Nearly three decades after dematerialisation reshaped India’s securities market, it is preparing for another infrastructure upgrade. Through ‘Demat 2.0’, a pilot programme launched by the Securities and Exchange Board of India (‘SEBI’) and the Reserve Bank of India (‘RBI’) at the Global Fintech Fest 2026, corporate bonds can now be issued, held and settled as tokenised instruments on a Distributed Ledger Technology (‘DLT’) infrastructure. The pilot promises same day settlement, automated corporate actions and lower operational friction.
SEBI’s press release dated Sep 10, 2026, and the Frequently Asked Questions (‘FAQs’) detail the working of the pilot programme. Under ‘Demat 2.0’, the depository holds and manages the private keys needed to operate on the DLT ledger. The front-end process for the issuer remains unchanged but the bond’s key terms such as coupon rate, payment dates, etc. are now encoded into the token via a smart contract. Consequently, on allotment, tokenised bonds are credited directly to investors’ Demat 2.0 accounts, while issue proceeds are credited to the issuer’s CBDC (‘Central Bank Digital Currency’) wallet through atomic settlement, i.e. the securities and payments are transferred simultaneously or not at all. The issuer receives payment in e-rupee the same day as bidding, which used to conventionally take around 2–3 days, while also eliminating several manual processes currently undertaken by issuers, registrars, and banking intermediaries. While regulators only seek to modernise market infrastructure, without altering the legal character of corporate bonds, their unique nature warrant greater regulatory clarity. This piece seeks to highlight the regulatory inconsistencies that arise when the existing legal and operational framework is applied to tokenised asset settlement under Demat 2.0.
Notably, the treatment of Foreign Portfolio Investors (‘FPIs’) under Demat 2.0 remains uncertain. Although SEBI registered FPIs are permitted to invest in wide range of debt instruments under the SEBI (Foreign Portfolio Investors) Regulations, 2019, (‘FPI Regulations’) neither the FAQs nor the Pres Release clarify if they will be eligible participants. Beyond this, CBDS wallet requirement also presents an additional operational hurdle. Under Demat 2.0, access to CBDC wallets is limited to RBI-approved institutions, as CBDC currently operates within a closed network of participating banks. Additionally, the FPI Regulations require an FPI to appoint a SEBI approved Designated Depository Participant (‘DDP’), as an intermediary. Thus, an FPI accesses the Indian securities market through the DDP. At this stage, two problems arise. First, not every SEBI-registered DDP would necessarily also be a participating institution in the RBI’s CBDC framework. Second, in addition to DDP’s existing duties and powers including securities custody, KYC, and compliance monitoring, they would also have to take up digital-currency wallet intermediation. Neither the FPI Regulations nor the RBI Master Direction on debt instruments require or expressly authorise DDPs to undertake CBDC wallet intermediation, creating a regulatory gap.
Another grey area is the categorisation of such a wallet balance and transactions. It is unclear if it should be treated as currency or a normal account balance (deposit). This is a consequential question, as it dictates the permissibility of such transactions, the applicable regulatory framework, and the compliance and reporting requirements that follow. The Finance Act, 2022 amended the Reserve Bank of India Act, 1934 to expand the definition of ‘bank note’ to include digital form of currency. In fact, a token-based CBDC is explicitly described as a bearer instrument like banknotes i.e. whoever holds the token at a given time is presumed to own it. On the other hand, the RBI issues CBDC to consumers indirectly through intermediaries (banks), who manage the customer’s claim, perform KYC checks, and handle account-keeping. This intermediated structure is functionally closer to a bank managing a customer’s account balance. If treated as currency, it would have to be routed through AD Category-I bank and monitored by RBI through purpose codes. It would also mean settling a capital account transaction in cash, whereas the existing framework only contemplates it being done through banking channels, and thus would likely need a new RBI authorisation. On the other hand, if it is treated as a normal account balance, FEMA (Deposit) Regulations, 2016 would apply, and it would need to be classified under one of the existing account categories (NRE, NRO or SNRR) or a completely new one. Since a wholesale CBDC wallet is not currently recognised as a permitted channel for inward remittances, the legality of using them to settle bond subscriptions also remains uncertain.
Beyond FPI participation, Demat 2.0 also lacks a clear exit framework. The pilot currently operates in SEBI’s Regulatory Sandbox, introduced through the SEBI (Regulatory Sandbox) (Amendment) Regulations, 2020, which allows SEBI to grant temporary regulatory exemptions, for up to 12 months, to facilitate the testing of new products, processes, services or business models in a live sandbox environment on a limited set of eligible customers. SEBI circular dated June 14, 2021 clarifies that only entities already registered with SEBI under Section 12 of the SEBI Act, 1992 are eligible to apply, and each such entity is treated as a single ‘principal applicant’. The framework’s single-applicant, limited-user architecture was designed with individual fintech product testing in mind, and using it as the legal basis for infrastructure adopted market-wide, raises questions about its suitability, and whether such use falls within the purpose for which the Sandbox regime was enacted. More importantly, if the underlying sandbox exemption is not renewed, or SEBI decides not to convert it into permanent regulation, the legal status of already issued tokenised bonds remains uncertain. Under Stage 1 of the programme, tokenised bond issuances amounting to 31,025 crore have already been completed. A single entity’s trial can be unwound with limited consequences, but unwinding a market-wide system with real investor money already committed is a significantly more consequential exercise.
Prima facie, India’s framework resembles the EU’s approach to DLT-based market infrastructure, but important differences remain. While both jurisdictions preserve the legal character of tokenised securities and rely on targeted regulatory exemptions, the EU creates a dedicated framework for DLI-based market infrastructure. Regulation (EU) 2022/858 grants only targeted, time-limited exemptions from specific provisions of Markets in Financial Instruments Directive II (‘MiFID II’), Markets in Financial Instruments Regulation (‘MiFIR’), and the Central Securities Depositories Regulation to operators running DLT-based trading infrastructure, whereas India’s approach is notably more cautious, limiting the testing to a regulatory sandbox. The divergence is even sharper in settlement design. India is building a new framework around the wholesale digital rupee, a new form of central bank money created specifically to settle interbank and government-securities transaction, and Unified Markets Interface, which is designed to integrate asset tokenisation with wholesale CBDC-based settlement. Europe, by contrast, is integrating DLT platforms with its existing TARGET Services infrastructure through the Pontes project rather than creating a new digital settlement asset. Which approach delivers better outcomes remains to be seen.
Regulators across major jurisdictions are increasingly exploring how DLT can be integrated into existing capital market infrastructure. India’s approach to this global trend is notably cautious. Yet, as the experience of other jurisdictions demonstrates, the challenge lies not in tokenising securities but in building a regulatory framework capable of supporting them at scale. The questions surrounding the use of the regulatory sandbox, the treatment of foreign investors, and the long-term settlement architecture all stem from that broader concern. As India moves beyond the pilot stage, the success of Demat 2.0 is likely to depend less on the underlying technology and more on the extent to which regulators can provide legal certainty around the infrastructure supporting it.
Siddhant Shinde is an Associate at Cyril Amarchand Mangaldas.
Akash Nath is an Associate at Shardul Amarchand Mangaldas & Co.
The views in this piece do not reflect the views or opinions of Cyril Amarchand Mangaldas or Shardul Amarchand Mangaldas & Co.
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