SECP Mandates Digital Shares for Unlisted Companies

In a significant regulatory development, the Securities and Exchange Commission of Pakistan (SECP) has commenced the second phase of reforms aimed at complete digitisation of shareholding in unlisted companies. This initiative mandates the transition from physical share certificates to electronic (book-entry) securities maintained through the Central Depository System (CDS), administered by the Central Depository Company (CDC).

Historically, unlisted companies in Pakistan have relied on paper-based share certificates, exposing shareholders to risks including loss, destruction, forgery, and unlawful transfers. Such vulnerabilities have contributed to a substantial volume of shareholding disputes pending before judicial forums. Migration to book-entry form is expected to substantially mitigate these risks by ensuring secure, transparent, and tamper-resistant ownership records.

From a compliance and governance standpoint, the shift to electronic shareholding will enhance traceability of beneficial ownership, reduce administrative inefficiencies, and streamline corporate transactions. Electronic settlement will enable expedited transfers, real-time updating of share registers, and improved accuracy in ownership records. Additionally, digitised shares may be pledged as collateral, thereby facilitating structured financing and improving access to credit markets for businesses.

The CDS framework will further strengthen regulatory oversight by centralising data and enhancing visibility of ownership structures within unlisted entities. This reform aligns with broader objectives of improving corporate governance standards and reinforcing investor protection mechanisms.

Under the forthcoming notification, all existing unlisted companies maintaining physical share certificates will be required to convert such shares into electronic form prior to executing any share-related transaction. Post-conversion, all transfers, allotments, rights issuances, bonus shares, buybacks, or changes in shareholding structure must be processed exclusively through the CDS, with shareholders maintaining holdings in book-entry format.

It is noteworthy that the SECP has already mandated newly incorporated unlisted companies to issue shares solely in electronic form, effectively discontinuing the issuance of physical certificates. The phased implementation approach allows legacy entities to continue routine operations while ensuring gradual but mandatory compliance with the digitisation regime.

Comprehensive onboarding procedures for induction into the CDS have also been approved, including prescribed eligibility criteria, documentation protocols, verification mechanisms, and applicable tariff structures. These measures are designed to ensure a structured, secure, and seamless transition.

This reform represents a transformative step in modernising Pakistan’s corporate and regulatory landscape, promoting transparency, strengthening compliance culture, facilitating dispute reduction, and advancing the ease of doing business in line with international best practices.