Tokenising Corporate Bonds: Can Technology Deepen India’s Debt Market?

The Securities and Exchange Board of India (SEBI) recently announced it plans to undertake a pilot project to tokenise corporate bonds using the Distributed Ledger Technology (DLT). While many view tokenisation as the next technological milestone to shape India’s debt market, others remain sceptical about whether it can genuinely deepen the corporate bond market or merely improve the efficiency of its underlying infrastructure.

The debate is both timely and necessary. Better technology can make markets function more efficiently, but whether it can create a deeper market is a far more fundamental question.

India’s Bonds Are Already Digital
Digital transformation of bonds took place decades ago with dematerialisation. India’s Government Securities are already held electronically through SGL, CSGL and RBI Retail Direct accounts. Corporate bonds and equities are held in demat form through NSDL and CDSL. Mutual fund units are maintained either by Registrars and Transfer Agents, or by depositories when investors choose to hold them in dematerialised form.

Tokenisation, therefore, is not about digitising bonds. It is about changing the way digital ownership itself is recorded, validated and transferred. Ownership records are currently maintained through a centralised ledger. Every financial asset has a trusted institution maintaining the official register of ownership.

Distributed Ledger Technology follows a different approach. Instead of one institution maintaining the only ownership register, multiple participants maintain identical synchronised copies. Every transaction is validated through predetermined protocols and updated simultaneously across the network. Rather than maintaining multiple databases that require constant reconciliation, everyone works from the same synchronised record—often described as a “single source of truth.”

It is important to distinguish this from public blockchain networks, and financial regulators across the world largely prefer permissioned DLT, where only regulated entities participate in the network.

India is not new to this technology. SEBI had earlier introduced the use of DLT for monitoring security creation and covenant compliance for non-convertible securities. The proposed pilot now seeks to evaluate whether the technology can be extended to the issuance, transfer, settlement and servicing of corporate bonds.

The Potential Benefits
With tokenisation, settlement would become significantly faster as ownership records update simultaneously across the network. Smart contracts could automate routine activities such as coupon payments, and redemption proceeds and manual reconciliation between different market participants will reduce considerably, lowering operational costs.

Importantly, every transaction will have a tamper-resistant audit trail, improving transparency and reducing operational risk.

The most widely discussed benefit, however, is fractional ownership.

Many corporate bonds continue to have face value of ₹100,000 or even ₹10 million, effectively limiting participation to institutional investors and high net-worth individuals. Tokenisation could, theoretically, divide the same bond into smaller digital units, allowing investors to participate with much smaller amounts.

On paper, this appears attractive as lower investment size could broaden access and make corporate bonds available to retail investors. But, accessibility and investor demand are not the same thing.

Will Smaller Ticket Sizes Create More Investors?
This is where the discussion moves beyond technology and into market structure.

India already offers retail investors multiple avenues to participate in fixed income markets. Besides bank fixed deposits, investors have access to debt mutual funds, target maturity funds, Bond ETFs, listed corporate bonds through online bond platforms and Government Securities through RBI Retail Direct.

Yet, direct retail participation in the corporate bond market remains relatively modest.

The reasons are straightforward. Retail investors generally evaluate fixed income products based on four factors—returns, safety, liquidity and simplicity.

A highly rated corporate bond may offer only a marginally higher yield than a bank fixed deposit, but the investor will also need to assess credit risk, interest rate risk, taxation, secondary market liquidity and ease of exit. For many households, the incremental return may not adequately compensate for these additional risks.

This is where expectations from tokenisation need to remain realistic. Technology can reduce the minimum investment amount. It cannot reduce credit risk. Nor can it improve the financial strength of the issuer. A lower-rated corporate bond does not become a safer investment simply because it has been divided into smaller digital units.

Similarly, if highly-rated corporate bonds continue to offer yields comparable to bank deposits, merely reducing the ticket size may not materially change investor behaviour.

Fractional ownership undoubtedly improves accessibility. Whether it creates meaningful demand is an entirely different question.

The Real Challenge Lies Elsewhere
India’s corporate bond market has grown significantly over the past decade and has become an important source of funding for banks, financial institutions, public sector undertakings and large corporates.

However, issuances and secondary market trading continue to be heavily concentrated among AAA and AA-rated issuers. As one moves down the credit spectrum, liquidity declines sharply.

Thus, if institutional investors themselves remain selective in taking credit exposure, will retail investors suddenly become comfortable investing in lower-rated corporate bonds simply because they are available in lower denominations?

The answer is unlikely to be straightforward, even though online bond portals have started selling curated lower-rated bonds to retail investors. However, the size is still minuscule.

Tokenisation may initially strengthen segments that are already relatively liquid—Government Securities, PSU bonds and highly rated corporate issuers—rather than materially expanding financing options for lower-rated borrowers. Perhaps the real challenge facing India’s corporate bond market is not technology but investor appetite for credit risk.

The International Experience
Several countries have already experimented with tokenised securities, offering useful lessons.

Hong Kong has successfully issued tokenised green bonds, demonstrating that distributed ledger technology can make bond issuance and settlement more efficient. Switzerland has developed a regulated ecosystem for digital securities while allowing them to coexist with the conventional market infrastructure. Germany has introduced a legal framework permitting electronic securities to be maintained either through traditional registers or distributed ledgers. Thailand and the Philippines have used tokenisation primarily to broaden retail participation in sovereign bonds through smaller investment sizes.

The lesson is clear.

Tokenisation has improved operational efficiency, settlement processes and transparency. However, there is limited evidence that tokenisation by itself has deepened corporate bond markets or improved liquidity for lower-rated issuers.

As India moves forward, DLT infrastructure should remain firmly within the domain of regulated Market Infrastructure Institutions.

Institutions such as NSDL and CDSL are natural candidates to anchor this transition. They already maintain electronic ownership records for millions of investors and possess the governance standards, operational capabilities, cyber security frameworks and disaster recovery systems required for systemically important market infrastructure.

Evolution, Not Disruption
One often hears the argument that blockchain cannot be hacked. That statement is only partly correct.

A permissioned distributed ledger may itself be highly resilient, but cyber criminals rarely attack only the ledger. They target user credentials, application interfaces, cloud infrastructure, identity management systems and increasingly, smart contracts themselves.

A coding error could potentially affect coupon payments or redemption proceeds. A compromised digital identity could result in unauthorised access even if the underlying ledger remains secure. As financial markets become increasingly digital, cyber resilience becomes as important as market resilience.

Tokenisation should be viewed as an additional layer of market infrastructure rather than a replacement for the existing system.

Investors should continue to have the flexibility of holding securities through their familiar demat accounts, with distributed ledger technology operating in the background for settlement and servicing. Just as Government Securities coexist through SGL accounts, RBI Retail Direct and demat holdings, tokenised corporate bonds can coexist with the existing depository framework.

Such an approach would allow the market to migrate gradually without disrupting investor behaviour or existing operational processes.

Conclusion
Tokenisation has the potential to become an important milestone in the evolution of India’s debt market infrastructure. It can certainly make the market more efficient, transparent and technologically advanced.

However, expecting technology alone to deepen the corporate bond market may be placing unrealistic expectations on what is essentially an infrastructure reform.

India’s corporate bond market continues to face deeper structural challenges—limited market making, concentrated liquidity, a narrow investor base beyond highly rated issuers, regulatory investment constraints for certain institutional investors and relatively low retail awareness. These challenges cannot be solved by technology alone.

SEBI has therefore taken the right approach by beginning with a pilot. The objective is not merely to demonstrate that distributed ledger technology works. That has already been established in several jurisdictions. The real objective is to determine whether it works within India’s legal framework, market structure and investor ecosystem.

Better technology can undoubtedly build better market infrastructure. Whether it can build a deeper market will depend not only on technology, but also on investor confidence, market liquidity, credit appetite and the continued evolution of India’s debt market ecosystem.