In another attempt to deepen retail participation in the corporate bond market, the Securities and Exchange Board of India (Sebi) plans to tokenise bonds through a distributed ledger technology (DLT)-based mechanism. On Tuesday, Sebi chairman Tuhin Kanta Pandey said the regulator is exploring the framework and that it could take six to nine months to roll out.
Tokenisation involves converting a corporate bond into digital tokens representing fractional ownership of the instrument, reducing reliance on paper certificates and multiple intermediaries. Experts said the move could improve liquidity, lower the minimum investment threshold below the current ₹10,000, reduce transaction costs and enable faster settlements.
The proposal is among several measures introduced to deepen India’s corporate bond market, including regulation of online bond platforms, reducing the minimum investment threshold from ₹1 lakh to ₹10,000, introducing a market-making framework to improve liquidity, and proposing a separate category for debt brokers.
While most market participants welcomed the tokenisation initiative, many also flagged concerns over its practical implementation, particularly for retail investors. Some experts said the regulator would need to address several technical, legal and operational issues before launching the framework.
They cautioned that smaller lot sizes without adequate secondary-market liquidity, along with gaps in legal and digital infrastructure, could limit the effectiveness of the mechanism.
The framework could significantly improve retail participation from an accessibility standpoint, said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap. However, he added that participation would rise meaningfully only if liquidity improves, investor awareness increases and investors understand credit risks better.
“Existing securities laws, depository systems, insolvency frameworks and settlement regulations were not designed for tokenised securities. Regulators will need to clarify legal ownership, settlement finality, taxation, pledge creation and default-resolution mechanisms,” Srinivasan said.
One of the key advantages of the framework would be instantaneous settlement. “Currently, when doing a primary deal, the security is generally credited in your books one to two days later, creating a mismatch if redemptions come in during that gap, forcing me to maintain heavy liquidity buffers, which is a drag,” said Rajeev Radhakrishnan, chief investment officer (debt) at SBI Mutual Fund.
However, he warned that practical issues could emerge until tokenised instruments gain wider market acceptance. Counterparties may refuse tokenised securities and continue accepting only dematerialised instruments, potentially leading to fragmented issuance and divided liquidity, he added.
Some legal experts also questioned whether the framework would suit retail investors. “Tokenised products can be complex and may be subject to volatility, making them potentially unsuitable for retail investors,” said Tirthankar Datta, partner at JSA Advocates & Solicitors. Tokenising volatile underlying assets, commodities or other financial instruments could expose retail investors to speculative price swings, he added.
For asset management companies, tokenisation could eliminate T+1/T+2 settlement delays, free up liquidity and simplify daily net asset value calculations.
However, concerns remain over cybersecurity and scalability. Advanced quantum computing systems could potentially compromise security, while handling thousands of transactions at a national scale remains untested, said Umesh Sharma, CIO-debt at The Wealth Company.
He estimated that it could take five to seven years of gradual upgrades before the digital system meaningfully replaces the traditional bond market, depending on adoption, technological improvements and regulatory approvals.
DLT uses a permissioned infrastructure called Unified Markets Interface (UMI) and operates on a securities ledger that functions as a parallel execution and settlement layer alongside the existing depository framework.
Key features include atomicity, programmability and fractionalisation, said Vishal Mody, director of technology at IndiaBonds. Through atomic settlement, “the transfer of Central Bank Digital Currency (CBDC) and corporate bond tokens occurs simultaneously, ensuring that either both legs of a trade settle or neither does,” he said.
