TaxTMI 
TaxTMI 
TaxTMI 
Introduction
Blockchain and distributed ledger technologies (DLT) are experiencing vigorous improvement, and the financial world is shifting toward a structural transition that is facilitated by the technology. Tokenised securities ranked among the most disruptive innovations to be developed in the form of digital tokenised securities, which are blockchain-based. Although in technologically sound jurisdictions this concept has taken firm roots in the generation of technological and economic development, in India, we are in the middle of a egulatory crossroads. India has well-developed and highly regulated capital markets, but they are extremely traditional in their issuance, settlement, and transfer infrastructure. This article aims to find out whether India is prepared, in legal, regulatory, and technological aspects, to accept tokenised securities as one of the capital markets to evolve.
Understanding Tokenised Securities
Securities that are tokenised are those that have been issued, recorded, and traded on a blockchain platform. In contrast to cryptocurrencies, which are mostly illegal and highly speculative, the tokenised securities usually have backing by real assets in the world, and their compliance depends on the regulation of securities in the jurisdiction it is to be used. As an example, a business may offer shares or bonds as security tokens, ownership, or credit rights on blockchain network. They can fractionalise these tokens, which is to say that high-valued portions of assets can be divided into smaller fungible parcels and so increase liquidity and accessibility. In addition to this, the functionality of smart contracts is provided by tokenisation, which allows automation of regulatory compliance (such as transferability restrictions, dividend payouts) and settlement systems, minimizing intermediation and operational friction.
International Regulatory Trends
India lags behind several nations that have proceeded further to incorporate tokenised securities in their capital markets. In the United States, the Securities and Exchange Commission (SEC) has provided clarity and stated that security tokens must be correctly issued under applicable securities laws, especially the Howey Test. Regulated security tokens can be issued and traded using licensed platforms such as Zero and INX. The European Union, the Markets in Crypto-Assets Regulation (MiCA), and the Pilot Regime on DLT-based market infrastructure offer a proactive environment in Europe.
Tokenisation. The principles-based, sandbox-based Singapore Monetary Authority (MAS) has approved a regulated environment in which asset tokenisation is permitted. The Financial Market Supervisory Authority (FINMA) of Switzerland regulates the tokenised securities under the current regulations, allowing financial institutions and banks to use DLT as infrastructure. These jurisdictions offer good comparison standards to India, displaying a technology openness combined with regulatory prudence.
India’s Legal and Regulatory Framework
India does not have an exclusive law to support tokenised securities at the moment. Nevertheless, a number of the available legislations can arguably be used to control such instruments. Securities The legal meaning of the term securities has been provided under the Securities Contracts (Regulation) Act, 1956 (SCRA), which regulates the forms of trading and trading modalities. Section 2(h) of the SCRA makes it possible that, subject to several exceptions, instruments that are tokenised as equity, or debt, or units of a mutual fund are securities, and hence within the purview of the SEBI Act. Section 56 of the Companies Act, 2013 and the relevant accompanying rules regulate the process of issuing as well as the transfer of securities and require a set of registers of members to be maintained. It is not clear that a so-called blockchain ledger, managed by a decentralised smart contract, would satisfy these legal requirements. SEBI Act, 1992, and many other SEBI regulations, including ICDR, LODR, and SAST, would have been applicable in the case of tokenised securities in case they are recognised as securities under Indian law. Moreover, the Information Technology Act, 2000 recognizes the electronic records and digital signatures but does not specifically take into consideration the blockchain type of records or even decentralized registries.
SEBI’s Stance on Tokenisation
SEBI has been cast in a wait-and-watch policy towards tokenised securities. In 2020, it established a Committee on Financial and Regulatory Technologies (CFRT), which identified the potential of DLT in post-trade infrastructure. Nevertheless, its discussion paper on DLT in the securities market, released in 2021, did not go that far as to support security tokens. According to SEBI, legal clutter, regulatory overlap, cybersecurity risks, and scalability are the key obstacles. Though the regulatory sandbox has been active since 2020, no case of the testing of a security token issued in a regulated sandbox has been reported. This implies an unwillingness to go beyond the exploratory status. Since SEBI needs to allow tokenisation, either it needs to broaden the reach of the security laws in force, or it needs to design customised rules, since tokenless leads to a set of different set of rules..
Benefits of Tokenisation for Indian Capital Markets
The Indian capital markets have a transformative potential with the tokenised securities. Among the most hyped benefits are the potential to have real-time (T+0) settlement, which would dramatically minimize counterparty risk, or the requirement to have clearing corporations, resulting in capital efficiency. Automated regulatory conformance can be achieved using smart contracts to enforce regulatory lock-in requirements, industry caps, or property limits. Investment opportunities in high-value assets such as commercial real estate, infrastructure projects, or, in the case of private equity, fractional ownership can democratise investments and increase the broad retail investor base. Also, tokenised securities are potentially interoperable between markets, and/or have seamless cross-border issuance/trading, provided that they comply with FEMA and other laws. Besides, DLT usage gives an audit trail that cannot be broken, thus making it transparent and decreasing the chances of possible manipulation or insider trading. The decline in reliance on the middleman also foresees cost savings both to the issuers and the investors.
Legal and Structural Challenges
These notwithstanding, there are deeper legal and institutional concerns on the issue of tokenisation in the Indian context. The first barrier is the fact that blockchain-based registries are not being recognised in the Companies Act and SCRA. Until the moment when a blockchain ledger receives legal equivalence with the statutory register of the members or beneficial owners, ownership rights can hardly be considered indisputable. Second, the role of the depositors, such as NSDL and CDSL, should be redesigned. Depositories Act, 1996 prophesied a centralised system wherein dematerialisation and record keeping are carried out by regulated entities. Conversely, tokenisation promotes decentralisation and d peer-to-peer model. SEBI will have to determine how to authorize or not authorize the existing depositories to shift towards use of DLT-based systems, or whether to grant licenses to fresh entrants viz. digital secure stores (or dusty hands of dusty feet behind temple, or whatever other fanciful terminologies one want to use), DLT registrars, token registrars, or whatever new-fangled names they coined. Third, ambiguity in cross-border issuance and trade is yet to the framed particularly interactions with the foreign portfolio investors (FPIs). It would mean having to re-regulate with FEMA regulations, ODI/FDI framework, and sectoral limits to be more accommodating to the decentralised and borderless nature of tokenised assets. Lastly, the issue of cybersecurity and protection of investors has to be reviewed. The quality of smart contracts is limited to the quality of the code, and given that there is no required audit of tokenised protocols, this might create novel systemic risk to investors.
Need for a Regulatory Sandbox for Tokenised Securities
The Indian approach to the regulatory framework of tokenised securities should be sequential and calculated. There is a need to have a targeted sandbox framework on tokenised securities to fill the innovation regulation gap. That would enable small-scale experimentation of tokenised forms of issuances of debt or equity under controlled conditions, in a predetermined set of investors and parameters of risk. Regulated market intermediaries, fintech startups, and institutional investors are some of the participants of the sandbox. SEBI must issue a short regulatory waiver or no-action letter so that experimentation is possible without any undermining of the protection of the investor. Ancillary infrastructure like blockchain-based registries, audits of smart contracts and DLT custodians, and interoperability with already existing systems like RTI, depositories, and clearing corporations, should all be tested in such a sandbox. Learnings from such sandbox tests could be used in wider regulatory changes.
Comparative Models and Lessons for India
India can learn quite a lot concerning other jurisdictions experimenting with or issuing tokenised securities. As an example, the GGerman Electronic Securities Act (eWpG) accepts blockchain-based registers on debt instruments and accepts a central or decentralised issuance structure. The report of the UK Law Commission suggests that digital securities and smart contracts can be treated in the same way as the established rules on property. The Abu Dhabi Global Market (ADGM) has published an entire DLT framework permitting tokenised securities through exchanges and custodians. Japan has allowed security tokens under its Financial Instruments and Exchange Act (FIEA), and they have made it clear about the expectations of the intermediaries and issuers. The models prove that regulatory certainty, technological neutrality, and cross-sectoral coordination are relevant, and India has to look forward to these aspects to remain competitive.
Proposed Roadmap for India
As a realistic roadmap towards India, it is important to begin withthe regulatory recognition of tokenised securities. This might be due to the need to amend the SCRA, Companies Act, and Depositories Act to provide a legal basis for the ownership recording valid medium being the blockchain. Then, SEBI should be given the power to grant licenses to market infrastructure institutions whose work is based on the DLT, including token exchanges, smart contract auditors, and decentralised custodians. It would be feasible to start a national project similar to ONDC to develop mutual DLT infrastructure to issue tokenised capital markets. Corporate laws should be changed so that they will allow voting based on smart contracts, dividend payouts, and other shareholder activities. At the same time, cross-border issuance and cross-border trading need to be compliant with FEMA, PMLA, and tax requirements so as to avoid regulatory arbitrage. GST law and Income Tax Act, as well, may have to change to deal with tax events as transfers of tokens and additional sales. Finally, the education of investors and hacker safety requirements should be emphasised to enhance confidence in this new environment.
Conclusion
Although India is not yet in a position to completely embrace the concept of tokenised securities on its capital market scene, the trend is evident, and the challenge is immediate. The combination of blockchain and tokenisation is not a technological change but also a legal and institutional change. It requires daring innovations, calibrated experimentation's and strong policy coordination. SEBI, the Ministry of Corporate Affairs, RBI, and other stakeholders need to collaborate to develop a naira-forward-looking legal framework that combines innovation with investor protection. When used correctly, tokenised securities would transform the processes of raising capital, trading, and settling instruments, transforming India to a new era of availability, visibility, and efficient solutions. To the capital markets lawyers, there is a challenge and in the process an opportunity of creating an estate of a legal framework, which can end up defining the next generation of financial markets. India must take action and not respond.