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CENTRAL DEPOSITORY COMPANY OF PAKISTAN LIMITED - OVERVIEW

INSTITUTE OF BUSINESS & TECHNOLOGY (BIZTEK)

CENTRAL DEPOSITORY COMPANY OF


PAKISTAN LIMITED (CDC) – AN OVERVIEW

Prepared By
AHSEN KHURSHID – BEM / 863

Course Code: MKT – 606


EMBA

December 2008

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Central Depository Company Of Pakistan Limited - Overview

CONTENTS
1. INTRODUCTION

1.1. Introduction ------------------------------------------------------- 3

1.2. Purpose of Study ------------------------------------------------------- 3


1.3. Research Methodology -------------------------------------------------- 3

2. CAPITAL MARKETS

2.1. What is Capital Market --------------------------------------------------- 4


2.2. Stock Exchanges & their Role ----------------------------------------- 6
2.3. Stock Exchanges in Pakistan ------------------------------------------- 7
2.4. What is Security ------------------------------------------------------------ 7

3. CENTRAL DEPOSITORY COMPANY OF PAKISTAN LIMITED

3.1. Introduction ------------------------------------------------------------------ 10


3.2. Implementation of Central Depository System (CDS) ------------ 10
3.3. Features & Benefits of CDS --------------------------------------------- 13

4. CDS ELEMENTS & ACCOUNT STRUCTURE

4.1. Types of Elements --------------------------------------------------------- 19


4.2. Basic Operations of the Depository ------------------------------------ 24
4.3. CDS Transactions ---------------------------------------------------------- 27
4.4. Value Added Services ----------------------------------------------------- 57

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5. CONCLUSIONS & RECOMMENDATIONS

5.1. Conclusion ------------------------------------------------------------------- 59


5.2. Recommendations --------------------------------------------------------- 59

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CHAPTER 1:

Introduction:

1.1 – Introduction
1.2 - Purpose of Study
1.3 Research Methodology

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1.1 - Introduction:

The topic which I have chosen for my project is “Central Depository Company of
Pakistan Limited – An Overview”. Central Depository Company (CDC) is a very
renowned company of Pakistan and front line regulators of Capital market.

1.2 - Purpose of Study:

The reason for choosing said topic for my project is to bring awareness among the
public regarding the role & functions of Central Depository and educate them regarding
this unique nature of organization. We will discuss in detail the business & technical
areas of CDC in later chapters which will help the readers to understand the purpose of
existence of this Company.

1.3 - Research Methodology:

I have used the secondary data for my project based on the company’s internal reports,
procedures, Regulations and interviewed various senior officials for the information. I
have also applied my own experience in the company to further enlighten my project.

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CHAPTER 2:

Capital Markets:

2.1 – What is Capital Market


2.2 - Stock Exchanges & their Role
2.3 - Stock Exchanges in Pakistan
2.4 - What is Security

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2.1 - WHAT IS CAPITAL MARKET?


In order to understand this term, it is necessary to define the broad categories of
investments:

Forms of investment

Investments can be in various forms, some of these are: real estate, business
enterprises, precious metals and stones, valuable works of art, financial investments
etc. Some forms of investment may have a non-financial reward too, such as aesthetic
or emotional pleasure from works of art, jewellery, house property etc., but in most
cases we strive to at least retain the purchasing power of our savings (i.e. beat inflation)
and preferably come out ahead.

Financial Investments

As opposed to physical assets, financial investments are generally a right or an


entitlement to receive money (or streams of money). The Financial investments
themselves are in two broad categories – direct investments, that we hand over to an
obligor (the party that uses our money) and get back our entitlement (dividends,
interest, principal etc.) from the obligor (Examples are bank deposits and investments in
the National Savings Schemes) and market-based investments that we (normally but
not always) take over from some other investor; and when we want to encash our
investment, we find someone in the market to take over our investment from us.
(Examples are shares of companies, bonds issued by companies called TFCs in our
market) or tradable bonds issued by the government, etc. Financial investments are
normally represented by certificates, generally referred to as “securities”. However,
there is a trend to convert securities into a paperless (electronic) form, which is kept
track of, by a custodian such as the Central Depository Company (CDC). The essential
attribute of a market-based tradable investment is that one can sell the investment and
get cash for it.

Capital Market

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This is the market place where financial investments (normally of a long-term nature)
can be acquired or disposed off. The term is used in the plural to signify separate
market segments for various types of financial investments. The stock exchange (also
referred to as the stock market) is where shares and bonds issued by business entities
(companies) are traded. There is sub-category called the Money Market, which is
normally the market for acquiring or disposing off very short-term financial investments
but will include inter-bank placement of very short-term deposits and dealings in
currencies too.

Equity

In the first capacity, we participate in the ownership of the business and have an
equitable right (legally enforceable right) in the business, to the extent of our share in it.
Thus we become “equity” or “share” holder – both terms are synonymous in the
investment parlance. As an equity investor, we are entitled to distribution of profits and
in the event the business is liquidated at some stage, we are entitled to our share of the
net assets left over.

Debt

In this case we have a debt that we have to recover from the business in accordance
with an agreed repayment schedule and we are entitled to compensation for the use of
our money (interest, by whatever name called). The money we invest with government
and banks is also in the category of debt. From the point of view of the borrowing entity,
we are a creditor and we rank senior to equity in the event of liquidation i.e. creditors will
be paid off first and whatever is left over after that will go to the equity holders (owners).

2.2 - STOCK EXCHANGES AND THEIR ROLE

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What is Stock Exchange?

Section 2(m) of Securities & Exchange Ordinance 1969 defines a Stock Exchange as
under:

“Stock Exchange means any person who maintains or provides a market place or
facilities for bringing together buyers & sellers of securities or for otherwise performing
with respect to securities the functions commonly performed by a stock exchange, as
that term is generally understood, and includes such market place and facilities”

In view of the definition given above, a stock exchange simply means a market place for
the buying and selling of securities (equity / debt) of different companies listed on stock
exchange.

The purpose of a stock market is to facilitate the exchange of securities between buyers
& sellers, thus reducing the risk of investing. A stock market is nothing more than a
super-sophisticated farmers market linking buyers & sellers.

Role & Functions of Stock Exchange

A stock Exchange is responsible for vetting companies before they can be admitted to
have their shares traded on the stock market. It provides a market place for shares to
be bought and sold by bringing companies and investors together in one place through
the intermediation of brokers. It watches over the market constituents to ensure that the
market is working efficiently and fairly thereby acting in a policing role for the market. It
helps corporations and governmental units to raise capital. It provides an opportunity to
people to grow their savings by investing in the securities of different listed companies.
It reveals investors judgment about the potential earning capacity of corporations, thus
giving guidance to corporate managers. It generates employment & income also.

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Stock Exchange in Pakistan is regulated by the “Securities & Exchange Commission of


Pakistan (SECP)” which an autonomous body is being a part of the Ministry of Finance
and directly accountable to the Parliament.

2.3 - STOCK EXCHANGES IN PAKISTAN

There are three Stock Exchanges in Pakistan

 Karachi Stock Exchange (Guarantee) Limited


 Lahore Stock Exchange (Guarantee) Limited
 Islamabad Stock Exchange (Guarantee) Limited

Karachi Stock Exchange (KSE) is the largest stock exchange in Pakistan. The legal
status of these exchanges is that these are public limited companies, limited by
guarantee. The term guarantee means that members are liable for the liabilities of the
exchange to certain extent in case the exchange is wound up under the provisions of
applicable law. These are non-profit companies as their profit is not divisible among the
members. However, the same profit may be utilized for the betterment of the exchange.

2.4 - WHAT IS SECURITY?

Section 2(1) of the Securities & Exchange Ordinance 1969 defines Security as:

“Security includes

 Any stock, transferable share, scrip, Modaraba certificate, note, debenture


stock, participation term certificate bond, investment contract, and pre-
organization certificate or subscription and in general, any interest or
instrument commonly known as a “security” and, any certificate of deposit for,
certificate of interest or participation in, temporary or interim certificate for,

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receipt for, or any warrant or right to subscribe to or purchase, any of the


foregoing but does not include currency or any note, draft, bill of exchange or
banker’s acceptance or any note which has a maturity at the time of issuance
of not more than twelve months, exclusive of days of grace, or any renewal
thereof whose maturity is likewise limited;
 Any Government security as defined in the Securities Act, 1920; and
 Any Bonus entitlement voucher issued by the State Bank of Pakistan in
accordance with any scheme announced by the Commission;”

So in simple words, every legal document that creates a legal right against a company
or a person is a security. It may be a debt or equity security. Each share represents a
small stake in the equity of a company. You can buy large or small lots to match the
amount of money you want to invest. A company’s share price can rise or fall as a result
of its own performance or market conditions.

Once the shares are brought and transferred in your name your name will be entered in
the company’s share register, which will entitle you to receive all the benefits of share
ownership including the rights to receive dividends, to vote at the company’s general
meetings to receive the company’s reports. If you decide to sell your shares you will
need to deliver share certificates to the broker in time for the transaction to be
completed.

Companies issue shares to raise money from investors. This money is used for the
development and growth of businesses of companies. A Company can issue different
types of securities such as ordinary shares, preference shares, shares without voting
rights or any other shares as are permissible under the law. These give shareholders a
stake in the company’s equity as well as a share in its profits, in the form of dividends,
and a voting right at general meetings of shareholders.

With the introduction of the Central Depository System (CDS), an investor can have
shares in paper form or can own shares in an electronic book- entry form at the Central
Depository Company (CDC) which will be discussed in detail in coming chapter.

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CHAPTER 3:

Central Depository Company of Pakistan Limited:

3.1 – Introduction
3.2 - Implementation of Central Depository System (CDS)
3.3 – Features & Benefits of CDS

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3.1 - CENTRAL DEPOSITORY COMPANY OF PAKISTAN LIMITED (CDC)

Introduction

Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 and
subsequently became operational in 1997 to manage and operate the Central
Depository System (CDS). CDS is an electronic book entry system to record and
transfer securities. Electronic book entry means that the securities do not physically
change hands and the transfer from one client account to another takes place
electronically. An IBM led consortium along with the management of the company
implemented CDS in Pakistan.

The aim of CDC is to operate as a central securities depository on behalf of the financial
services industry so as to contribute to the country's ability to support an effective
capital market system which will attract institutional and retail level investors from
Pakistan and abroad.

Mission Statement

CDC is committed to provide secured and dependable services to the capital and
financial markets in an efficient and cost-effective manner comparable to best
international practices. The Company’s aim is to be the centre of excellence by
continuously employing the state-of-the-art technology available and best talent in the
country while maintaining good corporate governance in its working. It is committed to
provide its employees an environment of professional and personal growth.

Vision

To be a leading national institution providing quality services to capital and financial


markets stimulating economic growth.

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3.2 - Implementation of Central Depository System

With exponential growth in the Pakistani Capital Market during the last decade resulting
in manifold increase in trading volumes, the physical handling of paper certificates not
only became laborious but also time consuming. The manual system was no longer
feasible. It was in this perspective that CDC was incorporated to implement and operate
the CDS.

Experts of the renowned international firm Price Waterhouse conducted a study in 1993
to develop a conceptual framework for the depository. The study was sponsored by the
United States Agency for International Development (USAID) and their report laid the
foundation of depository design.

In November 1994, the Board of CDC awarded a turnkey contract to the IBM
consortium for the implementation of the system in Pakistan. The IBM consortium
proposed a comprehensive Master Implementation Plan (MIP) to the CDC board after a
detailed analysis of the following.

 National requirements
 Company and Banking laws
 Regulations & Procedures
 Financial and organizational aspects of the project

In April 1995, MIP was approved by the CDC board.

Thereafter, user groups performed, training sessions were conducted to introduce the
system to the clients and the necessary infrastructure was developed. The
infrastructural development included testing and development of software, hiring and
training of personnel and establishment of CDC offices. The CDC offices at Lahore and
Islamabad were connected to the head office through VSAT link leading to the
development of a geographically neutral depository.

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Problems Faced by the Capital Markets before CDS

Since the last decade, the capital markets of Pakistan have witnessed a substantial
growth leading to a manifold increase in the trading volume. The custody and safe
keeping of physical certificates required maintenance of huge vaults by the individuals
and institutions and the physical settlement of certificates was no longer feasible.
Moreover, the manual system was also plagued by lengthy delays, risks of damage,
forgeries and considerable time and capital investment.

Following is a list of the major problems faced by the Members of the Stock Exchange,
Investors, Issuers of Securities and others:

a) Increased volume of book keeping and paper work.


b) Problems in settlement due to increased volume.
c) Maintenance of huge vaults for safe keeping of certificates.
d) Long and cumbersome share transfer procedure taking up to 45 days.
e) Payment of stamp duty on share transfers which ranged from 0.1% to 1.5% of
the face value.
f) In case of new issues the issuers would take more than two months for the
dispatch of certificates to the successful applicants and for the subsequent
preparation and verification of transfer deeds.
g) Risks of damaged, lost, forged and duplicate certificates.
h) Lengthy and tedious procedure involved in pledging of physical securities.
i) Capital and time investment required for issue and dispatch of share certificates,
cash dividend, bonus and right issues.
j) Issuance of duplicate certificates.
k) Activities carried out for share transfer during book closure:

 Signature verification
 Checking correct value of transfer stamps

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 Verifying genuineness of certificates


 Signature of Director for confirmation of transfer

The answer to all these questions was to set up an electronic book entry system in
Pakistan. This led to the establishment of Central Depository Company of Pakistan
Limited developed to manage and operate the Central Depository System (CDS).

3.3 - Features & Benefits of Electronic Settlement through CDS

Following are some of the benefits of electronic settlement of securities through


CDS:

 Reduced workload due to paperless settlement.


 Reduced manpower and requirements.
 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 bonus, rights and new issues.
 Substantial reduction of paperwork during book closure.
 Convenient pledging of securities
 Substantial reduction in time & capital investments.

% AGE OF
SR.
INSTITUTION SHARE
#
HOLDING
1.
The Karachi Stock Exchange (Guarantee) Ltd. 39.8%

2.
Lahore Stock Exchange (Guarantee) Ltd. 10.0%

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3.
Citicorp Overseas Investment Corporation 10.0%

4.
MCB Bank Limited 10.0%

5.
Habib Bank Limited 6.35%

6.
National Investment Trust Limited 6.35%

7.
Investment Corporation of Pakistan 5.0%

8.
NIB Bank Limited 5.0%

9.
International Finance Corporation 5.0%

1
0. Islamabad Stock Exchange (Guarantee) Ltd. 2.50%

Total

Security Measures

The Central Depository Company of Pakistan Limited takes security of Central


Depository System extremely seriously and is committed to provide a complete and
secure system to its clients so as to ensure smoothe and risk free settlement of
security transaction. However, it is important to understand that most systems do not
cater for all security features from day one and such features evolve with the system
itself. Nevertheless, we are constantly looking into the possibilities to further enhance
the security of the system and are committed to make CDS an exemplary system in
this regard. Following are some of the features implemented so far:

1) CDS IDs and Passwords: All CDS elements are allocated unique IDs and
Passwords through which to enter the system.

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2) Dial-in IDs and Passwords: This feature is an additional layer of security for
those clients who are connected to us through telephone lines.

3) Terminal Authentication: CDS elements can only get connected to us through


their designated terminals.

4) Two factor Authentication - RSA & VPN

Contingency Site

CDC provides the backbone for smooth and efficient settlement operations of the
Pakistani capital market. Almost all of the total settlement of the stock exchanges is
now done through the CDS. By recognizing the computer facility being the core
resource for the operation of CDS, we have critically evaluated potential risks of CDS
becoming unavailable to the users and accordingly developed a contingency site
office in Karachi. The site is installed with redundant hardware; software and
requisite network to provide cost effective connectivity and support to all CDS users.
A reliable data communication link is deployed to connect the remote site with the
primary site and transmit the latest CDS status to the remote site at the shortest
possible intervals. This arrangement is an additional to daily tape back ups made to
keep record of the CDS status and will ensure convenience, safety, reliability and
efficiency.

Insurance Coverage

In order to protect itself from any loss arising due to claim lodged by any CDS
element, the Central Depository Company of Pakistan Limited has obtained
insurance coverage against the following risks:

1. Employees' infidelity
2. Computer Crime

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3. Professional Liability

Insurance coverage has been acquired from a consortium of New Jubilee Insurance
Company Limited, EFU General Insurance Company Limited, Adamjee Insurance
Company Limited and PICIC Insurance Limited for Rs. 1 billion.

Since commencement of business the sum insured was Rs. 50 million, however it
was increased to Rs. 300 million on December 30, 2005. The coverage was
increased again on November 01, 2006 and now stands at Rs. 1 billion.

Services Offered

Following is a brief description of the services provided by us:

Customer Support Help Desk

It is essential to understand the importance of effective and timely customer support


in the success of a service providing organization. We believe that effective and
timely customer support is the right of our clients and the key to our success.

Since inception, CDC has been providing timely and effective customer support to
CDS elements through dedicated Customer Support Staff regarding the use of CDS
software and the workings of Central Depository Company of Pakistan Limited. The
system works as an interface between CDC and its clients and is also being used as
a tool to educate the clients.

Highly trained professionals with complete and lucid knowledge of the CDS can be
contacted in Karachi, Lahore and Islamabad through toll free 0800-CDCPL (23275)
during operating hours. It is a completely automated system in which queries are
entered in Complaint Management System by our staff and are either satisfied on
receipt or referred to the concerned department electronically for resolution. This

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electronic transfer of queries reduces considerable paper work and processing time.
To ensure early response to every problem, any query pending over its allocated
time is reported to the senior management.

Just like Central Depository System, Customer Support Help Desk is also
geographically neutral. This ensures consistent standard of services throughout the
country.

Account Statement Verification

An Account Holder / Participant can confirm the balance of the accounts maintained
by them from Customer Support Services. In this regard, the Account Holders /
Participants are required to provide a duly signed Account Balance Statement
obtained from their terminal. Upon receipt of the statement, the same is generated
from CDC's terminal and handed over to the requestor after due verification.

Such requests are also entertained for sub account holders. However, they are
required to provide a request letter and present their original NIC to obtain the report.
This measure has increased the confidence level of investors substantially.

Global Terminal Facility

All CDS elements are required to access CDS through their authenticated terminals
only. For the benefit of its clients, CDC has provided computer terminals at its
premises to be operated by clients, (all CDS elements) in case of any technical
problem at their end. With this facility, clients can directly log on to their accounts
from CDC premises and complete their transactions.

Clients are required to bring a request letter duly signed by the authorized signatory
(ies) of the account to avail this facility.

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CDC E-mail Facility

CDC E-mail Facility provides CDC the capability to send encrypted e-mails with
digital signatures to its Elements in Karachi, Lahore and Islamabad. With this facility
in place, CDC can correspond to 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.

Training

In order to familiarize our clients with the concept & workings of the Central
Depository System, CDC provides training to its clients on as needed basis. In a full-
day training session, clients are walked through the Central Depository System
enabling them to have a comprehensive understanding of the system. CDC does not
charge clients for training and the clients can request as many session as they
desire.

In addition to the above, various other services like password reset, change in
registration details of Account holders / Participants, change in user option, change
of authorized signatories and installation / reinstallation / additional connection etc.
are provided to the clients.

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CHAPTER 4:

CDS Elements & Account Structure:

4.1 – Types of Elements


4.2 – Basic Operations of the Depository
4.3 – CDS Transactions
4.4 - Value Added Services

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CDS Elements & Account Structure

4.1 - TYPES OF ELEMENTS

Issuers/Registrars/Transfer Agents

The companies or issuers of capital whose securities are converted from physical to
electronic book entry securities play a significant role in the Central Depository
System (CDS). To induct a security into CDS a security must first be declared as an
eligible security (by fulfilling the admission criteria set out in CDCPL Regulations) for
the purposes of CDS. Once a security is declared eligible for the purposes of CDS,
the issuer is provided with the necessary software to connect to the CDS for
verification and dematerialization of the said security and then only it can be inducted
into CDS (made live in CDS).

The securities' induction is done in two phases:

 Eligibility Process
 Induction of an Eligible security

Eligibility Criteria:-

As per Central Depository Company of Pakistan Limited Regulations (CDCPLR), the


Central Depository Company of Pakistan Limited (CDC) can declare any security
(listed or unlisted) as an eligible security if it is satisfied that:

 The issuer has the data processing capacity and operational capability.
 The securities are valid, legal and transferable by book entry or otherwise.
 The issuer has acquired or has the capability to acquire the capacity to
communicate reliably with CDC in accordance with the procedures.

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 The issuer employs or has the capability to employ personnel familiar with the
regulations and procedures to carry out its obligations.

If the issuer is a company, it is not in receivership, court appointed manager ship or


liquidation or if the issuer is a body corporate, it is not under any equivalent form of
administration.

The declaration of the Securities as Eligible Securities would be in the public interest.

Induction Process:-

Following is the procedure for induction of securities into the CDS:

A) Notice of Eligibility

A notice of declaration of Eligible Securities is given to the following, at least thirty


days before the date of eligibility of the security or any earlier date as agreed
between CDC and an Issuer of the security:

 Issuer of the Security


 Relevant Stock Exchange(s) - In case of a listed security
 Securities & Exchange Commission of Pakistan

B) After the notice, a security induction package containing necessary documents is


sent to the Issuer. The issuers are required to return these documents at least two
weeks before the preferable live date of the security in CDS to remove any mistakes
or ambiguities on time.

LEGAL AND COMPLIANCE

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The Central Depository Company of Pakistan Limited was formed under Central
Depositories Act 1997 which was passed on June 10, 1997. Subsequently, Central
Depository Company of Pakistan Limited Regulations were developed and approved
by the Securities and Exchange Commission of Pakistan (formally known as
Corporate Law Authority).

The establishment of a Central Depository System required changes in the legal


framework. Before Central Depositories Act, 1997 registered owner of securities
were recognized as beneficial owner by law. Therefore, all the rights of the security
holder (benefits & voting rights etc.) were vested with the registered owner which was
not suitable to the depository structure. The Central Depositories Act, 1997 made it
possible to recognize the beneficial owner of securities on the basis of holdings in
depository accounts. In the current depository structure, all securities are registered
in the name of Central Depository Company of Pakistan Limited in the capacity of a
nominee, the account holders are considered to be the beneficial owners of
securities on the basis of their holdings in CDS accounts.

Relevant Legislation:

 Central Depositories Act, 1997


 Central Depository Company of Pakistan Limited Regulation
 Companies Ordinance, 1984 and
 Zakat & Ushr Ordinance, 1980

CDS Network

CDC's network spans across multiple 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

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important concerns for CDC. Confidentiality, Integrity and Authenticity is 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’s public
switched telecommunication network. Sufficient numbers of simultaneous dial-in lines
at various sites are maintained to allow first call connection. We also have more
reliable and high bandwidth metro fiber connectivity for the external clients. Currently
this facility is being offered to the Karachi based external clients only.

In line with the International standards, CDC also maintains state of the art Disaster
Recovery (DR) and Business Continuity by maintaining a complete DR site which
enables the company to retain all of its critical services with zero data loss from the
DR site in case of a site level disaster.

CDS Software

CDS is a menu-driven client/server application system. The Graphical User Interface


based proprietary client runs on a Microsoft Windows based PC - the client neither
stores users data nor executes the application logic: 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.

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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.

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4.2 - BASIC OPERATIONS OF THE DEPOSITORY


The Central Depository performs the following basic operations:

• Deposit of existing eligible securities into the Central Depository System


(CDS).

• Withdrawal of securities in the form of physical from the CDS.

• Credit of new issues/offer for sales/right issues into the CDS.

• Free Delivery — book entry deliveries without any associated cash


movement.

• Pledge

• Pledge — creating a pledge on securities in favour of an


Eligible Pledgee.

• Pledge release — the pledge can only be released by the


Eligible Pledgee.

• Pledge call — transaction is used to move securities under


pledge for the purpose of enforcement of pledge.

• Corporate Action

• Providing various reports to Issuer/Transfer agent


(R/TA) in accordance with Central Depository Act 1997 and
Central Depository Company of Pakistan Limited
Regulations for:

• sending notices of general meetings or any


other notices

• allowing attendance in general meetings or to


appoint proxies

• dispatching dividend or other warrants

• dispatching any other payments or benefits

• dispatching formal offers for subscription

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• Direct credit of bonus shares

• Merger / Demerger of Eligible Securities

• Split / Consolidation of the face value of Eligible


Securities

IMMOBILISATION
The CDC is an ‘immobilised’ type of depository. Account Holders do not hold
Registered Form Securities certificates as evidence of their ownership of
securities. Registered Form Securities Certificates deposited in CDC are
cancelled by the Issuer/Transfer agent (R/TA).

ACCOUNT STRUCTURE
The Central Depository System maintains the following types of accounts :
• Main Account — Each account holder in the system is allocated a
main account by virtue of being an account holder in the CDS. This
account is mainly used as a transit account for deliveries received/sent
by the account holder. The account holders are required to transfer
security balances from Main account to respective account as soon as
possible.
• House Account — used for keeping securities beneficially owned by
the account holder concerned.
• Sub-accounts (Client Accounts) — used for keeping securities
belonging individually to each of those clients of a Participant who
require their securities to be kept in a Sub Account.
• Investor Accounts — Investor accounts are accounts which can be
opened and maintained by CDC Investor Account Services.

DEPOSITORY OPERATIONS AND PARTICIPANTS


The table below shows the different types of elements in the Depository and
their relevant activities in CDS. Detailed procedures for each of the

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transactions shown in the table are given in the manual in the chapter dealing
with Direct Transactions.

Free
Pledge
Deposits Withdrawals transfer Pledge
release/ call
s
Account Holder/Participant
Stock Brokers X X X X
Bank/Financial
X X X X
Institutions
Institutional Investors X X X X
Others
Eligible Pledgee X
Registrar/Transfer
X X
Agent

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4.3 - CDS TRANSACTIONS

DEPOSIT OF ELIGIBLE SECURITIES INTO THE CDS

Securities of Issuers which have been declared as eligible securities


are brought into the system through this functionality. The deposit
request transaction can be initiated by an Account Holder/Participant
either on behalf of his client or on his own behalf and will result in the
cancellation of the security certificate in the name of the current owner
and an increase in the CDC’s nominee holding in the
Members’/Security Holders’ Register of the Issuer.

All categories of Account Holders/Participants, i.e., stock brokers;


banks/financial institution, and institutional investors will be able to
deposit security certificates.

Detailed Procedures

The detailed procedures for the deposit of security certificates into the
Central Depository System are as follows:

1. Account holder/Participant will fill out a four copies of Securities Deposit


form.
2. Although distinctive numbers of the securities being deposited are entered
on the Securities Deposit Form, these numbers are not entered into the
Central Depository System at any stage. The objective of putting them on
the form is to provide an audit trail back to the original securities should
this be found necessary at a later stage.

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3. Relevant security certificates and the signed transfer deeds accompanying


them will be attached to the Securities Deposit Form. The Account
Holder/Participant will enter the name of the CDC as the transferee.
4. Account Holder/Participant will then key in the data to the system using
the form as the data entry document.
5. The Issuer/Transfer agent (R/TA) will mark the appropriate spaces in the
Securities Deposit Form, indicating against each security certificate
whether it has been accepted or rejected. In case of rejection, the
Issuer/Transfer agent (R/TA) will put the appropriate rejection code in the
‘Rejected’ column.
6. Partial acceptance of some of the certificates on a Securities Deposit
Form will be allowed by the system.
7. Cancellation of a deposit request will be allowed until such time the
transaction is not saved by Issuer/Transfer agent (R/TA).
8. While CDC has authorised its Account Holders/Participants to sign
transfer deeds as transferee on behalf of CDC under Regulation 8.1.1.
However, if an Account Holder/Participant wish to authorise any person to
sign the transfer deed on his behalf then he may contact the concerned
Issuer/Transfer agent (R/TA) as to what would satisfy his requirement.

Note: During the Book Closure period for a Security, the System
will not allow Account Holders/Participants to process and post
Deposit Request transactions for that particular Security.

WITHDRAWAL OF ELIGIBLE SECURITIES FROM THE CDS


The withdrawal functionality enables Account Holders/Participants to
withdraw securities from the Central Depository System in the form of
physical certificates. This functionality is provided to cater for Account
Holders/Sub-Account Holders who wish to withdraw any securities from
CDS. Securities Withdrawal Form will be completed by an Account
Holder/Participant either on behalf of his client or on his own behalf and

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will ultimately result in the issuance of a fresh security certificates in the


name of the transferee in the form and a decrease in the CDC’s
nominee holding in the Members’/Security Holders’ Register of the
Issuer.

Detailed Procedures

The withdrawal transaction will be initiated by an investor requesting an


Account Holder/Participant or an Account Holder/Participant to
withdraw securities on his own behalf. The detailed procedures will be
as follows:

1. Account Holder/Participant will prepare/receive four copies of


Securities Withdrawal Form The Issuer/Transfer agent (R/TA) will
verify that the Securities Withdrawal Form is properly completed and
will then execute the Withdrawal Approval transaction. The system
provides for a two-stage confirmation process i.e., ‘update’ and
‘post’. This is a control feature, which the Issuer/Transfer agent
(R/TA) can use if he wants to approve withdrawal requests in one
step and issue relevant security certificates in another.

2. Partial approvals of withdrawal transactions by R/TA will not be


allowed.

Note: During the Book Closure period of a Security, the System


will not allow Account Holders / Participants to process and
post Withdrawal Request transactions of that particular
Security.

FREE DELIVERIES
The term ‘free deliveries’ applies to all book-entry deliveries of
securities, which take place without any corresponding movement of
cash on the system.

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An Account Holder/Participant is only allowed to deliver securities out of


his Account Family. The security controls built into the system do not
allow an Account Holder/Participant access to any Account Family
other than his own. Participants are required to deliver securities out of
sub-accounts only after obtaining written instructions from their
respective clients.
This category of transaction also covers book-entry deliveries between
an Account Holder/Participant’s main account, house account and the
sub-accounts maintained on the system.
The Free Delivery transaction does not require separate initiation and
confirmation stage. The transaction is completed when an Account
Holder/Participant enters data into the system asking for securities to
be delivered from his account to another account. The Account Activity
Report produced by the system on request provides the necessary
documentation and audit trail of the transaction. For the sake of their
own documentation, Account Holder/Participants can get their clients
to fill out standard forms when giving instructions to the Account
Holder/Participant.
If the recipient of the securities being delivered does not wish to accept
them, he can execute another free delivery to reverse the impact of the
original transaction.
Once an Account Holder/Participant has delivered securities from his
account to another Account Holder/Participant’s account, the
transaction can only be reversed by the recipient delivering them back.

Free deliveries are executed in the CDS by means of the four following
options:

• Intra Account Movement

• Bulk Intra Account Movement

• Inter Participant Free Delivery

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• Bulk Inter Participant Free Delivery

Each of the above options is described in detail in the paragraphs that


follow.

Intra Account Movement

The Central Depository System provides the facility to Account


Holders/Participants to transfer securities between accounts within their
control. Securities delivered to an Account Holder/Participant from
another Account Holder/Participant are always delivered to his Main
Account. It is the Participant’s responsibility thereafter to transfer such
deliveries, to the respective account under his umbrella using the Intra
Account Movement transaction. Similarly, before he can deliver
securities to the accounts of other Account Holder/Participants, the
Account Holder/Participant must transfer securities from the respective
house, sub-account under his Account Family to his Main Account
using the same transaction. For transfer from Sub-Accounts/clients
written instructions of the Sub-Account Holder/clients is required. It
must be borne in mind that the Intra Account Movement covers only
free deliveries, i.e., those not involving a corresponding movement of
cash on the system.
While making intra account movements to handle clients’ securities the
Account Holder/Participant should strictly comply with the provisions of
Section 24 of the Central Depositories Act, 1997.

Bulk Intra Account Movement

The Bulk Intra Account Movement transaction has been provided in the
CDS to cater for the need for posting or deleting a large number of
previously entered but un-posted Intra Account Movement transactions,
instead of having to post each transaction individually. It is purely a
device for saving time and effort.

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Inter Participant Free Delivery

This transaction is used to make Free Deliveries of securities between


one Account Holder/Participant and another. As stated above Free
Deliveries are transfers of securities between one account and another,
which do not involve corresponding cash movements on the system.
Inter Participant Free Deliveries can only be made through an Account
Holder/Participant’s Main Account. In other words, if an Account
Holder/Participant has to transfer securities held in one of his client’s
accounts to the account of another Account Holder/Participant, he first
has to make an intra-account Free Delivery of those securities into his
Main Account and then transfer them.
In case where the Account Holder/Participant wants to make free
delivery transaction in favour of an Investor Account. He is required to
specify Investor Account Services Id and the relevant account number.

Bulk Inter Participant Free Delivery

The bulk inter Participant Free Delivery transaction has been provided
in the CDS to cater for the need for posting or deleting a large number
of previously entered but un-posted Inter Participant Free Delivery
transactions, instead of having to post each transaction individually. It
is purely a device for saving time and effort.

PLACING SECURITIES UNDER PLEDGE


An Account Holder or a Participant, acting either on his own behalf or
on behalf of his client, can place securities under pledge to an Eligible
Pledgee. Prior written authorization from sub-Account Holders/clients is
required in case of pledge through sub-account. Placing securities
under pledge results in the securities being flagged as no longer
available for handling until such time as they are released from pledge.

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Detailed Procedures

The detailed procedures for placing securities under pledge is as


follows:

1.An Account Holder or a Participant, either on behalf of a client or on


his own behalf, fills out three copies of Pledge Form

2. The Eligible Pledgee creates a new group for the pledge using the
Open Group transaction

3. The Account Holder/Participant enters the pledge transaction into


the system by using the Pledge form as the basis for data entry.

4. The Account Holder/Participant sends one copy of the Pledge form,


duly signed by the Account Holder/Participant and his client (in case
securities are being pledged on behalf of a client) under whose
instructions the securities are being pledged to the Eligible Pledgee.

5. The Eligible Pledgee retains the signed form mentioned above for its
own record.

6. One copy of the Pledge Form is retained by the Account


Holder/Participant and the third copy is given to the client (in case
securities are being pledged on behalf of a client).

7. Reversals of Pledge transactions are not allowed. The only way to


reverse a Pledge transaction is to put through a Pledge Release
Transaction, which is described below.

8. The Eligible Pledgee is to obtain printed reports from the CDS


showing the position of securities pledged to him by various Account
Holder/Participants of the Depository and/or their clients.

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9. In the case of Pledgee Banks, the Eligible Pledgee(s) are the


designated branches of that particular bank, which have been given
Pledgee status by the CDC.

RELEASING SECURITIES FROM PLEDGE


Securities, which have been placed under Pledge, can be released only
by Eligible Pledgee. It is not part of the CDC’s functions to verify that
instructions received from the Eligible Pledgee, either for the release or
for the call of pledged securities, are authentic. In other words, if an
Eligible Pledgee gives instructions to release certain pledged securities,
the CDC will not verify that the obligation of the pledgor has been
discharged or that alternate collateral has been furnished.
As soon as securities have been released from pledge they will be
available to the Pledgor for handling.

PLEDGE CALL
Securities, which have been pledged can be transferred to any other
account at any time by the Eligible Pledgee or transferred to any other
account in CDC at any time by the Eligible Pledgee for handling under
his instruction. The CDC does not require the Eligible Pledgee to
establish that the Pledgee has defaulted or otherwise created a
condition whereby a pledged call may be made.

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CORPORATE ACTIONS

For all purposes and in particular for the purpose of Corporate Actions,
the records of the Depository will, in fact be considered an extension of
the Members’/Securities Holders’ Register maintained by the
Issuer/Transfer agent (R/TA). In other words the details of the beneficial
owners of the CDC’s nominee holding will be obtained from the records
of the Depository and shareholder entitlements will be determined, as
far as the securities held in the Depository are concerned, on the basis
of the Beneficial Owners Report provided by the CDC.

Detailed procedures by means of which the Depository will handle the


various corporate actions involved are given in the following
paragraphs.

BOOK CLOSURE
A book closure period is a period during which the Issuer/Transfer
agent (R/TA) does not accept for processing any certificates for the
purpose of recording their transfer of ownership. Traditionally, the book
closure period is a device whereby, in the absence of depository
systems, the Issuer/Transfer agent (R/TA) were given adequate time to
process the large numbers of security transfers which were invariably
submitted before the cut-off date for carrying out corporate actions.

In this regard, issuer shall notify to the CDC as per standard format of
any Book Closure period fixed by them, specifying in the notice the
Book Closure start date and the Book Closure end date.

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The Depository is required to provide to the Issuer/Transfer agent


(R/TA) a detailed breakdown of the balance of securities standing to the
credit of the CDC nominee holding in the Members’/Securities Holders’
Register maintained by the Issuer/Transfer agent (R/TA), in order to
enable them to distribute the benefits accruing as a result of the
corporate actions to each beneficial owners according to his entitlement
and/or to forward such communication to each beneficial owners as is
required under Corporate Laws. In addition to this, the Depository does
not allow the initiation of fresh Deposit and Withdrawal requests during
a book closure period to make sure that the balance of securities in the
CDC’s folio in the Members’/Securities Holders’ Register remains
frozen during the book closure period. However, Deposit and
Withdrawal requests which are pending at the end of
Issuer/Transfer agent (R/TA) as at the first day of book closure are
processed during the book closure period in accordance with the
provisions of the Central Depository Company of Pakistan
Regulations, i.e. within five(5) days from the receipt of the
Registerable Transfer documents.

Notices of Meetings or other Notices


Where the Notice of General Meetings (GM) or any other Notice is to be
given by the Issuer to its shareholders in accordance with the
requirements of Corporate Laws, such Issuer shall notify to the CDC at
least 7 business days before sending the statutory Notice to the
shareholder.

The notice to CDC shall specify:


1. The date on which statutory Notice is to be sent, and

2. Details of securities to which statutory Notice relates.

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On the 1st Business Day before the date on which the notice to be sent
to shareholders, CDC shall provide the Beneficial Owner Report (titled
“List of Beneficial Owners - LOBO”) via download facility which
contains the Registration Details of each Holder within the CDS as of
the end of day on the 5th Business Day before the Notice of G.M. or
other Notices to be sent to the shareholders.

On the basis of above “Beneficial Owners Report”, the Issuer shall


circulate the Notice of G.M or any other Notice to its shareholders.

Attendance of General Meeting and/or determination of Dividend


Entitlement and/or Redemption
Issuers to distribute dividend/redemption to Account Holders and Sub-
Account Holders on the basis of their Holding Balances and
Registration Details provided in the Central Depository Register
(LOBO/SBD) as of the end of day preceding the commencement of
Book Closure Period (Relevant Time). CDC shall provide the above
details to the Issuers/Transfer agent (R/TA) in accordance with CDC
Regulation No. 12.3.5.

On the close of 5th Business Day after commencement of Book Closure


period (relevant time), CDC shall provide the Beneficial Owners
Report (titled ‘Share Book Details’ -SBD) and the gross entitlement
list to the Issuer/Transfer agent (R/TA) via download facility
The above Beneficial Owners Report and gross entitlement list will have
the adjustments related to valid Change Registration Details Report as
well as Deposit Approval Transactions & Withdrawal Approval
Transactions which were existing in the Deposit Pending Position and
Withdrawal Pending Position as on the Relevant Time.

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Bonus Shares
When the Board of Directors of an issuer of Book Entry Securities
recommends bonus issue on such Book Entry Securities, the issuer will
forthwith but in any event before book closure date notify the CDC:

a) Date on which allotment of such bonus shares will be made.


b) Rate (%) of bonus issue recommended by the Board of
Directors.

On the close of 5th Business Day after commencement of Book Closure


period (relevant time), CDC shall provide the Beneficial Owners
Report (titled ‘Share Book Details’ -SBD) and the gross Entitlement
List including draft notification via download facility:

The above Beneficial Owners Report and the Entitlement List will have
the adjustments related to valid Change Registration Details Report as
well as Deposit Approval Transactions & Withdrawal Approval
Transactions which were existing in the Deposit Pending Position and
Withdrawal Pending Position as on the Relevant Time.
Subsequent to Board of Directors approval for the allotment of bonus
shares, issuer to:

a) allot and register the integer portion of the bonus issue, as


provided in the entitlement list, in the name of the Central
Depository Company of Pakistan Limited;

b) dispose of the fractional entitlement of account holders and


sub-account holders as per entitlement list in accordance
with the relevant laws; and

c) distribute the proceeds of fractional entitlement in


accordance with relevant Rules & Regulations.

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The issuer shall forthwith notify the CDC once the bonus shares have
been allotted and registered in the name of CDC. Such notification
should also include the relevant information in respect of, if there is any
variation in the date of allotment of bonus shares and/or in the rate (%)
of the bonus shares allotted, from the previous one which had been
communicated to CDC.

Upon receipt of the above notification the CDC shall credit the integer
bonus entitlement to the respective Accounts and Sub Accounts
immediately after the end of Business Day on which such notice has
been received.

New Issues
The deposit of new issues, declared eligible for the Depository, will be
initiated when the Issuer/Transfer Agent (R/TA) notifies the CDC of the
New Issue and the relevant schedule.

Detailed Procedure
The detailed procedures involved in the transaction are as follows:

1. Upon completion of formalities of CDC Admission by the Issuer


as per CDC Regulations, CDC will setup the new security in the Central
Depository System.

2. Upon intimation by Issuer / Registrar/Transfer Agent (R/TA),


CDC will define New Issue into the CDS. The Issuer / R/TA, after the
completion of the balloting procedures, will prepare lists of successful
applicants opted to have their securities directly to be credited into the CDS
according to the information available in the application forms (if applicable).
The Issuer / R/TA, using a suitable word processing or text editing program,

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will prepare comma-delimited text file containing the data of successful


applicants.

3. The Issuer / R/TA will execute Initial Upload process in New


Issue Module in the Central Depository System (CDS) to upload the details
of successful applicants opted for directly credit of securities into the CDS.
The Issuer / R/TA will obtain the List of Successful applicants and First
Upload Error List (if any) in order to verify the following Registration Details
with application forms submitted by the applicants at the time of
subscription:

• Particpant ID (both for Individual & Corporate Body)

• Particpant Name (both for Individual & Corporate Body)

• Account Id, type & title (both for Individual & Corporate
Body)

• NIC No. /Passport details [for non-resident


Pakistani/foreigner] (for Individual only)

• Joint Holder Name(s) & NIC(s) (for Individual only)

4. The Issuer / R/TA will correct/remove the errors appeared in the


above-mentioned error list in the text file and then repeat the Upload
process. This process will be repeated until all errors are corrected or
records with errors are removed from the list of successful applicants.

5. After successful initial upload (with zero error), Issuer / R/TA will
initiate final upload Option in New Issue Module in the Central Depository
System (CDS).

6. Issuer will provide the confirmation letter for credit of securities in


book entry form to CDC.

7. Upon receipt of above mentioned letter, CDC will verify contents


& authorised signature(s) & also define credit date into the CDS.

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8. During the EoD process, the system will automatically credit the
securities present in the upload to the respective accounts in the CDS.

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Offer for Sale

In accordance with CDC Regulation No. 8.B. read with section 14 of the Central
Depositories Act, 1997, the following procedures are prepared in order to handle
“Offer for Sale” transactions through the Central Depository System:

Separate Procedures will be applicable to:

I. Securities already live on CDS and where offerror holds securities in physical
form at the time of offer.
II. Securities not live on CDS at the time of “Offer for Sale” transactions.

I: Detailed Procedure for Securities Live on CDS.

2. Issuer / Registrar/Transfer Agent (R/TA) to provide notice to CDC. CDC


will define New Issue to execute “Offer for Sale”.

3. The Issuer /R/TA, after the completion of the balloting procedures, will
prepare lists of successful applicants. Separate lists to be prepared for
applicants who would have opted to have their securities deposited in the
CDC, on the basis of information available in the application forms.

3. The Issuer / R/TA, after the completion of the balloting procedures, will
prepare lists of successful applicants opted to have their securities directly
to be credited into the CDS according to the information available in the
application. The Issuer / R/TA, using a suitable word processing or text
editing program, will prepare comma-delimited text file containing the data
of successful applicants.

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4. The Issuer / R/TA will execute Initial Upload process in New Issue
Module in the Central Depository System (CDS) to upload the details of
successful applicants opted for directly credit of securities into the CDS.
The Issuer / R/TA will obtain the List of Successful applicants and First
Upload Error List (if any) in order to verify the following Registration
Details with application forms submitted by the applicants at the time of
subscription:

• Particpant ID (both for Individual & Corporate Body)

• Particpant Name (both for Individual & Corporate Body)

• Account Id, type & title (both for Individual & Corporate Body)

• NIC No. /Passport details [for non-resident


Pakistani/foreigner] (for Individual only)

• Joint Holder Name(s) & NIC(s) (for Individual only)

5. The Issuer / R/TA will correct/remove the errors appeared in the


above-mentioned error list in the text file and then repeat the Upload
process. This process will be repeated until all errors are corrected or
records with errors are removed from the list of successful applicants.

6. After successful initial upload (with zero error), Issuer / R/TA will initiate
final upload Option in New Issue Module in the Central Depository System
(CDS).

7. Issuer will provide the confirmation letter for credit of securities in book
entry form to CDC.

8. Upon receipt of above mentioned letter, CDC will verify contents &
authorised signature(s) & also define credit date into the CDS.

9. During the EoD process, the system will automatically credit the
securities present in the upload to the respective accounts in the CDS.

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I: Detailed Procedure for Securities not Live on CDS.

1. Upon completion of formalities of CDC Admission by the Issuer /


Registrar/Transfer Agent (R/TA) as per CDC Regulations. CDC will setup
new security in the Central Depository System, and will define New Issues
to perform “Offer for Sale”.

2. The Issuer / R/TA, after the completion of the balloting procedures, will
prepare lists of successful applicants. Separate lists to be prepared for
applicants who would have opted to have their securities deposited in the
CDC, on the basis of information available in the application forms.

3. The Issuer / R/TA, after the completion of the balloting procedures, will
prepare lists of successful applicants opted to have their securities directly
to be credited into the CDS according to the information available in the
application forms.

4. The Issuer / R/TA will execute Initial Upload process in New Issue
Module in the Central Depository System (CDS) to upload the details of
successful applicants opted for directly credit of securities into the CDS. The
Issuer / R/TA will obtain the List of Successful applicants and First Upload
Error List (if any) in order to verify the following Registration Details with
application forms submitted by the applicants at the time of subscription:

• Particpant ID (both for Individual & Corporate Body)

• Particpant Name (both for Individual & Corporate Body)

• Account Id, type & title (both for Individual & Corporate Body)

• NIC No. /Passport details [for non-resident


Pakistani/foreigner] (for Individual only)

• Joint Holder Name(s) & NIC(s) (for Individual only)

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5. The Issuer / R/TA will correct/remove the errors appeared in the


above-mentioned error list in the text file and then repeat the Upload
process. This process will be repeated until all errors are corrected or
records with errors are removed from the list of successful applicants.

6. After successful initial upload (with zero error), Issuer / R/TA will initiate
final upload Option in New Issue Module in the Central Depository System
(CDS).

7. Issuer will provide the confirmation letter for credit of securities in book
entry form to CDC.

8. Upon receipt of above mentioned letter, CDC will verify contents &
authorised signature(s) & also define credit date into the CDS.

9. During the EoD process, the system will automatically credit the
securities present in the upload to the respective accounts in the CDS.

Merger

Scenario I

I. Merger of Company ‘A’ (Transferor) with Company ‘B’ (Transferee)


II. Both companies (company ‘A’ and company ‘B’) are live on CDS.

Upon receipt of Notice along with the certified true copy of scheme of
amalgamation and order of the competent authority, from the transferee co.

 CDC will define Book Closure period and swap ratio of merger for security ‘A’
into CDS, for determining the entitlements.

• Upon commencement of book closure period, CDC will restrict the following
functionalities for security of company ‘A’:

 Deposit Request and Withdrawal Request

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 Free deliveries (Inter Participant & Intra Participant)

 Pledge (including pledge release and call)

• On the close of 5th business day after commencement of Book Closure period
(relevant time), CDC will provide Merger Entitlement Report for company ‘B’
(reflecting new holding on swap ratio basis including fraction entitlements*, if
any) while Issuer will obtain beneficial owners report (titled “Share Book
details”) of company ‘A’ on his own CDS terminal via “Share Book Detail”
option in “Report and Queries”.

• Upon receipt of allotment notice of securities from Issuer, CDC will define the
apply date (if required) and CDS to automatically credit the entitled number of
securities of company ‘B’ as per entitlement report to respective accounts
and/or sub-accounts on apply date.

• For securities (company A) that remains under pledge immediately before


commencement of book closure period, CDS to automatically release the
pledge transactions for security of Company ‘A’ and create new pledge
transactions for security of company ‘B’ in favor of same eligible pledgee in
accordance with swap ratio on apply date. Issuer to provide the fraction
entitlement (if any) on such pledged security directly to the beneficial owners.

• CDC to revoke the CDS eligibility of the security (company ‘A’) on or


immediately after the apply date.

• Upon revocation of security (company ‘A’), the position owned, pending


deposit, pending withdrawal and pledge position will be removed by the
system on the Central Depository Register (CDR).

• CDC to close Issuer and R/TA, if required.

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Scenario II

• Merger of Company ‘A’ and Company ‘B’ forming new company ‘C’

• Both companies (company ‘A’ and company ‘B’) are live on CDS while
company ‘C’ is declared as an eligible security.

Detailed Procedure:

1. CDC will declare Company ‘C’ as an eligible security under


CDC Regulation No. 5.1.1.
2. Upon receipt of induction documents from the Issuer, CDC
will setup Issuer, RTA (if necessary) and new Security into
CDS.
3. Upon receipt of Notice along with the scheme of
amalgamation and certified copy of court order from the
Issuer (company ‘A’ and/or company ‘B’).

• We will define Book Closure period and ratio of


merger for security ‘A’ and security ‘B’ into CDS, for
determination of entitlements.

• CDC to notify revocation of CDS eligibility of


company ‘A’ and company ‘B’ as per Regulations.
4. Upon commencement of book closure period, CDS to
automatically restrict the following functionalities for
securities of company ‘A’ and company ‘B’:

• Deposit Request and Withdrawal Request

• Free deliveries (Inter Participant & Intra


Participant)

• Pledge (including pledge release and call)

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5. On the close of 5th business day after commencement of


Book Closure period (relevant time), CDC will provide
beneficial owners report (titled “Share Book Details”) of
company ‘A’ and company ‘B’ and Entitlement Report for
company ‘C’ (reflecting new holding on swap ratio basis
including fraction entitlements*, if any).
6. Upon receipt of allotment notice of securities from Issuer, we
will define the apply date and CDS to automatically credit the
entitled number of securities of company ‘C as per
entitlement report to respective accounts and/or sub-
accounts on apply date.
7. For securities (company ‘A’ and/or company ‘B’) that
remains under pledge immediately before commencement of
book closure period, CDS to automatically release the
pledge transactions for securities of Company ‘A’ and/or
Company ‘B’ and create new pledge transactions for security
of company ‘C’ in favor of same Eligible Pledgee in
accordance with swap ratio basis on apply date. Issuer to
provide the fraction entitlement (if any) on such pledged
security directly to the beneficial owners.
8. CDC to revoke the CDS eligibility of the securities (company
‘A’ and Company ‘B’) on or immediately after the apply date.
9. Upon revocation of securities (company ‘A’ and company
‘B’), the position owned, pending deposit and withdrawal and
pledge position will be removed by the system on the Central
Depository Register (CDR).
10. CDC to close Issuers and R/TAs, if necessary.

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Scheme of Arrangement (De-Merger)

• Separation of one of the division / department from Company ‘A’

• Establishment of separated division / department as a new Company ‘B’.

• Company ‘A’ is already live security on CDS whereas company ‘B’ will be
declared as an eligible security prior to de-merger process.

Detailed Procedure:

• CDC to declare Company ‘B’ as an eligible security in accordance


with Chapter 5 of CDC Regulations.

• Upon Completion of formalities by the issuer in accordance with


CDC Regulations and submission of required documents, CDC will
setup the new Security, Issuer, R/TA (if necessary) into CDS, (prior to
de-merger).

• Company ‘A’ will be required to submit the following documents to


CDC in accordance with CDC Regulations and any other documents
which may be required by CDC:

 Notice of book closure and ratio.

 Scheme of arrangement (de-merger).

 Certified copy of Court Order.

• Upon receipt of above documents:

 CDC will define book closure period & ratio of de-merger (for
crediting the new shares in new company ‘B’ and reducing of
shares of existing company ‘A’ within CDS) into CDS, for
determination of entitlements.

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• Upon commencement of book closure period, CDS to automatically


restrict the following functionalities for security of Co. ‘A’, till apply date.

 Deposit Request and Withdrawal Request

 Free deliveries (Inter Participant & Intra Participant)

 Pledge (new pledge or pledge release and call of existing


pledge transactions)

• On the close of 5th business day after commencement of Book


Closure period (relevant time), CDC will provide beneficial owners
report (titled “Share Book details”) and Entitlement Report for company
‘A’ and company ‘B’ (reflecting new holding on swap ratio basis
including fraction entitlements, if any) to the company ‘A’ & ‘B’.

• Upon receipt of reduction of shares capital letter as per from the


issuer (Company ‘A’), CDC will define the apply date and CDS to
automatically reduce the holding of company ‘A’ shares as per
entitlement report from the respective accounts and/or sub-accounts.

• Upon receipt of allotment letter as per from Issuer (Company ‘B’),


CDC will define the apply date (if required) and CDS to automatically
credit the entitled number of shares of company ‘B’ to account holders
and sub account holders of Company ‘A’s as per entitlement report.

• For securities (company A) that remains under pledge immediately


before commencement of book closure period, CDS to automatically
release the pledge transactions for security of Company ‘A’ and create
new pledge transactions for securities of company ‘A’ & ‘B’ in favor of
same eligible pledgee in accordance with swap ratio on apply date.
Issuers to provide the fraction entitlements (if any) on such pledged
securities directly to the beneficial owners if required.

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• Fractional entitlements will be disposed off and distributed in


accordance with relevant laws and regulations to respective account
holders and sub-account holders as mentioned in beneficial owners
report.

• On apply date, security authorities to be given to security ‘B’ in


order to able the participants execute deposit and withdrawal request.

Share splits and consolidations

In accordance with section 13 of Central Depositories Act, 1997, the following


procedures have developed for handling consolidation / sub division of securities
on CDS.

Detailed Procedures:

• Issuer is required to notify us the Book Closure start and end date,
details of consolidation / sub-division and to provide certified true copy
of Special Resolution (Form 26) filed by the company to the Registrar
of Companies.

• Upon receipt of notice, we will define Book Closure period and


details of consolidation / sub-division in the CDS:

• Upon commencement of Book Closure, following functionalities will


be blocked in CDS till consolidation / sub-division apply date :
• Free deliveries (Inter Account and Intra Account)

• Pledge, pledge release and pledge call

• Deposit and Withdrawal request

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• CDC to obtain and provide Share Book Detail and


Consolidation / Sub-division entitlement list along with specimen
notification as to confirmation of revised CDC nominee holdings
in the Members’ Register to issuer on 5th Business Day from Book
Closure Start Date. In case of no pending deposit requests, the said
list can be provided at any time after start of book closure period, if
requested by issuer.

• Upon reopening of share transfer books, the authorities for Deposit


and Withdrawal approval functionalities will be blocked till apply date.

• Upon receipt of Confirmation of Revised CDC nominee holding in


the Members’ Register as per as per standard format from the issuer,
CDC will define Apply Date and System to automatically revise the
holding during EOD process.

• After the end of day, preceding the apply date (consolidation/ sub-
division date), CDC will obtain list of shareholders for internal record
purposes.

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Credit of Ordinary Shares / Certificates against Paid Rights into CDS

In order to eliminate the physical process relating to issuance of share


certificates against paid rights, the following procedures are prepared in order to
handle “Credit or ordinary shares/certificates against Paid Rights” in which
holders of paid rights maintaining account on CDS will get their
shares/certificates directly into their respective CDS accounts instead of physical
share certificates. It is assumed that the current procedures for issuance &
subscription process of rights in the market will remain unchanged.

Detailed Procedure:

The detailed procedures involved in the transaction are as follows:

1. In cases where subscription payment is made by the shareholders


(irrespective of whether principal shares/certificates are held in physical
form or book entry form) in whose name the letter of rights are issued i.e.
where the payment is made through “Letter of Acceptance”, the
shareholders will have the option to either receive the physical share
certificates or to get the credit of shares/certificates directly into his CDS
account.

For this purpose Issuer / Registrar/Transfer Agent (R/TA) will be required to


provide the following fields on Letter of Acceptance.

• CDC Participant Id or CDC Investor Services A/c Id


• House account # or Sub account # or CDC Investor account #.

2. In cases where the subscription payment is not made by the


shareholders (irrespective of whether principal shares/certificates are held in
physical form or in book entry form) in whose name the “Letter of Rights”

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are issued i.e. where the payment is made through “Application by


Renouncee(s) for Registration”, the investor will have the option to either
receive the physical shares/ certificates or to get the credit of
shares/certificates directly into his CDS account.

For this purpose Issuer / R/TA will be required to provide the following fields
on Letter of Renunciation.
• CDC Participant Id or CDC Investor Services A/c Id
• House account # or Sub account # or CDC Investor account #.

However, in case of the renunciation, the name of investor is required to be


mentioned on the Application for Renunciation but the renunciation to be
made in favor of the Central Depository Company of Pakistan Limited.

3. In case of under subscription, the underwriters will also have the


option to get the credit of shares/certificates directly into their CDS account.

5. On the basis of Paid Letter of Rights alongwith Payment details


received from the banker(s), the Issuer / R/TA will prepare lists of
successful allotees opted to have their right securities directly to be credited
into the CDS, using a suitable word processing or text editing program, will
prepare comma-delimited text file containing the data of successful
applicants.

6. The Issuer / R/TA will execute Initial Upload process in New Issue
Module in the Central Depository System (CDS) to upload the details of
successful applicants opted for directly credit of Rights into the CDS. The
Issuer / R/TA will obtain the List of Successful applicants and First Upload
Error List (if any) in order to verify the details provided in the Letter of
Rights. Particpant ID (both for Individual & Corporate Body)

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7. The Issuer / R/TA will correct/remove the errors appeared in the


above-mentioned error list in the text file and then repeat the Upload
process. This process will be repeated until all errors are corrected or
records with errors are removed from the list of successful applicants.

8. After successful initial upload (with zero error), Issuer / R/TA will initiate
final upload Option in New Issue Module in the Central Depository System
(CDS).

9. Issuer will provide the confirmation letter for credit of right securities in
book entry form to CDC.

10. Upon receipt of above mentioned letter, CDC will verify contents &
authorised signature(s) & also define credit date into the CDS.

11. During the EoD process, the system will automatically credit the
securities present in the upload to the respective accounts in the CDS.

Procedure for Buy Back of Shares


Under Section 95A of the Companies Ordinance 1984

1. Company to forward us following documents

• Certified true copy of Special Resolution alongwith scheme of buy


back of shares under section 95A of the Companies Ordinance,
approved by shareholders in General meeting.

2. Company is required open a separate sub-account or Investor account in


Central Depository System. {Account title “[Company name] (buy back of
shares)}”, in order to receive the Book Entry Shares to be purchased by
the company under section 95A of the Companies Ordinance 1984.

3. Upon completion of time allowed for transfer of shares as mentioned in


acceptance letter, Company to provide written instructions to CDC, upon

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receipt of which CDC will cancel the holding reflecting in Company’s CDS
account through Stock Adjustment functionality.

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Procedures for Revocation of CDS Eligibility of Redeemable Securities


including Term Finance Certificates

The following procedures have been devised in compliance with CDC


Regulation No. 5.5.A in order to:

 Revoke the Central Depository System (CDS) eligibility of


such TFC’s; and

 Remove the holding balances from respective accounts and


sub-accounts including IAS accounts, upon final maturity.

Detailed procedures: (for listed & unlisted securities)

1. Issuer will be required to notify us the following details when TFCs going
to mature or early redemption:

 Final book closure period; and

 Final redemption date / maturity date

2. Accordingly CDC will record final book closure period on the Central
Depository Registrar (CDR).

3. Upon commencement of Book Closure period, the following


functionalities will be blocked in the Central Depository System in order to
restrict the movement of balances:

 Free deliveries (Inter participant & Intra Participant)


 Pledge (including Pledge Release and Call)
 Deposit Request & Withdrawal Request

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4. CDC will make available beneficial owners report as per schedule for
payment of final redemption amount.

5. After making final redemption payment to TFCs holders, issuer will be


required to provide us confirmation letter regarding the same supported
with duly certified Auditor Certificate.

6. On the basis of above mentioned confirmation, CDC will immediately


issue notice of revocation of CDS eligibility (seven business days prior
notice in case of listed security) and accordingly remove the holding
balances from respective accounts and sub-accounts including IAS
accounts.

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4.4 - VALUE ADDED SERVICES

Apart from its core operations, CDC also provides some value added
services, brief detail of which is as follows:

Investor Account Services (IAS):


Investor Account Services offered by CDC allows investors to directly open
and maintain accounts in Central Depository System for electronic settlement
of securities.
Earlier, to settle the securities through Central Depository System, investors
had to open client accounts (sub accounts) with the Participants (brokers &
financial institutions). Now, with Investor Account Services, investors can also
have direct access to CDC.

Trustee Operations
CDC commenced Trustee Business Operations from March 01, 2002 by
acting as Trustee for open-end & Closed-end mutual funds.

Registrar (RT/A) Services


Also R/TA Services has now been commenced in MAY 2008 which are now
fully operational. Some very renowned companies PIA & Khushhali Bank
Limited are on CDC RTA portfolio.

INTERNATIONAL AFFILIATIONS
CDC also represents Pakistan on international desk and is a member of
renowned international capital market associations like

• ANNA : Association of National Numbering Agency

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• ISSA: International Securities Services Association

• ACG: Asia-Pacific Central Securities Depositories Group

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CHAPTER 5:

Conclusion & Recommendations:

5.1 – Conclusion
5.2 - Recommendation

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Conclusion & Recommendations:

5.1 - Conclusion:
Now in the end, I believe that we have very deeply understood the nature,
business & functions of CDC. We have gone through the basics of capital
market, its fundamentals and ingredients, the CDC, its role & functions and the
CDS.

5.2 - Recommendation:
Keeping the current situation of stock market, I also believe that this information
is now vital for public in analyzing the position of CDC. It is common
misunderstanding now a day that shares which are kept with CDS elements i.e.
with Participants are safe as these are in CDS. This is wrong & disastrous
approach. Shares which are kept with brokers are free to move by them as the
agreement for their movement is being signed by shareholder and participant.
CDC has nothing to do with it as it can only facilitate the book entry transfers.
Only shares which are kept with CDC directly in IAS, those are safe as the
shareholder have authority to move it.

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