NEPSE listed companies' securities that are in paper form are deposited in the electronic form.  

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. Three years on, many investors have not joined CDSC despite so many benefits associated with it.  Why are the investors, especially the small ones, are so reluctant to join it. ShareSansar talked to Mr. Subodh Sharma Sigdel, Chief Executive Officer of CDS and Clearing Limited.

An excerpt:

Where does CDSC figure in the capital market and what exactly are its functions?

CDSC is the sole depository company in Nepal which acts as the central securities depository and clearing house for securities traded in Nepal Stock Exchange Ltd. It is a place where NEPSE listed companies' securities that are in paper form are deposited in the electronic form. Another major function of CDSC is to act as a clearing house that is responsible for the clearing and settlement of payment and ownership whenever the shares are traded. The ownership of dematerialized securities can be conveniently and shortly transferred belonging to investors deposited in demat accounts at depository participants.

What are the main benefits CDSC can offer to its clients?

It eliminates all physical hassles and risks associated with the physical certificates, like the risk of theft, worn out, unmatched signatures, forgery, damages to the documents, loss of certificates during transit, etc. We all know how difficult it is at present to get the shares transferred. We have heard of cases in which it has taken a month to get the shares transferred.

This system is accepted worldwide and, among SAARC countries, even Bhutan has implemented this system. Even third countries, developing countries, least developed countries and underdeveloped countries have adopted the depository system as they are well aware of its benefits.

Another positive aspect of CDSC is that it brings into speedy settlement cycle as the securities are transferred immediately resulting the increment of trade volume. This is the fact that was observed in the international market when CDS was introduced. No doubt when transactions volume surge up, the liquidity in the market also significantly increases.

Are there more benefits?

The demat account makes it easier to the investors to manage various securities portfolio in a single account and can easily receive the detail information about their investment.  During my visit to India, a senior member of Bombay Stock Exchange Ltd. told me that an Indian couple had held securities of 200 companies in physical form. After their expiry, their descendants came to know about the investment 25 years later mere. What I am trying to say is that if those couple had a Demat account, the concerned depository participant would have informed about the holdings to their inherent in time.   

Despite so many benefits, why are many stakeholders reluctant to join the CDSC? 

I believe that the investors who trade actively are aware of the benefits of CDSC. But the inevitable hurdle is that the stock brokers have not applied for the clearing membership yet and the clearing members are indispensible party of CDSC. That's why; we are not able to carry out transactions electronically. Since transactions cannot be happened electronically, we cannot make mandate to the investors as well.  

As prescribed in CDSC Byelaws, the clearing members are required to deposit a cash guarantee of Rs. 1 Million for getting clearing membership. They had pleaded for the bank guarantee instead of cash guarantee and seeing the possibility, we had forwarded their request to SEBON which has recently been approved.  We are planning to provide clearing membership to trading members by this week and begin the clearing and settlement of transactions of securities held in demat form by the end of Ashwin.

How many companies have shown interest to join CDSC so far?

We have received applications from 24 companies and we have already signed agreement with 14 companies. We have also granted DP license to 10 companies.

As per the regulation, all listed companies must join CDSC within a year of its inception of the operation. We started opening demat account from Shrawan 1, 2069 so the deadline for admitting the securities in CDSC for listed companies has already been terminated by the end of Ashad of this year.

We have notified the companies about the deadline being over.

In order to increase awareness, we organized an interaction program at Pokhara for Pokhara based listed companies. Similarly, we recently conducted Issuers Awareness Program on 13^th September 2013 focusing real sector companies and insurance companies. We will be holding an issuer awareness program for other categories of the listed companies.

When CDSC was established, our major moto was to bring the shares of all the listed companies incorporated with CDSC. So, we are not only waiting for that to happen but also making efforts for it.

We hope that we can achieve that goal with a little push from SEBON. For that, we have been regularly interacting with SEBON and SEBON is positive with us and has promised to support our initiatives.

But the power to force the listed companies rests with SEBON and not CDSC, isn’t it?

Definitely, the power is with SEBON. The regulation clearly prescribes the joining date in CDSC for the listed companies.

What happens if the companies don’t join CDSC?

That is something SEBON is looking into. We don’t have any rights to compel the companies to join us. We are making our best efforts to create awareness and educate the issuers to join CDSC.

Investors are also set to benefit from this. So, wouldn’t it be possible to create a push from the ground level through investors’ awareness campaigns?

That can happen only if the brokers who are clearing members for us start working with us. After that we can prepare strategies for clearing and settlement for demat shares. For example, shares of 15 companies have already been dematerialized. Any investors holding shares of these companies can trade and settle in demat as well as paper form. By making comparison between two modalities, investors would definitely prefer the electronic form. This will create push from the ground level to other issuers who are not attached to CDSC. 

Can’t this be applied in case of the IPOs as well?

We have already pleaded on it with SEBON. And we have been told that a decision in this regard would be taken in a few days. Currently, it is not possible to cover up 100% IPOs because our DPs are centric to the valley only and have not been able to spread their network to all over Nepal. So, if we make demat compulsory at this moment, how will a person in Jhapa or Dadeldhura apply for an IPO?      

So, we urged to make it compulsory to have shares in demat form within the Kathmandu Valley only in the first phase so that IPO allotment could be done directly into the demat account. SEBON has perceived our proposal positively. Once, we start trading and settlement of demat shares, I believe it will be easier for SEBON to instruct companies to issue IPO through CDSC. 

You have seen institutions like CDSC in other countries. Where are we compared to them?

Agencies like CDS in other countries have advanced much further. After seeing their works and plans, I try to implement some of them, but some macro forces are not in my hands that is why we have not been able to expand. Because of these macro forces we have not been able to move ahead even in our primary role as the provider of depository and clearing and settlement functions. In this scenario the things we see in the international looks like a day dreaming.

 If we are able to replicate even 5 to 10 percent of what we see in the other countries, we will see huge development.

For example, we can introduce the concept of e-voting. Many shareholders do not get to cast their votes during their company’s AGM. If there is the facility of e-voting, shareholders can go through the agendas and cast vote staying at their home. The result of e-voting comes out within a minute after the voting deadline is over.

There are other concepts as well, such as common KYC, National Academic Depository, and Insurance Repository in which much progress have been made by other countries.

We attend many conferences in which we cannot even participate in the discussion just because we haven’t reached to that level. Though we had learnt through other people’s discussion, as participants we cannot give any input because they discuss about issues like cross border transactions, local entity identifier, foreign investment, custodian bank, etc.  

Is CDSC fully prepared to serve all the stakeholders?  

All what we needed was the byelaws, software and well-trained staff, all of which is ready. Today, we are proud to declare that we are providing 100 percent settlement in physical form and despite of huge transactions volume at present, we are able to give an excellent settlement result in time every day.

One of the daily newspapers accused CDSC that our staff stay idle in the daytime and rigorously work in the night time to make an illusion of overtime working. Indeed, the fact is that our staffs honestly work till office hour but sometimes due to huge transactions volume and late receipt of documents from brokers, they have to work till late until the entire clearing of transactions finished up.  We are strictly stuck into the rules designed by the byelaws. Hence, it is not justice to say that CDSC is doing nothing.

Getting our prompt service, the brokers and even investors are happy to receive their payment and ownership within the prescribed settlement cycle as their cost of opportunity has been drastically minimized.

It is reluctant to say that the goal behind CDSC was established, has been diluted at the present scenario but we are putting into entire effort to create an environment for that as well.

Many small investors, let’s say those who have invested in 10 shares, worry that doing transaction through CDSC increases the cost burden. How will you rope in such investors who are mostly based in rural areas?

At the beginning the transaction charge was 0.25 percent. In case, the transactions worth NRs. 1 crore, the transaction charge would be NRs. 25,000. As we got the complaint against the charge being too heavy, we requested SEBON to slash down it to NRs. 25 per transaction.  We anticipate this new transactions charge would be accepted by all related stakeholders as the investor has to pay NRs. 25 only per transaction, indifferent of transactions value.

But people must also take into account about the hassles they would have been freed of after this system had come into effect and the indirect costs that would be saved. For instance, if an investor wants to sell his shares, he should count down the frequency that he has to visit to broker and RTA and the cost and time value associated with this.

In the coming days, we will try to introduce convenient and sophisticated online services so that the investor does not have to approach to DP for each transfer.  We are here to provide the cost effective service to all our stakeholders.

Therefore, the investors have to do a cost-benefit analysis rather than pointing out to fees structure.  I believe that those investors who have been facing these hurdles everyday will definitely understand the need of CDSC.

 Regarding penetrating the service of CDSC to the remote areas, it is true that CDSC cannot go all over Nepal in one shot. We will expand our network in phase wise. We will gradually render our service to all 75 districts.