On Monday, REC raised Rs 500 crore via India’s first tokenised bond issuance. The bond and the money changed hands at the same instant, and the paper was bid, allotted and listed the same day. V Shunmugam explains how tokenisation can ensure faster settlement and cut transaction costs in the debt market
How were the bonds issued?
REC IS A highly-rated power sector financier, making it a natural candidate for this bond tokenisation experiment. The bond issuance process was split into two, and only the second half changed. The base issue was Rs 100 crore with a green shoe option of Rs 400 crore, under the Securities and Exchange Board of India’s Regulatory Sandbox Framework, a controlled space for trying something new. It attracted bids worth Rs 796 crore.
Bidding ran on the National Stock Exchange’s electronic bond platform, the route REC has always used. After allotment, the bonds went not into an ordinary demat account but into Demat 2.0, a securities account built by the two depositories, National Securities Depository Limited and Central Depository Services Limited, that keeps the holding on such a ledger.
How was the payment made?
The payment was made using the Reserve Bank of India’s wholesale CBDC — the digital currency for institutions. Each participant here has two accounts, called wallets — one for the bond and one for the digital rupee—each secured by a secret code, or key, that alone allows transfers. Because both wallets are recorded on the same ledger, the bond could be transferred only if the corresponding money moved simultaneously.
This process, known as atomic delivery-versus-payment, explains why pay-in, allotment, and listing were completed within a single day.
If it is called a token, is it still a bond?
The basic rules for bond issuance remain the same. REC must make timely principal and coupon payments, while the buyer bears three common bond risks: the issuer might default, yields could rise, and the price could fall, or buyers may be scarce to find when selling.
The only change is in the record of ownership. Currently, it resides in a depository register, with money moving separately through banks. In the pilot, this record is on a distributed ledger — a shared database maintained by multiple approved institutions and accessed simultaneously.
What are the specific benefits?
Our dematerialisation is already among the best systems anywhere, so the gains must be specific. They come from eliminating the need to match two records, one for the security and one for the cash; from settlement being final at the moment of trade, which releases collateral otherwise locked until the cycle closes; and from writing instructions into the security itself, so that a coupon pays out on its own.
Once listed, can anyone trade in it?
This is yet to be achieved. The bonds are registered on the NSE and the BSE, but registration doesn’t equal liquidity. The reported terms include a three-month lock-in period; hence, exchanges would only make trading arrangements for these tokenised bonds when they are available by December.
Its success in the primary market has been demonstrated; the secondary market remains to be tested. Issuing a bond on a ledger is straightforward; the real challenge lies in enabling its transfer at a transparent price and moving the money, which in this case will be CBDC.
Are there any new risks?
There’s an additional operational layer of risk now.
- Keys must be protected, since losing a key results in a hold-up similar to a lost certificate.
- Demat 2.0 needs to integrate with current depository and clearing systems; else, its users could be isolated.
- A shared ledger acts as a collective point of failure, unless the law considers a ledger entry as definitive proof of ownership.
Will a token find new buyers?
No, because technology moves securities but cannot create appetite. This can increase efficiency and reduce transaction costs. Our present corporate bond market is thin for reasons predating any ledger: issuance is concentrated among top-rated borrowers; insurers and provident funds buy and hold because their compliance and liabilities require it; and few firms will quote a two-way price. This issue went to a handful of institutions holding both wallets, which is the opposite of a broad market.
What can we expect next?
This is a well-built demonstration. December will provide more insights. Clarity is needed in custody, accounting, and tax treatment since no institution will accept what its auditor cannot categorise. The sandbox should transition into a permanent regulation, allowing weaker issuers and retail investors to participate.
A security and central bank money need to be settled simultaneously on the same ledger. Infrastructure changes and investor adoption (including CBDC) can transform market capabilities.
The writer is partner, MCQube
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.