Sebi's Demat 2.0 pilot explained: How tokenised bonds help investors

Corporate bonds could soon move beyond the conventional demat system, with the capital markets regulator testing a tokenised version that could make issuance, settlement and interest payments more automated. Demat 2.0 does not mean a new kind of bond.

A pilot by the the Securities and Exchange Board of India (Sebi) will use distributed ledger technology (DLT) to issue, hold, trade and settle corporate bonds as digital tokens. Sebi says the technology will change how ownership and transactions are recorded, while the bond itself will continue to have the same legal character, investor rights, coupon, maturity, rating and other terms as a conventional dematerialised bond.

The pilot also brings India’s central bank digital currency (CBDC), the e₹, into the settlement process. By linking the securities and payment legs, Sebi is testing whether transactions can settle simultaneously rather than leaving a gap between delivery of the bond and payment.

What is Demat 2.0?

Demat 2.0 is a Sebi pilot to test the next generation of financial market infrastructure. It will use DLT to issue, hold, trade and settle corporate bonds in tokenised form.

Under the existing system, ownership of securities is recorded through conventional databases. Under Demat 2.0, the corporate bond itself will be issued as a native digital token on a private, permissioned DLT network operated by the depositories.

This does not turn the bond into a cryptocurrency or create a new investment product. Sebi’s FAQs say that “the pilot does not change the legal character, rights, obligations or regulatory treatment of the corporate bond. What changes is only the technology.”

The tokenised bond will retain the same ISIN, coupon, maturity, covenants, rating, security and investor rights as the conventional bond.

Does tokenisation change the bond?

No. The bond remains a security under the Securities Contracts (Regulation) Act, 1956 and continues to come under the applicable Sebi regulatory framework.

The bond’s key terms, including its coupon rate, payment dates, day-count convention and redemption terms, will be encoded into the token through a smart contract.

This distinction is important for investors. Tokenisation changes the technology used to maintain the ownership record and settle transactions. It does not by itself change the credit quality or contractual terms of the underlying bond.

Do investors need a new demat account?

No.

The Demat 2.0 account is an extension of the investor’s existing demat account, not a separate demat account. Existing KYC details will also be used.

Registration will take place through the existing depository interface by linking an eligible demat account with the investor’s CBDC wallet and providing the required consent. Tokenised holdings will continue to be visible through the depository’s existing interface and holding statement.

Investors also will not need to manage private cryptographic keys themselves. “The depositories will hold and manage the private keys on behalf of investors,” the document says.

Why is the e₹ being used?

The pilot uses the e₹ for the money leg of the transaction.

An investor participating in the pilot would need a CBDC wallet opened with their bank. The securities and payment legs are linked through the DLT infrastructure so that they can settle together.

This is known as atomic Delivery-versus-Payment (DvP). In simple terms, the bond and the money change hands as one linked transaction. If the securities transfer succeeds, the payment succeeds; if one leg fails, the other does not settle either.

The aim is to remove the settlement gap between delivery of securities and payment, thereby reducing counterparty exposure during that period.

Ashish Singhal, cofounder of crypto exchange CoinSwitch, said the significance of the pilot goes beyond tokenising bonds.

“Sebi’s Demat 2.0 pilot represents a significant evolution in the architecture of India’s capital markets,” Singhal said. He added that its importance lies in creating a “programmable and interoperable framework” covering issuance, ownership, settlement and asset servicing.

According to Singhal, linking tokenised securities with the RBI’s wholesale CBDC could enable atomic settlement, reduce settlement risk and improve post-trade efficiency. He said the initiative could also serve as a blueprint for tokenising other regulated financial assets in India while keeping them within a regulated framework.

Will there be a separate exchange for tokenised bonds?

No.

Demat 2.0 does not propose a separate exchange or segregated market segment for tokenised corporate bonds.

Existing RFQ and OTC reporting platforms of stock exchanges will be linked to the DLT infrastructure. Price discovery, order handling and reporting will continue through existing channels, while the securities and funds settlement legs will be integrated with the tokenised system.

This is important because tokenisation does not mean investors will have to move to a separate crypto-style marketplace to buy or sell these bonds.

What happens to interest and redemption?

The pilot is designed to automate scheduled payments.

The terms of the bond will be encoded into a smart contract. This means coupon payments, redemption and other scheduled corporate actions can be executed automatically based on holdings recorded on the ledger on the relevant record date.

Sebi says the objective is to reduce repeated manual instructions and reconciliation between institutions for each corporate action.

For investors, this could eventually make receiving interest and principal more streamlined. However, the pilot is still testing the technology and operational arrangements.

What about credit risk?

Tokenisation does not remove the underlying credit risk of a corporate bond. Existing requirements relating to credit rating, debenture trustees, listing, disclosures, investment eligibility, valuation and investor protection continue to apply.

There is also no separate credit-rating requirement merely because a bond is tokenised. The existing rating continues to reflect the credit risk of the issuer and its obligations.

Therefore, investors should not interpret tokenisation as an indication that a corporate bond is inherently safer than a conventional bond issued by the same company.

Can investors sell the bond?

Full secondary-market trading is planned for the second stage of the pilot.

Until then, Sebi has provided for an interim exit mechanism. A peer-to-peer or demat-to-demat transfer may be enabled on request through the depositories. The payment can be completed through CBDC or banking channels outside the atomic settlement architecture.

The FAQs state that this is intended to ensure investors are not locked into the investment before secondary-market trading is enabled.

When can retail investors participate?

The pilot is proposed to be rolled out in three stages.

Stage I: Tokenised corporate bond issuance through integration with the existing Electronic Bidding Platform (EBP), with participation initially expected to be institutional.

Stage II: Secondary-market trading, with access extended to retail participants. An interim peer-to-peer or demat-to-demat transfer mechanism may operate before this stage.

Stage III: Potential expansion to credit rating agencies, depository participants and other regulated entities, along with consideration of other financial instruments and a wider range of corporate actions.

This means retail investors are not the initial focus. Their participation is proposed once secondary-market trading is enabled.

Why does Demat 2.0 matter?

The pilot is small compared with India’s overall corporate bond market. That makes it important not to mistake the initial issuances for an immediate transformation in bond-market liquidity.

Prateek Gupta, head of business, Mudrex, said the pilot is significant because institutional use of blockchain infrastructure is moving closer to the core of financial markets.

“India is building the rails before building the market,” Gupta said, pointing to the combination of tokenised bonds and wholesale CBDC settlement.

He said the Rs 1,025 crore issued across three issuers remains small compared with the broader corporate bond market and therefore does not yet represent a liquidity revolution. The bigger test, according to Gupta, will be whether secondary trading, programmable corporate actions and wider investor access can take the initiative beyond an infrastructure experiment.

The pilot is also testing whether tokenisation can enable near-instant settlement, reduce manual intervention and reconciliation, improve auditability and traceability, and integrate securities settlement more closely with central-bank money.

It will also examine cyber security, scalability, resilience, auditability and settlement finality before any wider rollout.

Demat 2.0 is being conducted under Sebi’s Regulatory Sandbox. Any wider framework will depend on the outcome of the pilot.

The bond remains a corporate bond; what is changing is the infrastructure used to issue, record, transfer, settle and service it.