Technology does many things to help manage your money. This includes a smooth flow of money from your bank account into stocks, bonds, or other securities you buy. That also ensures money returns to your account after you sell your assets. The process was cumbersome just a decade ago when paperwork used to take hours or days. Today, with the foundation of unique identity, smartphones, and related software and hardware technology, buying or selling a security listed on the stock exchange is a breeze. For the young readers, that is the way of life they have learnt and got used to.
The Securities and Exchange Board of India announced it with fanfare at the Global FinTech Fest in Mumbai recently. Demat 2.0 is an upgrade to the plumbing of your personal finance system. You are familiar with investing in the equity market using your smartphone. SEBI has announced the same thing for corporate bonds. Just like companies issue equity and raise capital for expansion, they borrow from banks and other financial institutions. They also issue debt securities publicly with a fixed-interest-rate coupon. However, India's bond market is dominated by government treasury bonds. Most buyers are banks and financial institutions. There is no space for retail investors like you and me to actively buy or sell bonds. Besides, servicing individual investors is not an easy process for companies. They want fewer bond investors to participate with more money and complete the process quickly.
With Demat 2.0, the inefficiencies of the existing system would go away in a flash. It would be easier for individuals with small savings to invest in high-quality company bonds. Credit rating agencies determine the quality of these bonds. They evaluate the companies' finances and regularly publish their findings. Just like research analysts in equity markets, credit rating agencies in bond markets tell you about the quality of the bonds you invest in. Participation from mutual funds and family offices is also low because of the slow settlement cycle in the bond market.
Demat 2.0 introduces tokenisation for debt or bond offerings. It takes a page from blockchain, the distributed ledger technology that powers cryptocurrencies. A Demat 2.0 bond is a self-contained digital token.
It is not a cryptocurrency but a security regulated by SEBI, the market regulator. India does not allow cryptocurrencies to be traded on stock markets or regulate them.
When you own a bond, your interest rate depends on batch clearing. The company puts the money into an escrow account, and the registrar tells them the list of eligible holders. Funds move into your account after the process is completed. Under Demat 2.0, all payment rules are coded directly into the token that you own. As the coupon date approaches, the system verifies your holding and automatically releases the money into your digital Rupee wallet. It requires no paperwork, reconciliation tagging, or manual dividend warrants.
When you sell mutual funds today, you have to wait a full working day for the cash to hit your bank account. For fixed income funds, it is even longer. Demat 2.0 creates an atomic delivery against the payment through the digital currency network. Simply put, a simultaneous unbroken transaction ensures that it will not be possible to deliver the bond without receiving the cash and the other way round. For those moving large sums, like mutual funds or family offices, this significantly reduces settlement risk. Retail investors like us also benefit from that timeliness. It also lets companies reduce the minimum lot size to accommodate your savings. It helps you diversify your risk and generate a higher return than fixed deposits.
Demat 2.0 does not mean eye-popping returns on your investment. It will let you modernise your wealth protection plans and offer better returns than fixed deposits. It will be a big change from just being an institutional playground.
