India launches Demat 2.0 to issue corporate bonds on blockchain

India brings its corporate bonds onto the blockchain. India's financial regulator has launched Demat 2.0, a pilot project to issue and settle bonds in the form of digital tokens. Three companies have already raised a total of 10.25 billion rupees (around 92 million euros) thanks to this new infrastructure. The system combines a private blockchain with the digital currency of the Indian central bank. Its objective is not to create a new cryptocurrency, but to accelerate financial transactions which currently take several days.

Bonds settled immediately in digital rupees

A bond allows a company to borrow money from investors in exchange for interest. With Demat 2.0, this financial security is directly created in the form of a digital token on a register shared between several authorized institutions.

Unlike public blockchains like Bitcoin or Ethereum, this network remains closed. It is held by Indian depositories, the bodies officially responsible for registering the owners of financial securities.

Its main novelty comes from the settlement of transactions. When an investor buys a bond, the token and the money change ownership at the same time. The payment uses the digital version of the rupee tested by the Reserve Bank of India for transactions between financial institutions.

This mechanism removes the risk that one party delivers the obligation without receiving payment. It also allows the issuing company to recover the funds the same day, compared to two to three days with the usual operation.

Interest payment and final repayment can be automated. Instructions stored in the system will trigger payments on scheduled dates, without multiple intermediaries having to exchange and verify their files.

Three companies have already raised 10.25 billion rupees

According to the statement from the Securities and Exchange Board of India, three issues have already been carried out.

REC Limited, a state-controlled financial firm, launched the scheme on September 7 by raising Rs 5 billion from 18 investors. The industrial group Larsen & Toubro then obtained the same amount from four investors. IIFL completed the test with an issue of Rs 250 million subscribed by a single participant.

For investors, tokenization does not change the nature of the investment. The bond retains its interest rate, its redemption date, its financial rating and the protections provided by the regulations. It also remains visible in the usual securities account.

No new identity check is necessary. Custodians hold the computer keys in place of investors, who only need to enable Demat 2.0 and have a digital rupee wallet with a participating bank.

The deployment must continue in three stages. The first concerns broadcasts intended for institutions. The second will open up trading on the secondary market and should extend access to individuals. A final phase could integrate more regulated players and other categories of financial securities.