With most securities already dematerialised and trading in electronic form, there does not appear to be an urgent need to tokenise them | Photo Credit: ismagilov

The SEBI Chairman made headlines recently when he said that at a conference that the regulator is exploring a pilot project to tokenise corporate bond market. He stated the pilot will examine if tokenisation can result in ‘faster settlement, better traceability, automated servicing and greater transparency’. This, in his view, could lead to improved liquidity in the corporate bond market.

Whether tokenisation (explained below) can improve volumes in the corporate bond market is moot since this segment is grappling with several challenges including concentration of holding in the hands of large investors. But the Indian regulator is right in exploring tokenisation which is under active consideration of many of the major stock exchanges. It could well be the way forward, at least for some segments or functions of the stock exchange ecosystem.

Tokenisation, or not, participation is already beginning to improve in the corporate bond segment in India as individual investors go hunting for higher yields. SEBI needs to do whatever it can to encourage this.

What is tokenisation?

Tokenisation is linked to blockchain technology which came into prominence following the rise of the cryptocurrencies. IOSCO defines tokenisation as the creation, issuance or representation of assets on a digital token ledger or a programmable platform. All the transactions in the tokens are recorded on these digital ledgers, which are transparent, secure and can be accessed by everyone.

The idea is not new and has already been adopted in some countries, while other are still weighing it. According to the Bank for International Settlements, till July 2025, over 60 tokenised bonds have been issued, amounting to a total value of $8 billion. Of these, there were 24 corporate bonds with a total value of $3.8 billion, and 15 bonds issued by sovereigns, supranational entities and agencies (SSAs) with a value of $1.9 billion. Government bond issuers in tokenised form include the Republic of Slovenia, Hong Kong SAR, the Republic of the Philippines, the Bank of Thailand, the European Investment Bank, the World Bank and the Swiss cantons.

Not a smooth path

The idea of converting all securities — equities, bonds, derivatives — into tokens and enabling trading and settlement through distributed ledger does sound good as it will be faster, can bring down intermediation cost and perhaps improve liquidity. Settlement can take place in real time and bonds can trade in smaller fractions, improving demand. The BIS report found that the bid-ask spread was lower, at about 19 basis points in tokenised bonds versus 30 basis points in conventional bonds in the same category.

But complete tokenisation of all financial instruments is quite some way away. While newer issuances in some segments can be offered in tokenised form, transferring legacy transaction records on to distributed ledgers will be a monumental task. Partial tokenisation of markets is unlikely to be efficient. The infrastructure needs to be robust enough to ensure cyber security and handle communication with the clearing and settlement systems of the exchanges. The interoperability with other segments of the exchanges operating on legacy infrastructure is also likely to pose a challenge.

While many countries are weighing this, 91 per cent of them have very limited or no tokenisation use cases, according to IOSCO. Most tokenisation transactions are still in pilot phase with few reaching significant scale. A survey done in 2025 shows that only 11 per cent of institutional investors have invested in tokenised assets, with 61 per cent expecting to invest by 2026.

Most exchanges are moving ahead slowly in this due to the costs involved in the changeover and lack of perceivable benefit. With most securities already dematerialised and trading in electronic form, there does not appear to be an urgent need to tokenise them.

Curing corporate bonds

While India too needs to keep pace with other markets and certainly examine the feasibility of tokenising some segments of the market, it is unlikely to be the panacea that corporate bond markets need.

The inherent problems with the corporate bond market in India are well known — narrow issuer base with only the highest rated entities in the financial sector making most of the issuances, issuers preferring private placement route and most large investors preferring to buy and hold, thus affecting liquidity.

But the wind seems to be changing. Data from NSE’s pulse report show that the number of secondary market trades had more than doubled in FY26 to 28.4 lakh from 11.9 lakh in FY25. Value of turnover has increased 29 per cent in this period. Of note is that the number of individual investors has moved to 12.7 lakh by April 2026. The report also notes that individual traders accounted for 77.3 per cent of total trades, despite a very small share in value of turnover.

There appears to be increased awareness among retail investors of late. It is obvious that the declining return in equity market and the hunt for higher yield are taking individual investors towards corporate bonds. Companies have also been using this fund-raising route well, with outstanding corporate bonds standing ₹59 lakh crore.

The increase in individual investor participation must be encouraged with more awareness campaigns. Online bond platforms, which enable buying and selling of corporate bonds in smaller denominations have played a part in kindling investor interest. These platforms should be allowed to grow, but with sufficient guardrails. Vigil must be maintained on these platforms to prevent mis-selling of riskier bonds as high-yielding propositions.

The withdrawal of long-term capital gains tax with indexation on debt mutual funds has led to lower demand for these funds. This has resulted in share of turnover of mutual funds in secondary market for corporate bonds declining from 12 per cent in FY23 to 0.5 per cent now. Other institutional investors have also reduced their trading similarly, while individual investors have increased their participation. It may perhaps be good to bring back some tax sops for debt funds, to provide further impetus.

Published on June 12, 2026