A share transfer once meant a signed form and a paper certificate carried to the company’s registry. Modern markets settle trades by changing entries in an electronic register kept by a central depository. The Central Depositories Act 2015 (No 63 of 2015) created the legal framework for one in Papua New Guinea.
What the law means by a central depository
“Central depository” means a central depository which has been approved pursuant to Section 5 of the Central Depositories Act 2015 to establish and operate a system for the central handling of securities, whether or not listed on any stock exchange, whereby all such securities are deposited with and held in custody by, or registered in the name of, the company or its nominee company for the depositors and dealings in respect of these securities are effected by means of entries in securities accounts without the physical delivery of scripts.
The definition in the Capital Market Act 2015 captures the two ideas. Securities are immobilised: the depository or its nominee becomes the registered holder of all deposited securities. And dealings are book entries: a sale moves units from the seller’s securities account to the buyer’s without any certificate changing hands. The Securities Commission Act 2015 uses the same definition and, as amended in 2023, treats the three Acts together as “securities law”.
How the Central Depositories Act works
The Act follows the pattern of the stock exchange and clearing house provisions in Part II of the Capital Market Act. Its main elements are set out below.
| Topic | Provision | Effect |
|---|---|---|
| Approval | s 5 | A company may operate a central depository only with the Securities Commission’s approval, on conditions |
| Functions | s 8 | Central handling of securities, keeping securities accounts and settlement-related services |
| Dematerialisation | Act generally | Deposited securities are held in electronic form; certificates cease to be the evidence of title |
| Depositors and agents | Act generally | Investors open securities accounts through authorised depository agents (usually stockbrokers); the depository keeps a record of depositors; nominees may hold for others |
| Unit trusts | s 28 | The Act applies to units in a unit trust scheme as it applies to shares |
| Secrecy | Part IV | Account information is confidential, with limited exceptions for the Commission, courts and the depositor |
| Guarantee Fund | s 56 | A fund to meet losses caused by the depository system or its participants |
| Investigation and offences | Parts V–VI | Commission investigation powers and criminal offences for breaches |
The Capital Market Act dovetails with this. A central depository must file an annual regulatory report (section 16(2)), give the Commission notice before disposing of or acquiring significant assets (section 18), comply with Commission directions (section 19) and may be the subject of a suspension order over its board or principal officer (section 23). Under section 443, the depository, its depository participants and anyone to whom its rules apply are deemed bound to comply with those rules, and the Commission may fine a person in breach up to K5,000,000, direct compliance or order restitution. The exchange must also tell the Commission immediately if a broker is at risk of failing to meet financial requirements under the Central Depositories Act (section 13(5)).
What it means for an investor
If you buy listed shares or units through a PNGX participating organisation, the broker opens a securities account for you with the depository and you become a depositor. Instead of a certificate you receive a holding statement showing the securities credited to your account, and a fresh statement whenever the balance changes. The arrangement resembles the CHESS holding statements familiar to anyone who has invested in Australia. Three practical consequences follow.
- Title is proved by the depository’s record, not by paper. Keep your statements and your account number, and report an unexpected change at once.
- Transfers and settlement happen by book entry on the settlement date set by the exchange’s rules; the seller’s account is debited and the buyer’s credited. A lost certificate can no longer hold up a sale.
- Dividends, distributions and notices are sent according to the account details held by the depository and the issuer’s registry. If you move, tell your depository agent, not just the company.
A nominee holding, where a bank or trustee company holds the securities in its own account for you, is permitted, but the beneficial owner is then invisible to the issuer and must rely on the nominee’s records. The substantial holding rules look through nominees, and the Commission may trace the true owner.
Unit trusts and the depository
Section 28 of the Central Depositories Act applies the Act to unit trust schemes. Units of a listed unit trust can therefore be deposited and traded by book entry like shares, and the trustee’s register of unit holders under section 250 of the Capital Market Act will show the depository’s nominee as holder of the deposited units, with the depository’s record of depositors identifying the real investors. For an unlisted scheme the depository is irrelevant: units are issued and redeemed by the trustee and recorded only in its own register. See what happens to units on death for how deposited holdings pass to an estate.
The Central Depositories Act was certified on 2 December 2016 and commenced on a date fixed by notice in the National Gazette. Commentary published in early 2018 said it had not yet commenced, while a later report put commencement at 17 December 2017. The date could not be confirmed from public sources. Check the Gazette or ask the Securities Commission, and confirm with PNGX which depository arrangements currently operate for listed securities.
Sources
- Central Depositories Act 2015 — ss 5, 8, 28, 56, Parts IV–VI
- Capital Market Act 2015 — ss 2(1) (“central depository”), 13(5), 16(2), 18, 19, 23, 250, 443
- Securities Commission Act 2015 — s 2 (“central depository”, “securities law”)
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.