Nearly a decade and a half have elapsed since the CDSC was inaugurated on March 31, 2011. Since then it has consistently drawn sharp criticisms for failing to function in a full-fledged manner.The effort to bring CDSC to full operation has been plagued with fits and starts right from the beginning.
First, it was capital gains tax issue. There were differences among stakeholders on how to charge fee for every transaction in CDS system and incorporate it in capital gains. Even before the issue was resolved, brokers were already reluctant to work as Depository Participant and Clearing members—entities that work as interface between CDSC and investors--were because of the net worth requirement issue. In addition, the investors were complaining about high fees. Both of the issues were resolved.
That cleared the way for the CDSC to go ahead and create a system that would enable online trading. After putting in place the necessary systems, CDSC tested it with its staff and then invited a few brokers to check the system, during which everyone was convinced that the system was working perfectly.
After that, it was tested full-fledged with the involvement of all the brokers. Only after the mock trading and settlement was successful, NEPSE and CDSC took the next step of going live with Demat trading, clearing & settlement of banking stocks.
Even though investors were happy seeing how everything worked seamlessly and Nepal Rastra Bank, after studying how demat system works and how demat shares can be pledged, allowed banks to provide loan against demat shares, SEBON and CDSC seem to be in no hurry to speed up the full implementation of the online trading.
It was believed that online trading, facilitated by CDSC, would free the traders and individual investors from the hassles and risks associated with physical shares and give similar boost to the capital market as was witnessed after Nepse was computerized.
Many investors are now aware that being able to track share prices is not enough and that they should also be able to trade in their shares swiftly and safely. But the delay in bringing CDSC to full-fledged operation has hindered a full-blown online trading in shares.
As per CDSC’s website, of around 230 listed companies only 79 have registered themselves for the dematerialization process and 55 are said to be in pipeline. Therefore, with most shares still in physical form, at present, buyers and sellers have to wait for weeks and months for ownership transfer of shares. The manual verification and transfer of shares is not only cumbersome but also poses risks of loss and damage to the documents during the process.
“In order to expedite the dematerialization process, the CDSC has already made it mandatory for all commercial banks and other registered companies’ shares to be converted to electronic form in case of individual requests for ownership transfer,” said Sabina Pujari, head of Business Development and Operations at CSDC. “We have also been urging other listed companies, through written correspondence and follow up calls, to get themselves registered for the dematerialization process.”
“Those who have traded through dematerialized shares have expressed appreciation for the swifter ownership transfer, a process that can take months in case of physical shares,” Pujari added.
Despite clear benefits of dealing in shares in electronic form, SEBON and CSDC have been a little too slow in pushing for dematerialization of all listed shares.
Why is there no hurry?
Stock Brokers’ Association General Secretary Nitesh Agrawal said brokers are desperately waiting for the CDS system to work full fledged. “For brokers, delays or loss or misplacement of shares leads to revenue loss in the immediate term and loss of faith among investors who deal with us in the long run,” said Agrawal, who is also the managing director of ABC securities. “The system would be equally beneficial for common investors who would not have to worry about loads of paperwork while buying and selling shares.”
Agrawal attributed the delay in fully implementing CSDC to the lack of enthusiasm among common investors about electronic shares. “For those who are used to holding shares in hands and keeping them at home, the sudden realization that the certificates would be stored at some distant location in electronic form is hard to accept,” Agrawal said.
But the sooner CDSC comes into full operation the faster all investors will get accustomed to the new system. “One way CDSC can win the trust of investors is by making the whole system more user-friendly. At present, there is no way for the investors to find out the details about their shares online,” Agrawal added.
But there are enough indications of CDSC developing cold feet before taking the leap into a fully operational system. But Agrawal tried to reassure the CDSC of brokers’ support in case it faced problems. “Although brokers are aware of the high stakes involved, they have time and again urged CDSC to go full-fledged with assurances that they would stand together in the face of any difficulty,” Agrawal said.
Meanwhile, SEBON, the regulatory body, had formed a committee a few months ago to study the functioning of the Central Depository and Clearing System, following which the regulatory body asked some clarification from CDSC on the capacity of its systems prior to starting full-fledged demat clearing and settlement.
Niraj Giri, the spokes person of SEBON, said that the last he had heard from CDSC was that they were still working on strengthening the system. “CDSC is the ultimate implanting authority of the dmat system and SEBON will not stop it from becoming fully operational. We are willing to provide CDSC with all kinds of support it needs to become fully operational.”
Meanwhile, if we are to believe a former IT official with Nepse who was part of the team that installed the CSDC system, there is no reason to fear. “I am confident that the system is able to cope with much higher volume without any hassles,” said Harish Pokharel, Former Senior IT officer, Nepse. “The hardware used are robust and can cope with surge of volume. If a pattern of increased load is observed in server than it can be easily load balanced with the introduction of new servers.”
He further said, “In my opinion, CDS and clearing system can be run in full fledged without any worries. Any unforeseen obstacle seen can be handled during that time.”
According to him, the system is hassle-free and is sure to benefit the concern stakeholders. Business will rise for brokers. The shares will be even more liquid for investors, which in turn will bring huge influx of capital flow in the country economy.
“Transiting to new system has challenges and what we need is gut. In Nepal, it's in our nature that we are reluctant to face that challenge. The problem is that nobody wants to be responsible if something goes wrong. Things go wrong but they can be rectified,” said Mr Pokharel.
Experiences show that stakeholders are reluctant to embrace change and those in the decision-making positions wary of taking responsibilities. Commercial banks, whose shares are now traded only in demat form, adopted it only after Nepal Stock Exchange issued a circular warning them of suspending their trading.
Krishna Pokhrel, a senior Nepse official, said that the NEPSE had issued a circular for the commercial banks to adopt dmat process in good faith, which got a positive response. “We can urge other sectors to do it as well, but then CDSC itself has to be fully prepared. They have two committees to advise them on whether the system is ready for a full-fledged operation. We are waiting to hear from the committees,” said Pokharel.
Mr Giri of SEBON said, “If we look at it as an outsider, we don’t see any reason for the delay. Gradually, everybody should push for the full implementation of the system. We all know that the capital market’s further growth and expansion depends greatly on the CDSC going online as soon as possible.”
Selling and buying shares through an online system is easy, swift, convenient, and free from risks associated with physical shares. At a time when a huge number of shares are yet to be converted to electronic form, online trading is still a distant reality. A fully operational online share trading system will also offer a great relief for common investors residing outside the Valley as well as those living abroad.
