Central Depository System Q & A For MCQs and General Understanding

1 - What is Central Depository System? CDS is an Electronic Book Entry System: • To record & maintain securities • To register transfer of securities. The system changes the ownership of securities without any physical movement /endorsement of certificates & execution of transfer instruments.

2 - What are CDS Elements? There are three Elements of CDS namely: • Account Holders • Issuers/R/TA • Eligible Pledgees. These Elements have a defined role in the Central Depository System as the system is driven by them without direct involvement of CDC on day-to-day basis.

3 - What is meant by Account Holder? Account Holders are divided into two categories; Account Holders and Participants. Both, Account Holders and Participants have direct access to CDS. Account Holders are only allowed to keep their beneficially owned securities whereas Participants, in addition to maintaining their beneficially owned securities, are entitled to open Sub-Accounts in CDS in order to further provide custody services to their clients.

4 - Who can become Account Holder/Participant in CDS? Members of Stock Exchanges (for Corporate Member, standard custody clause in Memorandum of Association is mandatory), Commercial Banks, Modarabas and Developmental Financial Institutions can become Participant. Whereas, all entities (Private and Public) can be admitted as Account Holder.

5 - Who is an Issuer? The companies whose securities (both equity and debt) are inducted in CDS (directly in book entry form or by the way of physical deposit of securities) are called Issuers. Issuer may appoint the R/TA (Registrar/Transfer Agent) to perform its obligations or take action on its behalf. The Issuers/R/TA of capital also have direct access to the CDS. Once a security is declared eligible and becomes 'live' for the purposes of CDS, the necessary software and connection are provided to the Issuer of that particular security. The physical securities are converted into electronic book-entry securities only after proper verification by these Issuers or appointed R/TA. This process eliminates the problems of forged, duplicate, damaged or lost certificates as securities are thoroughly checked by the Issuers/R/TA before approval for CDS.

6 - Who is an R/TA? An R/TA (Registrar/Transfer Agent) may be appointed by an Issuer of Security to perform its obligations or take action on its behalf. The R/TA should be a company formed and registered under the Companies Ordinance, 1984 (Refer rule 4 of the Balloters, Transfer Agents and Underwriters Rules, 2001). Such appointments are required to be notified to the CDC (Refer CDC Regulations no 5.6.1).

7- When is it mandatory to acquire the services of independent R/TA? Issuers who are also maintaining Account Holder/Participant account in CDS are required to outsource their R/TA function to an independent R/TA. Further, as per section 204A of the Companies Ordinance, 1984, all listed companies [whether they maintain an Account Holder/Participant Account or not] are required to appoint an independent R/TA. (Refer CDC Regulation # 8.11)

8 - Who is an Eligible Pledgee? Any Company, Corporation or Institution such as Banks / Financial Institutions / Development Financial Institutions that are authorized to provide financing against securities can join CDC in the capacity of Eligible Pledgees. Further, Stock Exchanges / Clearing Companies can also join CDC in the capacity of Eligible Pledgees for risk management purpose.

9 - Who can request CDC to open their Margin Trading (MT) Account in CDS? CDS Participants / Account Holders who have been admitted as Trading Financiers by NCCPL can request CDC to open their MT Account.

10 - Who can request CDC to open Margin Financing (MF) Account in CDS? CDS Participants / Account Holders who have been admitted as Eligible Financiers by NCCPL can request CDC to open their MF Account.

11 - Which Transactions are supported by CDS? • Deposit • Withdrawal • Free Delivery • Pledge • Pledge Release • Pledge Call • Corporate Action • IPO • Settlement of Securities

12 - What is meant by Deposit? Deposit transaction is a series of actions through which physical certificates are converted into electronic book entry securities in CDS. The deposit request transaction is initiated by Account Holder/Participants in CDS either on their own or on behalf of their client.

13 - Can I deposit the securities in CDS which are not registered in my name? No, deposit of securities into the Central Depository System (CDS) that are not beneficially owned by the relevant account holder is prohibited. Therefore, no deposit request transaction should be made by the Account Holder/Participant unless the underlying securities are already registered in the name of the Title of account or in the name of joint account holder. (Refer CDC Regulation # 8.1.2)

14 - What is meant by Withdrawal? Securities can be withdrawn in the form of physical certificates from CDS through withdrawal transaction. This facility is provided to cater those account holders who prefer to keep physical security certificates. The withdrawal request transaction is initiated by Account Holder/Participants in CDS either on their own or on behalf of their client.

15 - What is meant by Free Delivery? The term 'Free Delivery' applies to all book-entry delivery of securities, as it takes place without any corresponding movement of cash in the system. Once the securities are Deposited/Credited in CDS, they become available for delivery from one CDS account to another. If transfer of securities is within the account family of a Participant, it is called an Intra-Account Free Delivery. Similarly, if securities are transferred from one Participant’s sub-account/house or IAS account to another sub-account/house or IAS account held under the umbrella of another Participant, the transaction is called an Inter-Participant Free Delivery. Each Free Delivery transaction is backed by Reason Code, which is associated with the nature of each transaction executed.

16 - What is meant by Pledge in CDS? An Account Holder/Participant, acting either on his own behalf or on behalf of his client, can place securities under pledge in favour of an Eligible Pledgee. Placing securities under pledge results in the securities being flagged as no longer available for transactions by the shareholder until released from pledge. The beneficial owner however continues to get the corporate entitlements on flagged securities.

17 - What is meant by Pledge Release? Eligible Pledgees can release securities, which have been placed under pledge in their favour. As soon as securities are released from pledge, they become available to the Pledgor (beneficial owner) for further transactions such as movement of securities, withdrawal or another pledge.

18 - What is meant by Pledge Call? Eligible Pledgees have the option of calling/transfer pledged securities in their own account or in any other account in CDS (if required).

19 - How Corporate Actions are handled through CDS? Shareholders entitlements like Bonus, Letter of Rights, etc. announced by the Issuer of Securities are directly credited to the respective accounts on the basis of the list of beneficial owners provided by CDC. CDS also facilitates the process of Merger, De-merger and Consolidation / Sub-Division in an efficient manner. Further, CDC provides the entitlement report to the Issuer / R/TA for the processing of cash dividends.

20 - How are New Issue/IPOs/Further Issue/Right Issue handled through CDS? Upon completion of formalities of CDC Admission by the Issuer in the Central Depository System, securities can be directly credited into the subscribers’ CDS accounts by uploading the details of successful applicants into the CDS. In this manner Account Holders can avoid the hassle involved in obtaining physical certificates and then converting them into electronic form.

21 - When should the Issuer/RTA intimate CDC about the Book Closure? Issuer of Eligible Security is required to notify CDC the Book Closure period at least 7 business days before the Book Closure Start Date. (Refer CDC Regulation # 12.1)

22 - When should the Issuer/RTA intimate CDC about the General/Review Meeting? Issuer of Eligible Security is required to notify CDC 7 business days before General Meeting for printing & sending the Statutory Notices to the shareholders.

23 - What is the purpose of R/TA Reconciliation? In order to ensure that no discrepancy exists between Central Depository Register (CDR) and the Member’s Register (or register or holder of other securities of the Issuer), Issuers / R/TAs are required to reconcile the number of Book-Entry Securities held in the CDR with the number of Securities recorded in the name of CDC on the books of the Issuer from time to time, but at least once in a month.

24 - When should Issuer/RTA submit the R/TA Reconciliation Report to CDC? Issuers / R/TA are required to submit RTA Reconciliation statement twice during a year to CDC on: ? Half Yearly Basis – Not later than 10th Business Day at the end of six months. ? Yearly Basis – Latest by the end of 4th month from the end of the financial year. This report also needs to be authenticated by the External Auditor of the Issuer. (Refer CDC Regulation # 13.7.1)

25 - What if the Issuer/ R/TA does not provide the R/TA Reconciliation on the specified time? In case the Issuer commits a breach of the requirement, a fine upto Rs. 10,000 (Rupees ten thousand) may be imposed. Where the breach continues, further regulatory action may be initiated against the non-compliant Issuer. (Refer CDC Regulation # 13.7.1B)

26 - Can CDS elements login to CDS using any PC? No, Elements’ terminals are binded with CDS as a security measure through their MAC/Hard Disk address [provided to CDC at the time of installation/reinstallation] and Elements can login to CDS only through their binded terminals.

27 - What is the Global Terminal Facility? 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.

28 - How can I use Global Terminal Facility? To avail the Global Terminal Facility, the designated user representing the CDS Element is required to bring the following: 1. Duly filled GTF Usage Form bearing company / business stamp duly signed by the authorized signatory(ies) in original 2. Original CNIC of the designated user as well as a copy which will be retained by CDC for its record. 3. Assigned R/SA token to logon to CDS through the global terminal. Printing of reports is not allowed to clients from Global Terminal. However, a download facility on client’s USB is allowed.

29 - Which service requests can CDS Elements make through CDC access IVR and Web? CDC access IVR and Web provide CDS Elements the facility to make the requests for CDS Password Reset, CDS Reinstallation, CDS Offline Data, Change of CDS Access Policy Option and Billing Invoice.

30 - What if I wish to use CDS on more than one terminal? Elements may request CDC for the installation of an Additional CDS Terminal. The connectivity charges are Rs. 10,000/- per month for each additional terminal along with the annual RSA Token Device charges.

31 - How can Elements connect to CDS? There are three options through which Elements can connect to CDS: 1. LAN (Available at Stock Exchanges) 2. Multinet 3. Dial-up 32 - Can Dial-in users connect to CDS by using any telephone numbers? No, CLI (Caller Line Identification) is a security feature in CDS for Dial-up Users implemented to enhance system integrity. With CLI, the Element using its Dial-up User ID is tagged to maximum of two digital telephone numbers. The CDS Dial-up Element can only connect through these tagged numbers. 33 - What is CDS User Access Policy Option? CDS User Access Policy offers CDS Elements different options for segregating their user level authorities. Elements should choose appropriate option according to their need and give post mode authorities to relatively senior personnel. 34 - Can I use internet on the same PC which I am using for CDS? No, in order to achieve maximum security and performance, the Element must ensure that the PC must be exclusively used only for CDC applications. Internet usage on the same PC is strongly discouraged.

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