SEBI, RBI launch Demat 2.0 pilot for corporate bond tokenisation

Why in the News

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have jointly launched a pilot named Demat 2.0. It tokenises corporate bonds and settles them in central bank digital currency (CBDC), which is sovereign money issued by the central bank in digital form. The stated purpose is to test whether distributed ledger technology can bring the security leg and the settlement leg of a bond trade closer together. The same test covers faster settlement and the automation of parts of asset servicing. Ownership records and cash movement sit on two separate systems today, and the gap between them is what carries settlement risk. The pilot puts both on one ledger.

How does the Demat 2.0 tokenisation pilot work?

1. Tokenised security: A corporate bond is issued as a token on a shared electronic ledger instead of as an entry in a single depository’s own database.
2. Digital settlement asset: The cash leg moves as CBDC on that same ledger, so payment and the transfer of ownership complete in one step.
3. Smart contracts: Coded instructions carry out servicing steps automatically once their conditions are met, for example a coupon payment on its due date.
4. Legal certainty of ownership: The design keeps the legal title of the holder intact during the experiment with new infrastructure.

Why does moving the security leg and the cash leg onto one ledger matter?

1. The 1996 reform only removed paper: Demat 1.0 converted shares held in paper form into electronic entries and left the payment leg on a separate banking rail.
2. The gap is where the risk lives: A delay between delivery of the security and receipt of the money leaves one counterparty exposed until both are done.
3. Part of the debt market already runs this way: Commercial papers and certificates of deposit trade in tokenised form on the unified markets interface and settle in CBDC.

Who is running the pilot, and what has it put through so far?

1. Depositories hold the tokenised paper: Central Depository Services Ltd (CDSL) and National Securities Depositories Ltd (NSDL) are leading the depository side of the exercise.
2. Exchanges and banks complete the chain: The BSE and the National Stock Exchange (NSE) are participants, alongside HDFC Bank and ICICI Bank.
3. The payments layer is inside the pilot: The National Payments Corporation of India is part of the participating group.
4. Three issuances have gone through: One is a Rs 500 crore issue by Larsen and Toubro, taken up by investors including the State Bank of India, Axis Bank and SBI Mutual Fund.

How far can tokenisation travel beyond corporate bonds?

1. Equity, mutual funds and gold are named next: The exercise can be extended to those asset classes once the bond leg is proven.
2. Collateral is the larger prize: A holding that settles within the day can be pledged and released the same day, which shortens the funding cycle for a bond holder.
3. The debt market was a deliberate choice: Secondary trading in corporate bonds is thin, so a failed experiment there does not disturb the settlement system the equity market depends on.

Challenges to Demat 2.0

1. Thin secondary trading limits what speed can deliver: Most corporate bonds in India are bought and held to maturity, so settlement time is not the binding constraint on liquidity. Eg. The bulk of corporate bond issuance is by private placement to a small group of institutional investors.
   The Fix: Pair the tokenised segment with market making obligations, so there is continuous two way quoting for faster settlement to act on.
2. Two depositories must interoperate or the market splits: A token created in one depository has to be recognised and transferable in the other, or holders end up in two separate pools. Eg. Moving securities between the existing depositories already requires an inter depository transfer instruction.
   The Fix: Fix a common token standard and a single transfer protocol before the pilot widens beyond its present cohort.
3. Settlement in central bank money reaches few investors: Only participants holding CBDC balances can settle this way, which leaves out most holders of corporate debt. Eg. The wholesale CBDC pilot started in 2022 with a narrow set of banks in the government securities segment.
   The Fix: Extend CBDC access to mutual funds and insurers, which together hold the largest share of outstanding corporate debt.
4. Coded instructions fail silently: A defect in a smart contract executes as written rather than as intended, and an automated coupon or redemption error propagates instantly. Eg. Automated liquidation logic on decentralised lending platforms has repeatedly triggered cascading sales on a single faulty price feed.
   The Fix: Require an independent code audit and a manual override for every servicing action before a token series goes live.

Conclusion

The pilot is a controlled test, confined to one instrument and a named set of participants, and it does not yet change how the wider bond market settles. Its value lies in whether the legal position of a holder on the ledger proves as secure as that of a holder in the present system. The marker to watch is the regulatory decision on whether the token becomes the record of ownership or remains a mirror of it. That choice, rather than the technology, decides how far the exercise can be extended.

Back2Basics: Depositories in India

1. Legal basis: The Depositories Act, 1996 gives statutory backing to holding and transferring securities in electronic form.
2. What a depository does: It maintains the ownership record for securities and effects a transfer by book entry rather than by physical delivery.
3. Access is intermediated: An investor does not deal with a depository directly and operates through a registered depository participant, usually a bank or a broker.
4. Supervision: Both the depository and its participants are registered with and regulated by SEBI.

Matching Previous Year Question

“[2026, GS3, 10 marks] What do you mean by Digital Rupee? In this context, explain the working and progress of India’s Central Bank Digital Currency (CBDC).”