The pilot launched on 10 September 2026 at the Global Fintech Fest in Mumbai. Three issuers, REC, L&T, and IIFL, have together raised over Rs 1,025 crore under the framework so far. It operates under SEBI's Regulatory Sandbox and is currently in Stage I, meaning participation is institutional only, for now. Secondary market trading and retail investor access are planned for later stages.
While market commentary has largely focused on liquidity and operational speed, the transition raises practical legal questions for issuers, debenture trustees, and institutional investors. Below is an analysis of the legal framework and compliance implications of Demat 2.0, and what stakeholders should be doing about it now.
1. Statutory Continuity: The Juridical Nature of the Token
The most important threshold question is whether Demat 2.0 creates a new asset class or a "virtual digital asset" (VDA) under the Income Tax Act. It does not. SEBI's own FAQs on the pilot confirm that a tokenised bond remains a "security" within the meaning of Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA), retaining the same ISIN, issuer obligations, coupon, maturity, covenants, rating, and investor rights as a conventional dematerialised bond.
The legal fiction of dematerialisation established by the Depositories Act, 1996 remains entirely intact. The DLT network is the technological medium through which the statutory depositories (NSDL and CDSL) maintain the register of beneficial owners; it does not displace their statutory role. Issuers must continue to comply strictly with the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, including disclosure norms, board approvals, and the appointment of Debenture Trustees.
2. "Code vs. Contract": The Information Memorandum and Smart Contracts
Demat 2.0 automates corporate actions, such as coupon payments and redemption on maturity, through smart contracts embedded in the DLT. This introduces a critical intersection between legal drafting and code logic.
The commercial terms hardcoded into the smart contract must be a precise translation of the Information Memorandum (IM) and the Debenture Trust Deed (DTD). If the smart contract code calculates something, a day-count convention, for instance, differently than the DTD stipulates, traditional contract law dictates that the DTD will prevail over the code.
Actionable insight: issuers and their legal counsel should implement rigorous "tech-legal" audits before issuance, to confirm the smart contract accurately reflects every covenant in the DTD. This is the single most practical safeguard against inadvertent technical defaults or bondholder disputes down the line.
3. Settlement Finality and Insolvency Risk
Demat 2.0 achieves "atomic settlement" by linking the depository's DLT with the RBI's wholesale Central Bank Digital Currency (e₹). The legal effect is significant: the transfer of the beneficial interest in the security and the payment of funds occur as a single linked transaction rather than in two separate steps.
From a disputes and insolvency perspective, atomic settlement is designed to substantially reduce counterparty default risk during the settlement window. Because the cash leg settles in sovereign fiat (CBDC) rather than a private stablecoin, the architecture is intended to benefit from the statutory protections around settlement finality under the Payment and Settlement Systems Act, 2007. It is worth noting that SEBI itself has listed the implications for clearing and settlement finality as something the pilot is specifically designed to test, so this remains a developing area of regulatory interpretation rather than one that is fully settled.
4. Fiduciary Duties of the Debenture Trustee
The statutory and fiduciary obligations of the Debenture Trustee remain unchanged, but the mechanics of their oversight will shift.
Historically, trustee disputes often arise from administrative delays, manual reconciliation errors, or delayed funding of escrow accounts. With smart contracts routing CBDC directly from the issuer's wallet to bondholders, many of these administrative frictions are removed. The trustee's duty of care will pivot toward verifying the initial smart contract parameters and monitoring the automated systems for technical execution failures, rather than chasing routine manual delays.
5. Custodial Liability
Institutional investors are insulated from the legal liabilities typically associated with blockchain self-custody. Under Demat 2.0, the statutory depositories manage the cryptographic private keys on behalf of beneficial owners, investors do not need to independently manage keys or acquire specialised infrastructure. Under the existing framework of the Depositories Act, the depository bears legal liability for loss of the asset due to negligence or systemic compromise, giving institutional investors continued legal certainty on this point.
Conclusion: What Stakeholders Should Do Now
Demat 2.0 modernises the plumbing of the capital markets without disrupting the underlying securities law. But because it is a live pilot under a Regulatory Sandbox, practical readiness matters more than waiting for a final framework to be notified.
For issuers considering participation: treat the smart contract as a legal document, not just a technical one. Before any issuance, have legal counsel and the technology team jointly review the smart contract line by line against the Debenture Trust Deed, with particular attention to day-count conventions, coupon triggers, and redemption logic, since these are the areas most likely to produce a silent mismatch between what the code does and what the deed says.
For debenture trustees: update internal monitoring protocols now, ahead of any mandate to do so. The trustee's practical role is shifting from chasing manual reconciliation to verifying smart contract parameters and monitoring automated execution. Trustees who build this capability early will be better placed as the pilot scales into later stages.
For institutional investors: participation currently requires only an existing demat account and a CBDC wallet with a participating bank, no new infrastructure investment is needed. That said, investors should still request confirmation from issuers that a tech-legal audit of the smart contract has been carried out before subscribing, given how new this settlement architecture is.
For all stakeholders: keep in mind this is Stage I of a phased rollout. Secondary trading and retail access are still to come, and the rules governing those stages are not yet finalised. Decisions taken now, especially around documentation and internal process, should be built to adapt as SEBI's guidance develops, rather than treated as a one-time compliance exercise.