It’s a computerized ledger system that enable the holding or transfer of securities without the need for physical movement. The ownership of security or shares is through a book entry instead of physical exchange CDS is for security what a bank is for cash transfer between banks. Eg A and B are 2 shareholders of XYZ Ltd. XYZ Ltd. does not need to deliver the share certificate to A or B but a ledger account for both shareholders would be maintained at the CDS. Their accounts will be credited with the number of shares. If A want to sell shares to B the CDS will debit A’s account and credit B’s account.
Advantages of CDS
1. It shortens the registration process in the stock exchange i.e. high speed of registering shareholders.
2. It improves the liquidity of stock exchange than increase the turnover of the equity shares in the market.
3. It will lower the clearing and settlement cost eg no need to prepare share certificates and seal them (putting a seal).
4. Its faster and less risky settlement of securities which make the market more attractive for investors e.g instances of fraud will be reduced since there is no physical share certificate which may be forged.
5. There will be improved and timely communication between company and the investors hence reduced delay in receiving dividends and right issues and improve information dissemination concerning a company.
6. It will lead to an efficient and transparent securities market to adhere to International Standards for the benefit of all stakeholders.
Functions of CDS
1. Immobilisation of securities ie elimination of physical movement of securities.
2. Dematerialisation i.e elimination of physical certificates or documents showing entitlement to a security so that ownership exists only as computer records.
3. Effective Delivery Vs. payment (DVP) ie simultaneous delivery and payment between the 2 parties exchanging or transferring securities. This can be done without delay if CDS is linked to the central payment clearing system e.g CBK.
4. Provision of detailed listings of investors according to the type of securities they hold e.g ordinary shares, preference shares.
5. Effective Distribution of Dividends, interests, rights issues and bonus issues.
6. Provision of book entry account ie electronic exchange of ownership of securities and payment of cash.