On Friday, the Securities and Exchange Board of India (SEBI) mandated that blockchain or distributed ledger technology (DLT) should be used to monitor the status of bonds or other listed debt securities. Instead of using blockchain to digitize the debt instruments, the purpose is to monitor the assets given as security for the debenture, its credit rating, and whether or not the issuer is up-to-date with interest payments. The use of blockchain applies to all non-convertible listed securities.
Based on SEBI’s requirements, it seems the purpose is twofold. Firstly by having a shared infrastructure, there is transparency so that all parties can see the data. For example, the Debenture Trustee has to update the interest payment status within seven working days of the payment due date. Similarly, every six months, the issuer has to share an audit certificate relating to the security or asset cover of the debenture.
A second purpose appears to take advantage of DLT’s immutability so that documents are hard to tamper with. The issuer has to share credit rating information and hyperlink to the press release. The credit rating agency confirms the validity (or not) of the data. After issuance, the bond issuer must update any new credit rating data within one working day.
Participants in the DLT network include securities issuers, debenture trustees, credit rating agencies, registrars and transfer agents, and depositories. All the institutions that are registered with SEBI will have access.
The ‘Security and Covenant Monitoring System’ will be hosted by Depositories. Testing of the system will start on January 1, 2022 and it’s set to go live on April 1, 2022.
This solution is primarily for compliance and monitoring. In contrast, most blockchain bond applications look to tokenize the debt itself. Numerous examples range from the European Investment Bank using Ethereum, Daiwa Securities using the Bitcoin network and many others such as SBI are using enterprise blockchain solutions.