Book-entry securities

What it means

Book-entry securities are securities that exist not on paper but only as entries in the records of the central securities depository and its members. The owner holds no paper document; ownership is recorded in the owner's securities account.

Mainly shares and bonds can be in book-entry form. In Slovakia bearer shares must be in book-entry form, which increases ownership transparency and rules out anonymous shareholdings. Registered shares can be either certificated or book-entry.

A book-entry security is transferred by an entry in the records, not by handing over a document. Ownership arises and passes at the moment the transfer is registered with the central depository, which thus acts as a public and reliable register of owners.

How it works in practice

A joint-stock company with book-entry shares does not keep its own paper list of shareholders but obtains it from the central depository. Before a general meeting it requests an extract to determine who is entitled to vote.

Book-entry shares are sold through a depository member, such as a securities dealer or a bank, or directly through the depository. The transfer agreement is supplemented by an instruction to register the transfer.

The transparency of book-entry shares also helps in identifying the ultimate beneficial owner and meeting anti-money laundering obligations. Banks and other obliged partners can more easily verify the ownership structure of shareholders.

What to watch out for

Fees are charged for maintaining a securities account and registering transfers. Small joint-stock companies with few shareholders should take these costs into account when deciding between book-entry and certificated registered shares.

When the form of a security changes, for example when certificated shares are converted to book-entry form, the statutory procedure must be followed, the articles amended and the change entered in the commercial register. Mistakes in this process can call shareholders' ownership rights into question.