Context
- SEBI, in coordination with RBI, plans to pilot bond tokenisation using blockchain to improve bond issuance, trading and settlement.
- SEBI has simplified Foreign Portfolio Investor (FPI) onboarding by accepting digitally signed Power of Attorney (PoA), removing notarisation, apostillisation and consularisation.
About Bond Tokenisation and its features
- Bond tokenisation means converting ownership or claims over a conventional bond into digital tokens recorded on a blockchain/ Distributed Ledger Technology (DLT), creating a shared and secure transaction record.
- Fractional Ownership: Allows bonds to be divided into smaller units, potentially lowering the entry barrier for retail investors to invest with lower amounts.
- Simultaneous settlement: Tests whether money and securities can move together, potentially enabling faster settlement than existing T+1 and optional T+0 systems.
- Smart contracts: Can automate coupon payments, redemption and other bond-related activities, reducing manual processes.
- Lower intermediation: A common digital record can reduce dependence on multiple intermediaries and reconciliation of separate records.
- Greater transparency: Blockchain provides a shared and secure record, making ownership and transactions easier to track.
Conventional Bonds vs Tokenised Bonds
| Basis | Conventional Bonds | Tokenised Bonds |
| Form | Held as conventional securities in the financial system | Represented through digital tokens |
| Technology | Records maintained through existing depositories and intermediaries | Ownership recorded on a blockchain/DLT |
| Settlement | Uses established T+1 and, where available, T+0 mechanisms | Aims to test simultaneous or near-instant settlement |
| Intermediaries | Involves multiple intermediaries | May reduce intermediary dependence |
| Bond servicing | Conventional coupon and redemption process | Smart contracts may automate some processes |
| Investment size | Often requires relatively higher investment amounts | Fractional ownership may allow smaller investments |
Significance
- Deepens Corporate Bond Market: Can improve market efficiency and participation, helping India develop a deeper source of non-bank finance.
- Mobilises Capital: A stronger corporate bond market can provide companies with an alternative to bank credit, diversifying sources of finance.
- Reduces Transaction Costs: Faster and more automated processes can lower reconciliation, processing and settlement costs.
- Improves Investor Access: Fractional ownership can reduce entry barriers and broaden participation in fixed-income securities.
- Attracts Foreign Capital: Easier FPI onboarding can reduce compliance burden and make India more attractive to global investors.
- Modernises Financial Infrastructure: Adoption of Blockchain/DLT and smart contracts can support the digital transformation of India’s financial markets.
Challenges
- Cyber and cryptographic risk: Future quantum computing may weaken cryptographic systems used to protect blockchain records.
- Interoperability: Connecting blockchain platforms with existing depositories and legacy financial systems may be technically difficult.
- Regulatory uncertainty: Clear rules are required on legal ownership, investor rights, dispute resolution and protection of token holders.
- Liquidity risk: A new tokenised market may initially have limited buyers and sellers, making it difficult to exit investments quickly.
- Technology and operational risks: Smart-contract errors or system failures could disrupt transactions and bond payments.
Way Forward
- Clear Regulation: Create clear rules for ownership, investor rights, dispute resolution and taxation of tokenised securities.
- Secure Technology: Strengthen cybersecurity and test systems against future quantum threats.
- System Integration: Ensure smooth interoperability between blockchain, depositories and existing settlement systems.
- Market Development: Build adequate liquidity and investor-protection mechanisms to support wider participation.
- Phased Expansion: Scale up the pilot based on results under SEBI–RBI oversight to strengthen India’s digital financial infrastructure and bond market.
Other SEBI Measures
- Credit Risk-o-Meter
- A colour-coded risk indicator for debt securities, linked to existing credit ratings.
- To be shown in offer documents and selling platforms to help investors understand credit risk of debt instruments more easily.
- Fixed-Income Channel Partners
- SEBI will introduce National Institute of Securities Markets (NISM)-certified intermediaries, similar to mutual fund distributors, to expand corporate bond distribution.
- They will not be permitted to handle investors’ funds or securities or charge separate fees to investors.
- FPI Onboarding Reform
- Foreign Portfolio Investors (FPIs) can now submit a digitally signed Power of Attorney (PoA) to their custodians.
- A PoA is a document that allows FPIs to authorise custodians to act on their behalf.
- A custodian is a SEBI-registered institution that holds and administers securities and related assets on behalf of investors.
- This removes physical authentication requirements such as notarisation, apostillisation and consularisation, reducing compliance time and improving ease of doing business.
Conclusion
Bond tokenisation can modernise India’s bond market through blockchain, faster settlement and greater transparency. Along with easier FPI onboarding, the reforms can attract wider domestic and foreign participation. A secure regulatory framework, strong investor protection and adequate liquidity will be essential for successful adoption.
FAQs
Q1. What is bond tokenisation?
Ans: It is the conversion of bond ownership or claims into digital tokens recorded on a blockchain. It can facilitate fractional ownership and digital settlement.
Q2. What do notarisation, apostillisation and consularisation mean in FPI onboarding?
Ans: Notarisation verifies a document officially; apostillisation certifies it for use abroad; and consularisation verifies it through an embassy or consulate. SEBI’s digital PoA provision removes these requirements.
Q3. What is the major benefit of tokenisation for retail investors?
Ans: Fractional ownership can reduce the minimum investment requirement and make corporate bonds more accessible to smaller investors.
Q4. What is a Credit Risk-o-Meter?
Ans: It is a proposed colour-coded indicator that will help investors understand the credit risk associated with debt securities alongside their formal credit ratings.
Q5. How has SEBI simplified FPI onboarding?
Ans: FPIs can submit a digitally signed Power of Attorney to custodians, eliminating requirements for notarisation, apostillisation and consularisation.
