Demat share trading system: Started in Nepal

Apr 15, 2014-CDS and Clearing Limited will start demat system of share transaction, wherein shares and securities are represented, traded, and maintained electronically, from Tuesday.

The system, being adopted for the first time in the country, will make the process for sales, purchases and transfers of shares significantly easier, mitigating most of the risks associated with paper certificates.

According to CDS, it will first carry out transactions of three stockbrokers that have acquired Clearing Member (CM) licenses. Of the 50 stockbrokers that have acquired CM licences, only six have maintained the bank guarantee required for carrying out demat trading.

The three brokering companies whose transactions will be carried out electronically in the first phase are Kalika Securities, Vision Securities and Trishakti Securities. “However, the other three have not submitted papers of their agreement with software developers,” a CDS official said. It has been almost a year since the CDS was launched. It had planned to start full-fledged online clearing by October, 2013. However, the reluctance of stockbrokers and companies to acquire CM and depository participant (DP) licences had been impeding the CDS plan.

Companies had been demanding a review of the deposit guarantee provisioned by the Securities Board of Nepal (Sebon) to take DP licences.

The regulator ahs relaxed the provision for CMs, allowing them to show Rs 1-million bank guarantee instead of making a cash deposit. But for DP licence, a company still needs to have a net worth of Rs 10 million.

Once the demat transactions begin, CDS will have to take the entire listed companies into paperless clearing system within the next six months, according to the CDS Bylaws 2012.

The CDS official said a number of companies, including brokers, had been pressing for demat trading. “They have said they will come to the demat system of share trading soon after the online clearing is launched.”

Under the demat transaction system, investors will have to place selling order only after dematerialising their share certificates, which is done through DPs. Both CMs and DPs are directly linked to the CDS through software, which settles stock transaction instantly.

Narendra Raj Sijapati, president of Nepal Stockbrokers’ Association, said the demat transaction system will reduce the clearance time to three days.

Of the 235 companies listed on the exchange, only 16 have so far reached an agreement with CDS for dematerialising their stocks. CDS has issued DP licences to 10 companies, and has registered 6,392 share certificates for dematerialisation.

Demat benefits

Demat account for shares and securities with Business purpose

The benefits of demat are enumerated as follows:

• Easy and convenient way to hold securities
• Immediate transfer of securities
• No stamp duty on transfer of securities
• Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)
• Reduced paperwork for transfer of securities
• Reduced transaction cost
• No "odd lot" problem: even one share can be sold
• Change in address recorded with a DP gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
• Transmission of securities is done by DP, eliminating the need for notifying companies.
• Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc.
• A single demat account can hold investments in both equity and debt instruments.
• Traders can work from anywhere (e.g. even from home).

Benefit to the company

The depository system helps in reducing the cost of new issues due to lower printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.

Benefit to the investor

The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.

Benefits to brokers

It reduces risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall trading and profitability. It increases confidence in their investors.

Disadvantages of Demat

• Trading in securities may become uncontrolled in case of dematerialized securities.
• It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors.
• For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market.
• Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various Bye-Laws of various depositories.
• Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity.
• There is no provision to close a demat account, which is having illiquid shares. The investor cannot close the account and he and his successors have to go on paying the charges to the participant, like annual folio charges etc..
• After liquidating the holdings, many Indian investors don't close their dp account.They are unaware that DPs charge even on dormant accounts 

Reference: 

http://kathmandupost.ekantipur.com/news/2014-04-15/demat-share-trading-system-from-today.html