DEMATERIALISATION – THE MOVE AWAY FROM SECURITIES PAPER
As articulated in the previous article, the motivation of moving away from paper in the capital markets is a fundamental positive change long overdue in our market as the market drives towards international best practice and in the process reaps the ensuing economic benefits. Indeed, there are more reasons for completely doing away with the use of securities certificates to eliminate various risks and enhance market efficiency. It is therefore imperative to dissect the process that an investor has to go through to eliminate paper in the trading process. The process is called dematerialisation.
In economics, dematerialization refers to the absolute or relative reduction in the quantity of materials required to serve economic functions in society. In common terms, dematerialization means doing more with less. In simple terms dematerialisation is a process by which the physical certificates of an investor are taken back by the company or Transfer Secretary and destroyed, and an equivalent number of securities are credited in the depository account of that investor. This is done at the request of the investor.
Dematerialisation was introduced in many markets with the intention to mitigate the risks associated with securities trading in paper format. The drive in the Zimbabwean capital market is to adopt the dematerialisation system successfully and with the plans to facilitate trading of almost all financial assets in dematerialisation format in coming future.
Storage of Dematerialised Shares – Depository
Depository is the body which is responsible for storing and maintaining investor’s securities in dematerialisation or electronic format. In Zimbabwe this role is played by Chengetedzai Depository Company Limited (CDC).
Who is a Depository Participant?
Depository Participant (DP) is the market intermediary through which investors can avail the depository services. Depository Participant provides financial services and includes organizations like stockbrokers, custodians and any other designated financial institutions.
To recapitulate dealing in dematerialisation format is beneficial for investors, stockbrokers and companies alike. It reduces the risk of holding securities in physical format from investor’s perspective. It’s beneficial for stockbrokers as it reduces the risk of delayed settlement and enhances profit because of increased participation. From securities issuing company’s perspective, issuance in dematerialisation format reduces the cost of new issue as paper work is not involved. Efficiency and timeliness of the issue is also maintained while companies deal in dematerialisation format.
In the new operating environment all trading in securities on the Zimbabwe Stock Exchange or any registered Exchange will be done in dematerialisation format. In this regard, an investor will not deal in paper securities, thus any investor will be required to dematerialise the securities first. In order to dematerialise physical/paper securities, investors are required to open a Securities Account and fill in the Securities Deposit Form, and submit the same along with physical shares through a Depository Participant. The complete process of dematerialisation involves:
- Investor surrenders the physical certificates for dematerialisation to the Depository Participant along with Securities Deposit Form.
- Depository Participant updates the Account of the investor and securities are allocated in investor dematerialisation holding.
The depository participant will send the request along with the share certificates to the issuing company or it’s Transfer Secretary for confirmation of authenticity, and simultaneously to the Transfer Secretary through the depository. After checking the records, the Transfer Secretary will deface the securities certificates and send a confirmation of dematerialisation to the depository. The depository then confirms the dematerialisation of shares to the Depository Participant to credit the holding of shares in the investor’s account electronically.
The process of dematerialisation is summarised as shown below:
Regulatory requirement for Issue of dematerialised securities
The current operating environment recognises the physical securities as articulated in the Companies Act [Chapter 24:03]. However, in an effort to achieve dematerialisation of listed securities Section 72 of the Securities Act [Chapter 24:25] notes that:” notwithstanding anything to the contrary in the Companies Act [Chapter 24:03], a participating issuer of listed securities may issue a security in dematerialised form or convert a certificated security into a dematerialised security; if it is authorised to do so by a resolution of its board of directors, board of management or other governing body.” This should be done provided that a certificated security shall not be converted into a dematerialised security without the consent of the current holder of the document of title concerned. In this regard, it is imperative that the listed companies thrive to have the respective resolutions to be in place in preparation of the dematerialisation environment. This is a key regulatory requirement going forward.
In order to adequately achieve a high success rate on dematerialisation it requires the concerted efforts of various parties in the capital market. According to the depository infrastructure each participant has a critical role to play to achieve the expected results in the new operating environment, thus each intermediary must thrive to educate the investor of the dematerialisation process and the benefits to be accrued thereof. Surely, with the envisaged benefits and efficiencies to the investor and the market, the paper has to end here by dematerialising securities!
Gerald G. Katerere
Risk & Compliance – Chengetedzai Depository Company