I am confident that CDS will be fully implemented in scheduled date

CDS and Clearing Limited, known as CDSC, was established in 2010 and inaugurated in March 2011 as a company promoted by Nepal Stock Exchange Limited to provide centralized depository, clearing and settlement service in Nepal. After four years, the company has finally started the process of dematerialized form of share trading from Baisakh. The CDS now plans to completely replace the paper-based trading with the paper-less trading by Baisakh next year. Yet, there are still confusions among the investors and other stakeholders about the functioning, trading process and settlement, among other issues. ShareSansar talked to Subodh Sharma Sigdel, Chief Executive Officer of CDS and Clearing Limited on various aspects of the CDS. Excerpts:

You have deferred the full-fledged operation date of CDS. Can you tell us about that plan?

We had made an action plan upon which dematerialized shares trading of commercial banks will begin from Magh 1, shares of other development banks, insurance and finance companies from Falgun 1, while the other remaining groups’ companies share trading will be held in dematerialized form. We had sent this action plan to the Securities Board of Nepal (Sebon) for the approval. Following the instruction of the Sebon to us to make our plan more realistic so that we can move ahead in a way that we do not need to backtrack later, the CDS will come into full-fledged operation by Baisakh. In the meantime, couple of issues have propped up during the course of CDS operation. Our ‘demat implementation team’ has identified two/three obstacles which might pose problems while fully implementing the CDS. In order to resolve these obstacles, we have to discuss and get approval from the board of CDSCL. Since the board meeting of our company has not sat for past two/three months, we have not been able to remove those obstacles. Once the board meeting is held and get approval for resolving those problems, we can implement the full-fledged CDS as per our action plan. We are committed toward that end.

Don’t you think that deferring the full-fledged operation of CDS time and again compelled the investors to think that dematerialized form of share trading is uncertain?

The deferral does not necessarily mean that. The talk on the plan of operating the CDS began from 2068. However, the current and then condition is different. We are now very advanced and enhanced in terms of capable manpower, ideology, system, infrastructure and technicalities. We all know that we are now sitting at the right platform. While we are on the process of full-fledged operation of CDS, one or two issues are only becoming obstacles. Otherwise, there are no other problems. If you look the data of the other day, nearly 60 lakh units of shares are already dematerialized. More than 15,000 investors have already opened their demat accounts. If you look the situation even before six/seven months, the situation was completely different. There were only 400—500 demat accounts; 8,000-9,000 shares were only dematerialized. The comparative figure speaks a volume. So, I would say that things are improving and getting better. But having said that, I have to accept it that there are a couple of barriers of a policy level which we are trying to remove. At an operational level, I don’t see any obstacles. Though the first trading of the dematerialized trading begun from Baisakh thereby requiring us to fully implement it by Kartik 2, the actual involvement of whole participants only started from Shrawn/Bhadra when Nepse issued notice about the CDS. It was not possible for the full-fledged operation within two or three months as the involvement of the participants began only from Bhadra. We should look each and every aspect while going taking CDS into live. The number of companies taking the CDS membership is increasing while all the commercial banks have already come on board the system. Soon, all development banks will be the member. Yet, we need depository participants (DPs) to get this system work. Otherwise, where would a client go and opened the demat account? Very few DPs cannot cater all the clients, so we need more DPs. Their networks should expand across the country. Only than the clients irrespective of the location can acquire or sell the shares. We delayed the full-fledged operation of the CDS concluding that the implementation of the system was not possible unless DPs enhance and expand their networks across the country. There were not more than four or five active DPs by Kartik 2 when we were earlier required to fully implement the system. Now the number of Dps has increased to 23 while eight or nine other are almost set to get the license. Since banks and their Registrar of Shares (RTs) have also taken the DPs and expanding their branches, I am now confident that CDS will be fully implemented in the scheduled date.

Though you said things are improving, half of the total listed companies have not even come to CDSC for membership and get their shares dematerialized. Don’t you think the process is moving too slow?

There are almost 130 companies that have already become the members including those in the pipeline. The dematerialized shares of commercial banks will begin from Magh 1 according to our action plan so all the commercial banks except Prabhu Bank has already become the members. Prabhu was on the merger process so it was a special case and it will also come soon. Development banks’ shares trading will be in dematerialized form from Falgun 1 and this will go on phase wise until the full fledged implementation from Baisakh. We are moving rapidly in this direction. Perhaps some companies are still watching whether the paper-less trading system will come into implementation or not. Once we climb a step of this process from Magh 1, it will be easy for other companies as there are still confusions about the implementation of the system. From Ashoj 22, the dematerialized shares of those companies which have gone into the ownership transfer are coming into dematerialized form only. There is even trading of those dematerialized shares in the market. There are issues of the capital gain tax also in the market. CDSC has been accused of not being able to calculate the capital gain tax. Currently, there is trading of those both demtareialized shares which are or are not entitled for the capital gain tax. So there are no problems in this regard and we will make it more advance. Nepse is also mulling over issuing one another directive to the companies to become the members of the CDSC. All the listed companies will board the CDS soon.

Still investors and brokers complain that CDSC and its system are currently not capable of calculating the capital gain tax and base rate. What is your say?

We can calculate it and are doing calculations. They want to have such software which can automatically calculate and give all rights, bonus, on market purchased price. This is about developing the technology more. Till this date for the paper-based trading, brokers have to put the purchase price for the capital gain tax following the order from the clients. However, we can adopt other formulas also. There are also talks to replace the capital gain tax by securities transaction tax. This can be an option. Similarly, allowing the clients for the self assessment for the capital gain tax which can be other option. Another option could be tying up capital gain tax to holding period. This provision is in Pakistan where share with holding more than two years is not charged of capital gain tax. Calculating the tax according to the weighted pricing can also be an option. We have invited brokers in the ‘dematerialization implementation team’ where we can discuss on various models to embrace a best one and take it to the higher authority like Sebon and Ministry of Finance for the implementation. But, it’s wrong that the current model is completely failed to work. We can work out on the aforementioned options for the long-term and advanced model.      

It is also said that the after full-fledged operation of the dematerialized form of trading, CDSC will not be capable of handling the settlement of all the transactions due to growth in the volume of transactions?

I don’t think so. Our manpower, which is working in this system for past three years, is capable. We have skilled manpower of IT since we do not need to work through the papers. The settlement cycle runs in just a click of a button. It can handle lakhs of transaction. I am not talking about few thousands of transaction but a lakh of transaction. When the transaction volume made a record high and the high volume in the subsequent days, the settlement were conducted all in papers. Our staffs were even able to handle such a high volume of manual trading and settlement. Compared to such a headache, the settlement of dematerialized shares will not be a problem.

Nepal Rastra Bank (NRB) had introduced the directive to the banks and financial institution (BFIs) to issue loans against the dematerialized shares. Still, investors are facing problems to get such loans. Procedure regarding this type of loans was expected.

It will be introduced very soon. Since the CDSC is currently without its board, we have not been able to issue the working procedure which is already prepared. As soon as the board meeting is held, it will be approved from the board to be issued. The working procedure was provided to the management of the CDSC by the ‘Demat Implementation Team’. Since the management can send working procedure to the banks only after the endorsement from the board, the procedure is yet to come into execution. In case the board is not formed or meeting is not held for some months, the management with the consent of our parent company Nepse will send the procedure to the banks.

You said that there two/three obstacles for the full-fledged operation of the CDS. Can you tell us what those obstacles are?

These are not major issues. Its matter related to broker and DP like who will bill the clients. We need clear guidelines on some issues which need mandate from higher authority. These will be solved within a day or two after the board meeting is held.

It seems not that the dematerialized form of trading is becoming a bit confusing and complicated to the investors. Have you felt that?

It’s not complicated, but it could be confusing because it’s new technology. People might be resistant to the change. They might lack idea and knowledge. We have talked with few investors who have already opened demat account and trading in the dematerialized form. They are very happy to get their shares in their demat account within three days. Others say they were happy because they get cash within four days. So after conducting trading, investors will find it convenient. Resistance and confusion are bound to seen everywhere until the new system is tried.

Who is responsible to teach and raise awareness among the investors about the new trading system?

We have conducted many programs for the investors. We have also hold programs outside valley in collaboration with Sebon. We have also imparted trainings to brokers. CDSC is doing its bit. The reason why we are training brokers is that the gateway of the investors in the share market is the brokers so they can train the investors. The investors come for trading at the secondary market from broker so brokers are in well positioned to train the investors.

Don’t you think there is a need of harmonization between for contradictory provisions in various laws or bylaws?

There were similar concerns earlier also. CDSC was established after sorting out those issues. I have not seen any legal issues yet.

The board of the CDSC is currently dissolved and new board is yet to come. Lack of board meeting does not affect the functioning of the company?

The management is doing its every day works. There are some policy level issues that I already talked is pending. Most of the works like making the listed companies members of the CDSC and licensing process of the DP, among others, are not affected due to the lack of the board. Everyday operational things are not affected. Only some policy level issues that need board approval is pending.

Fees and costs charged by the DPs to the clients vary. Even some DPs are found of opening demat account of the clients for free. Don’t you think that this sort of competition damages the system?

The CDS bylaw has fixed the cost of the service charge. We have not received serious concern about this yet. If any DP raises this issue, we will look into the matter.

Following the implementation of the CDS, will be there any changes in the T+3 settlement process?

 You might have asked that whether the T+3 settlement process could be brought to T+2 or not after the implementation of the CDS. The payment system of our country has made it difficult for us to bring it down. CDS means that the settlement can be completed even in T+0 but payment process of the bank delays the process. If we become realistic and move ahead in a way to complete the settlement within T+1, whole clients should have their accounts in our settlement bank. And there should be a rule which allows us to debit and credit in the account of the clients. This condition is only the solution for the settlement in the T+1. Otherwise, the electronic clearing system should be very robust that everyday clearing is conducted and transfer from one bank to another is of great ease. This technology can only allow us for T+1 settlement. Though we had also planned to bring down it to T+2, we have to put it hold on T+3 due to the payment system. CDS is itself robust which can make settlement in T+1. When I say T+0, it could be too unrealistic. That is also not impossible.