The Securities and Exchange Board of India (SEBI) is testing a new way of buying, holding and settling corporate bonds. Called Demat 2.0, the pilot will use digital technology to record bond ownership and transfer securities. For investors, however, there is no need to learn a new system or open a new demat account. The changes will mostly happen behind the scenes.
Your bond remains a bond
A tokenised bond is not a new type of investment. It will have the same coupon, maturity, credit rating, issuer and investor rights as a normal corporate bond. The only difference is how ownership of the bond is recorded. Instead of the bond being recorded in the usual database, it will be represented as a digital token on a private digital network. So, if an investor buys a tokenised bond, the investment risks remain the same. Tokenisation does not make a risky company safer or guarantee repayment.
No new demat account
Investors will not need to open a separate demat account. The proposed Demat 2.0 account will simply be an extension of the investor’s existing demat account. Existing KYC details will also be used. The tokenised bonds will continue to be visible through the investor’s existing depository interface and holding statement. Investors will also not have to manage complicated digital keys. The depositories will manage them on behalf of investors.
You will need a digital rupee wallet
The pilot will use the RBI’s digital rupee (e₹) for settling the money involved in a bond transaction. Investors taking part in the pilot will therefore need a CBDC wallet with their bank.
The idea is simple: when the bond moves from the seller to the buyer, the money should move at the same time. This reduces the risk of one side delivering the bond without receiving the payment.
What happens to interest payments?
The system could make coupon payments and redemption easier. Important details such as the coupon rate, payment dates and maturity can be built into the digital bond. This could allow interest payments and other corporate actions to be processed automatically. For investors, this could mean fewer manual processes and fewer chances of errors.
Can you sell the bond?
Initially, retail investors are not expected to be part of the first stage of the pilot. SEBI plans to expand participation to retail investors when secondary-market trading is enabled. Until then, an investor may be allowed to transfer the bond directly to another demat account through an interim mechanism. So, the investment is not necessarily locked in, but selling may be less convenient until normal secondary-market trading is available.
What does this mean for investors?
The biggest change is not in the investment itself but in the technology behind it. Investors will still need to check the issuer’s credit rating, financial health, interest rate and maturity before buying a corporate bond.
Demat 2.0 is mainly aimed at making the bond market faster and more efficient by reducing paperwork, manual processing and settlement risks.
