What’s the new technology all about?
The Securities Central Depository (SCD) is an electronic register that will store securities.
For the last 10 years, USE has operated a manual system and the shares held in paper form. Investors bought shares through a broker and the evidence of transaction is a share certificate.
However, there was a risk in this system because the certificates could get misplaced, stolen or forged. The other problem was delay in transaction due to verification of the certificate by a broker prior to a transaction which takes at least two days.
The trading would occur and then deliver the paper for the onward transmission, a process that would take between seven to 10 days. But with SCD, the securities will be deposited in the depository.
We will have an email system where shareholders can access the system to check and monitor their securities.
What is the implication of this to the shareholders? Shareholders have to open an account through a Securities Central Depository Agents (SCDA) who are largely broker/dealers.
When you buy shares, they will be deposited onto this account. Requirements for opening an SCD account include passport size photographs, passpor or IDs. Since we don’t have a national ID system, we have introduced a biometric reader where fingerprints will be taken to protect investors.
Institutions will be required to provide additional information like board resolutions, account signatories, and registration documents filed by the registrar. Foreigners are requested to send passports or IDs.
What is immobilisation?
The USE has been transacting in shares since 2000 when we first introduced our maiden product, Uganda Clays.
We have over 40,000 share certificates out there representing 12 counters. With the immobilisation process, we are doing it in phases.
To implement the SCD, we need to collect all these certificates and deposit them into the system. We started with Stanbic counter because it was an active counter and the process would be expedited.
Immobilisation means shares are pooled into the system and for anybody to trade, you need to get your certificate to the SCDA who will deliver it to the USE for depositing to certify trade. Once a counter is immobilised, you cannot use a paper certificate to trade on the floor. Everything has to be entered into the system for trade to occur.
We cannot run a parallel system of trading electronically held securities parallel to paper securities because of the risks, and reconciliation challenges involved.
We are only trading electrically deposited securities. Anybody holding Stanbic, New Vision, dfcu, Uganda Clays and Kenya Commercial Bank certificates has to go to SCDA because these counters have been immobilised.
We have rolled out to BAT, Bank of Baroda, East African Breweries, Equity Bank, Jubilee Holdings, Kenya Airways, and National Insurance.
Why has the process been slow?
When you introduce a new initiative that involves technology, there is a lot of education and convincing required. Some people are still asking questions.
But it is something we had factored in for this project. The timing of the project comes after the global economic meltdown. The drivers of opening accounts are going to be largely sellers.
Immobilisation is for people with existing shares, so the main drivers will be existing shareholders. Most of them will be driven to open an account when the need to sell arises. Secondly, because of the meltdown, prices are depressed across the various counters.
While many investors would like to sell, the prices are not attractive. People are waiting for the market to pick up before they can make a move, which is a hindrance to the process.
What we are seeing is a lot of demand but no supply. Those who are opening accounts are buyers but there are limited shares.
How many accounts have been opened so far?
Much as the process has been slow, we are happy that it’s not as slow as we had envisaged.
It has picked over the last two weeks. We have a total of over 300 million shares that have been deposited.
We have 1,400 tradable accounts that have been opened, which is an improvement. The response is across the board, with account openings by the locals, institutions and foreigners which means education efforts are paying off.
We have a lot of queries from several countries, which shows there is awareness about development at the USE.
Is this a reasonable number?
The gist of this process is that the drivers will be sellers. There are account holders who are not in a rush to transact soon. If you take Nairobi Stock Exchange, they introduced the SCD in 2004. Until Safaricom IPO, they had about 200,000 accounts despite having one million shareholders.
Because people are driven by the need to purchase, Safaricom IPO pushed the number of accounts to about two million. Account opening was driven by the need to participate in the IPO.
Does immobilisation have a deadline?
Immobilisation will continue for sometime. Shareholders can continue to hold their paper certificates, but the moment you want to sell, you will have to open an SCD account and deposit your securities. We have automated only one side of the platform, which is the depository because trading has remained manual.
This will hinge on the success of SCD and availability of funds. Once we automate the trading platform, we will have to move towards the dematerialisation phase to totally do away with paper. It will be implemented in two to three years.
Won’t the slow adoption to technology hit trading volumes?
There are so many people who do not see the need to sell due to the current price level while others don’t need the money and the rest have a long-term view. There is more education and aggressive campaign needed though that hinges on availability of resources.
People will take time but we will get a critical mass. The market is quiet apart from day-to-day trading and the process maybe sluggish. However, markets have cycles. There are times when we have a buyers’ market. From the time of the global meltdown, it was a buyers’ market. The trend has switched to a seller’s market.
We are seeing a lot of demand for shares but investors are gauging to see how sustainable it is before exiting their holdings at the peak of the stock price.
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