central depository act, 1997

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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 country’s 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 1 and 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. 1 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 Working of Stock Exchange a) Before CDC Member Company Stock Exchange Transactions only through Members. b) After CDC Company Member Stock Exchange CDC Buyer/ Seller

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Page 1: Central Depository Act, 1997

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 country’s 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.

1 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

Working of Stock Exchange a) Before CDC

Member Company Stock Exchange

Transactions only through Members.

b) After CDC

Company

Member

Stock Exchange

CDC

Buyer/ Seller

Page 2: Central Depository Act, 1997

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 sub-

accounts 5under their respective accounts; and

• Handle6, on behalf of sub-account holders, the book-entry securities 7in the sub-

accounts 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

2 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;

Page 3: Central Depository Act, 1997

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

8 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

Page 4: Central Depository Act, 1997

• 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 issuer’s charter, statute or

memorandum and articles, where applicable

10 Debenture u/s. 2(9): Includes a debenture issued by an issuer other than a company;

11 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;

Page 5: Central Depository Act, 1997

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

12 Tort: A civil wrong or wrongful act, whether intentional or accidental, from which injury occurs to another.

13 Owe: Have an obligation to return, pay or repay for something received

14 Fiduciary: A person bound to act for another’s 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;

Page 6: Central Depository Act, 1997

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 book-

entry 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 sub-

accounts 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)

17 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.