Why in news?

The Securities and Exchange Board of India (SEBI) has announced plans to launch a pilot for bond tokenisation, alongside easing the onboarding process for Foreign Portfolio Investors (FPIs) through a digitally signed Power of Attorney.

What’s in Today’s Article?

• What Is Bond Tokenisation?
• SEBI's Bond Tokenisation Plan
• Credit Risk-o-Meter for Investor Protection
• Easing FPI Onboarding: Digital Power of Attorney

What Is Bond Tokenisation?

• Bond tokenisation converts a traditional bond into digital tokens on a blockchain.
• Each token represents partial ownership of the bond, giving investors the same returns — interest payments and principal repayment — but at much smaller ticket sizes.
• How It Differs from Traditional Bond Investing?
  • Traditional bonds pass through multiple intermediaries for issuance, settlement, and custody.
  • Tokenised bonds can be issued, traded, and settled digitally with fewer intermediaries, backed by a real-time verifiable transaction record.
  • Accessibility for retail investors: Corporate bonds have traditionally been an institutional product requiring large capital. Fractional ownership through tokenisation removes this barrier, opening fixed income to everyday investors.
• Key Benefits
  • Faster Settlement - Corporate bonds currently settle on a T+2 cycle (two days after the transaction). On blockchain, settlement can happen in real time, freeing up capital faster and reducing counterparty risk during the trade-to-settlement window.
  • Greater Transparency - Every transaction on a distributed ledger is recorded and immutable, giving investors full visibility into ownership history, coupon payments, and redemptions without depending on intermediaries for accurate record-keeping.
• Key Risks and Concerns
  • Cryptographic vulnerability: SEBI has flagged concerns that future quantum computers could potentially break the cryptographic algorithms securing blockchain systems, risking the integrity of the entire record.
  • Interoperability challenges: Integration between legacy depository systems and new blockchain infrastructure remains untested at scale.
  • Regulatory gaps: India currently lacks a comprehensive legal framework defining ownership rights, dispute resolution, and investor protection for tokenised bonds — a gap that is likely to keep institutional participation limited until addressed.
  • Liquidity constraints: In the early pilot phase, secondary market depth is expected to be limited, meaning entry may be easier than exit for investors.

SEBI's Bond Tokenisation Plan

• SEBI plans to launch the pilot "in the near future," in coordination with the Reserve Bank of India (RBI), to improve accessibility, transparency, and efficiency in the bond market.
• The core idea is to test whether a shared ledger can enable simultaneous transfer of the security and money, making settlement more efficient and reducing reconciliation costs.
• The pilot will also examine the feasibility of automated coupon payments and other bond-servicing events through smart contracts.
• The move comes as SEBI pushes to deepen the bond market to channel more capital toward economic growth.
• It aligns with the regulator's broader push to modernise debt market infrastructure using technology.

Credit Risk-o-Meter for Investor Protection

• SEBI is also consulting on introducing a "Credit Risk-o-Meter" for debt securities to strengthen investor protection in a market that has been gaining traction.
• It will be a standardised, colour-coded visual scale mapped to existing credit-rating symbols.
• It will be displayed both in the offer document and on platforms selling the securities, along with the credit rating and the name of the credit-rating agency.

Framework for Fixed Income Channel Partners

• SEBI will "shortly" introduce a framework for fixed income channel partners, similar to mutual fund distributors, to improve distribution of the corporate bond market.
• These partners will be certified through the National Institute of Securities Markets (NISM).
• Importantly, channel partners will not handle client funds or securities, nor charge investors separately — the goal being to expand market reach while maintaining accountability and investor safeguards.

Easing FPI Onboarding: Digital Power of Attorney

• In a separate move effective immediately, SEBI now allows FPIs to submit a digitally signed Power of Attorney (PoA) to their custodians.
• A PoA authorises custodians — SEBI-registered institutions responsible for holding and managing FPI investments — to act on the FPI's behalf.
• This eliminates the need for notarisation, apostillisation, or consularisation of the PoA, significantly reducing onboarding time and improving ease of doing business.
• This builds on earlier SEBI measures, such as a common application form for FPI registration, aimed at simplifying compliance for foreign investors.

Conclusion

SEBI's twin initiatives — piloting blockchain-based bond tokenisation and simplifying FPI onboarding — reflect its dual focus on deepening India's debt market through technology while making the market more accessible to foreign capital.

Together with the proposed Risk-o-Meter and channel partner framework, these steps aim to build a more efficient, transparent, and investor-friendly bond market ecosystem.