ Seller

CDC
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Security u/s. 2(24): Means, Any government Security Any derivative relating to security or a Government security; or Any other instrument specified by the Federal Government, by a notification in the official Gazette, to be a security

Benefits of Electronic Settlement 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) 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 1. Participants/Account-holders: Account holders are divided in two categories a. Account holder: Only allowed to keep their beneficially owned securities in CDS. Account-holder means a person who opens and maintains an account 2with a central depository and operates such account [u/s. 2(3)]. b. Participants: allowed to keep their beneficially owned securities in CDS and provide custody services to their clients as well. Participant means u/s. 2(17) An account holder who is a member 3of a stock exchange; and Any other account-holder who meets the qualifications of a participant. Provided that such account holders Perform services for sub-account holders 4in accordance with the terms of an agreement entered into between the central depository and each of the participants; Transfer any securities to the central depository to the credit of any subaccounts 5under their respective accounts; and Handle6, on behalf of sub-account holders, the book-entry securities 7in the subaccounts under their respective accounts; 2. Issuers: 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. The process eliminates the problem of fake certificates as securities are
Account u/s. 2(2): Means an account maintained by a central depository in the name of an account holder so as to record the title of the account-holder to any book-entry securities entered in such account; 3 Member u/s. 2(16): Includes the registered owner of any equity security of an issuer which is established under any other law; 4 Sub-Account holder u/s. 2(28): Means a person in whose name a sub-account is opened and maintained by a participant with a central depository and is operated by that participant; 5 Sub-Account u/s. 2(27): Means a sub-account maintained, as part of the account of a participant, in accordance with the regulations by a central depository in the name of a sub-account holder so as to record the title of the sub-account holder to any book-entry securities entered in such sub-account; 6 Handling u/s. 2(12): With its grammatical variations and cognate expressions, in relation or similar means, the pledging of a book-entry security in accordance with section 12 or the withdrawal from the central depository system of the security represented by the book-entry security; 7 Book-Entry Security u/s. 2(5): In relation to a central depository, means a security which is transferable by book-entry in the central depository register pursuant to a declaration made by the central depository under sub-section of section 4 and which is a. In the case of a security transferable by registration, registered in the name of the central depository or issued to the central depository pursuant to section 14; or b. In the case of a security transferable by delivery or endorsement, deposited with or transferred by endorsement to the central depository;
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thoroughly checked by the issuers before approval for CDS. Issuer means any person, the Federal Government or a Provincial Government who or which has issued or proposes to issue any security [u/s. 2(14)] 3. Eligible Pledgees: Financial institutions that lend against securities can join CDC in the capacity of Eligible Pledgees. Eligible Pledgee means any person who, in accordance with the regulations, is recognized by a central depository as eligible for the purpose of receiving any pledge 8of book-entry securities [u/s. 2(11)]; 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.

Transactions handled by CDS


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

Central Depository System u/s. 4


1. Where accounts may be opened and maintained with central depository record the title of account-holders to book-entry securities ; or 2. where the account holders are participants, sub-accounts may be opened and maintained as part of the accounts of the participants a. transfers of such book-entry securities shall be effected electronically or by any similar means; and b. Pledging of such book-entry securities may be effected in accordance with section 12. 3. Where any securities are issued to or registered, transferred by endorsement or deposited with a central depository, such securities shall be entered in the relevant accounts or sub-accounts as book-entry securities. 4. The title to any book-entry securities entered in an account shall vest9 in the account holder and the title to any book-entry securities entered in a sub-account shall vest in the sub-account holder. 5. Handle such securities as book-entry securities as are declared as such by the central depository 6. Different types of accounts and sub-accounts for different classes of persons may be opened wit a central depository. Note In case of any securities transferable by registration (covered by single deposit form) the execution of the deposit form by or on behalf of the central depository as transferee of such securities shall be deemed to be the execution, by or on behalf of the central depository. A participant may enter book-entry securities beneficially owned by the clients in his own account without establishing sub-accounts in the names of such clients in the central depository system with the written authorization of his clients Central Depository may enquire whether such authorization has been obtained by the participant
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Pledge: A bailment or delivery of personal property to a creditor as security for a debt or for the performance of an act. Something given as security for the performance of an act 9 Vest: to grant with (have) a particular right

CDS shall operate by a Central depository for holding book-entry securities as a nominee for account holders and for facilitating the transfer of such book-entry securities A Central depository may hold book-entry securities, as a beneficial owner of such securities, in its own account opened and maintained on its own central depository system.

Central Depository not to be a member of an issuer etc. u/s. 5


Whether Central depository is the owner of a security (whether equity or debt including debenture10) or is named in the register of members of an issuer It shall be deemed not be a member of the issuer; and Persons named as the account-holder or sub-account holder shall be deemed to be members or owners as the case may be for such period in which book-entry securities are entered against their names in the central depository register Notwithstanding anything contained in this Act, An account-holder or a sub-account holder, who is named in the central depository register, at the close of business hours of the central depository on the day before the first day of the period of closure of register of Members of an issuer, as the holder of book-entry securities representing securities carrying voting rights in the issuer, shall be regarded as a member of the issuer for the purpose of attending and exercising all rights at a general meeting of the members of the issuer in respect of which the register of members has been closed. non-equity securities of an issuer, as the owner of book-entry securities representing such securities of the issuer, shall be regarded as an owner of such securities for the purpose of attending and exercising all rights at a general meeting of the owners of such securities of the issuer in respect of which the register of such securities has been closed Remember, The status of Central depository company (CDC) will not change to either holder or subsidiary company due to being named in Jumbo11 Certificate or being holder of securities Central depository will not be a member of issuer Central depository can act as a participant in the CDS Central depository can h old book-entry securities beneficially in its own behalf

Transfers under book-entry system u/s. 6


A transfer of book-entry securities from accounts or sub-accounts shall be made in manner as provided by rules provided under Central Depository Act Transfer shall be effected by making of an appropriate entry in the central depository register A transfer of book entry of book-entry securities in the manner set out in rules to Central Depository Act shall be a valid and effective transfer of title to the securities represented by the book-entry securities.

Effect of Book-entry Transfer on Transferee u/s. 7


The transferee shall be deemed to have agreed to have 1. Accepted the transfer subject to the terms and conditions on which the transferor held them immediately before such transfer; and 2. Agreed to becomes a member of the issuer and to be bound by the issuers charter, statute or memorandum and articles, where applicable

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Debenture u/s. 2(9): Includes a debenture issued by an issuer other than a company; Jumbo Certificates u/s. 2(15): Means one or more consolidated certificates of the securities of one kind or class issued by an issuer which are registered in the name of a central depository;

Liability of Central depository u/s. 8


1. Where the central depository has made, or has been allowed to make entries or handled or allowed to handle any book-entry securities according to the instructions of an account-holder or a participant, it shall not be liable for any loss, damages, compensation, costs and expense in tort12 or under any law or contract for any breach of trust 2. A central depository shall be fully discharged of its obligations to an account-holder and participant, upon the transfer or delivery of book-entry securities under the instructions of the account holder or participant 3. Except as provided in Central Depository Act, Central Depository shall not owe 13any fiduciary14 or any other obligations whatsoever to the sub-account holders in whose names sub-accounts are maintained in the CDS. 4. A central depository shall not be required to enquire whether or not a. An account-holder or a participant, has a right to handle any book-entry securities entered (his or sub-account) or to take any action in that regard; or b. The document evidencing title15 in respect of security deposited is genuine. 5. If any loss is caused to an account holder or a sub-account holder due to any negligent or wrongful act or omission of a central depository or any of its employees the central depository shall compensate such account holder or sub-account holder for such loss

Central Depository to supply information 16u/s. 9


For what purposes information can be obtained from Central depository u/s. 9 Information can be obtained by a company from Central Depository company (CDC), if a) For sending notices to any account-holder or sub-account holders of general meeting b) For sending any other notices or documents which are required to be sent by the issuer to holders of any security of the issuer; c) For the purpose of allowing to any account or sub-account holder to attend general meeting of any holders of securities of the issuer or to appoint proxies for this purpose; or d) For dispatching dividend or other warrants to any account and sub-account holder e) For dispatching to any account holders and sub-account holders any other payments or benefits paid by the issuer. What information can be obtained through central depository u/s. 9 a) Every issuer which is a company or body corporate and whose securities are entered in the CDS can request for a list of the names and other relevant details of the account-holders and sub-account holders, holding the book-entry securities together with details of the book-entry securities of such issuer entered in the accounts of such account holders or sub account holders. b) upon a request for information made by issuer to depository, A participant may supply to the central depository the list of names and other relevant details together with instructions that such information be forwarded to the issuer

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Tort: A civil wrong or wrongful act, whether intentional or accidental, from which injury occurs to another. Owe: Have an obligation to return, pay or repay for something received 14 Fiduciary: A person bound to act for anothers benefit, having a nature of trust. 15 Document evidencing title u/s. 2(10): Includes a. In the case of Non-Government Security, the share certificate, debenture certificate, modaraba certificate or any other certificate representing the security; and b. In the Case of Government security, such document or other evidence of title thereto as a central depository may require; 16 Information u/s. 2(13): Includes data recorded in a form which can be processed by equipment operating automatically in response to instructions given for a particular purpose;

c) All notices and other documents which an issuer is obliged or required to sent to its member or holder of any of its securities

Bar on rectification of Central Depository Register17 u/s. 11


Notwithstanding anything contained in section 152 of Companies Ordinance Power of Court to rectify registers the aggrieved party may apply to the court for relief and the court18 may award damages to the aggrieved party but shall not order rectification of the central depository register, if a) An account holder or a sub account holder did not consent to a transfer of any book-entry securities from, or to, his account or sub account; or b) The name of any account-holder or sub-account holder is fraudulently or without sufficient cause entered in, or omitted from, the central depository register.

Pledge of Book-Entry Securities u/s. 12


Pledge is something given as security for the performance of an act Book-entry securities shall be pledged in favor of an eligible pledgee (called the pledgee) to secure the payment of a debt or liability or performance of any obligation by any account holder or sub-account holder (called pledgor) through instructions given to a participant when the bookentry securities are blocked. In order to lend against electronic book entry securities, the pledgors can pledge the desired securities only in favor of eligible pledgee in CDS. Once pledged, the securities are no longer available for transfer/delivery to the pledgor until such time as Eligible pledgee releases them from the pledge. In short, the control over the pledged securities moves to eligible pledge until the securities are released. However any benefits still accrue to the pledgor. The CDS shall only allow the pledge to remove the block in such manner that they are available to the pledgor for the purpose of handling them. The CDS shall not allow the pledgor to handle the pledged book-entry securities unless the pledgee removes block from such pledged book-entry securities. A participant shall not create a pledge over any book-entry securities entered in any subaccounts maintained under his account without the authorization of the sub-account holder concerned. Pledge of book entry securities shall only made as provided in section 12 of CDC Act.

Powers of Pledgee of the Pledged Book-entry Securities u/s. 12


In addition to the powers available to Pledgee under the Contract Act, he shall have the following powers: Upon default, to transfer the pledged book-entry securities or any part thereof; and Any other power which may be granted to him in writing by the pledgor in relation to the pledged book-entry securities (Provided Central Depository shall not be concerned or affect by the exercise of any such power. Record u/s. 2(19): Includes in addition to a record in writing any photograph, disc, sound-track or other device in which sounds are embodied and any film, tape or other device in which visual images are embodied Access u/s. 2(1): In relation to the CDS maintained by a central depository, means the placing of information on that system or the retrieval of information there from. Authority u/s. 2(4): Means the Corporate law Authority constituted under section 11 of the Companies Ordinance 1984 (Omitted)
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Central Depository Register u/s. 2(7): Means a computerized electronic register maintained by a central depository in respect of book-entry securities 18 Court for the purposes of Section 11 of CDC Act: Mean the court having jurisdiction over the defendant.