Islamabad: The Securities and Exchange Commission of
Pakistan (SECP) has initiated the second phase of fully digitizing physical
share certificates evidencing the ownership of shareholders of unlisted
companies. Under this initiative, documentary share certificates of already
registered companies will be transferred to electronic (book entry) form
through the Central Depository System managed by the Central Depository
Company.
This initiative is a significant step towards modernizing
Pakistan’s corporate framework, enhancing transparency, strengthening investor
protection and improving ease of doing business.
Transferring shares of companies to book entry form will
reduce the risks associated with physical share certificates. Currently, a
large number of disputes related to ownership of shares of unlisted companies
are pending in the courts. Transferring shares in electronic form will make the
ownership record secure, transparent and immutable, which will significantly
reduce fraudulent transfers and related legal disputes.
Electronic shares will reduce the risk of loss, theft,
forgery or damage of documentary certificates and will also reduce the
administrative costs of companies. Transfer of shares through digital ownership
will be fast and secure, the settlement process will be completed quickly and
an accurate record of shareholding will be available in real time. Book-entry
shares can also be used as collateral for obtaining loans from banks.
For unlisted companies holding physical shares, conversion
of shares to electronic form has been made mandatory for any share transaction.
Such companies are required to convert their shares to book-entry form at least
30 days before any share transaction. After the conversion to book-entry form,
all share transfers, allotments and other share transactions will be carried
out only through CDS. It will be mandatory for all shareholders to hold their
shares in electronic form in future.
The SECP has already made it mandatory for all newly
registered unlisted companies to issue shares only in electronic form, while
physical share certificates are no longer acceptable for new companies. It will
be mandatory for subscribers to hold their shares in CDS at the time of
incorporation of the company.
A formal notification will be issued soon to convert shares
of already registered unlisted companies to book entry form, under which
physical shares will be mandatory to be converted into electronic form before
any transfer, allotment, rights issue, bonus issue, buyback or any change in
shareholding. This phased approach will enable old companies to gradually
migrate towards a fully digital system while continuing their normal
activities.
In this regard, the SECP has also approved a comprehensive
procedure for joining the CDS, which includes eligibility criteria, documentary
requirements, verification procedures and determination of applicable fees so
that the conversion process can be completed in a safe, orderly and efficient
manner.
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