Demat 2.0: Transforming Corporate Bond Settlement through Tokenisation

Context

The RBI and SEBI launched a Demat 2.0 pilot at the Global Fintech Fest 2026 to test tokenisation of corporate bonds using Distributed Ledger Technology (DLT). The first phase covered three issuers, while the next phase will focus on secondary-market trading.

About Dematerialisation

1. Dematerialisation (Demat) means converting physical securities into electronic form so that ownership and transactions can be recorded digitally.
2. The Depositories Act, 1996 provides the legal framework for holding and transferring securities through depositories. It covers securities such as shares, bonds, debentures, mutual fund units and government securities.
3. India has two main depositories:

1. • NSDL – National Securities Depository Limited
   • CDSL – Central Depository Services (India) Limited

1. Investors generally access these depositories through Depository Participants (DPs) such as banks and stockbrokers. A DP acts as the link between the investor and the depository and provides the Demat account.
2. BSE and NSE are stock exchanges that facilitate trading, while depositories maintain electronic records of securities.

What is Demat 2.0?

1. Demat 2.0 uses DLT and tokenisation to digitally issue and transfer corporate bonds.
2. The pilot combines:

1. • Tokenised corporate bonds
   • DLT
   • RBI’s Central Bank Digital Currency (CBDC)
   • Smart contracts

1. The objective is to bring the securities and payment legs closer to simultaneous settlement.
2. Investors can use their existing Demat accounts; no separate account is required.

Role of Key Institutions

1. SEBI: Regulates the securities market and oversees Demat 2.0.
2. RBI: Provides the CBDC-based settlement infrastructure.
3. NSDL & CDSL: Provide depository infrastructure for electronic securities.
4. Stock Exchanges: Facilitate securities trading.
5. National Payments Corporation of India (NPCI): Supports the digital payment and transaction infrastructure.

Significance

1. Faster and safer settlement: Atomic settlement enables simultaneous transfer of securities and funds; if both conditions are not met, the transaction does not settle partially, reducing settlement and counterparty risks.
2. Greater transparency: DLT provides a shared and traceable record of transactions.
3. Automated transactions: Smart contracts can execute predefined actions automatically when specified conditions are met.
4. Efficient bond markets: DLT can improve the efficiency of issuance, settlement and asset servicing.

Challenges

1. Cybersecurity Risks: Greater reliance on digital systems increases exposure to cyberattacks and system vulnerabilities.
2. Scalability Constraints: The technology may face difficulties in handling large transaction volumes efficiently.
3. Interoperability Issues: DLT-based systems may face compatibility problems with existing financial infrastructure.
4. Quantum Threat: Quantum computing could undermine existing cryptographic systems and create new security vulnerabilities.
5. Regulatory Complexity: Coordination among multiple regulators and market institutions may create implementation challenges.

Way Forward

1. Phased Expansion: Scale up Demat 2.0 after validating its security, scalability and interoperability.
2. Wider Adoption: Extend DLT-based settlement to secondary markets and other securities where feasible.
3. Stronger Security: Develop robust cybersecurity and post-quantum cryptography standards.
4. Investor Protection: Upgrade technology while maintaining regulatory oversight and investor safeguards to strengthen India’s digital financial infrastructure.

Additional Information: Corporate Bonds

1. Meaning: Corporate bonds are debt instruments through which companies raise funds from investors.
2. Return: Investors receive interest (coupon) and repayment of the principal at maturity.
3. Risk: They carry credit/default risk, depending on the issuer’s financial strength.
4. Trading: Corporate bonds can be traded in the secondary market before maturity.
5. Regulation: The Securities and Exchange Board of India (SEBI) regulates the corporate bond market.
6. Importance: They provide companies with an alternative to bank loans and support long-term capital formation

FAQs

Q1. What is Dematerialisation?
Ans. Dematerialisation is the conversion of physical securities into electronic form.

Q2. What is the difference between a depository and a DP?
Ans. A depository holds electronic records of securities, while a Depository Participant provides investors access to the depository through Demat accounts.

Q3. What is atomic settlement?
Ans. It means the transfer of securities and payment occur together. If both cannot be completed, partial settlement does not occur.

Q4. Are investors required to open a new Demat account for Demat 2.0?
Ans. No. The pilot retains the existing depository system and Demat accounts.