SEBI to Launch Blockchain-based Monitoring System

By September 7, 20213 Comments

On August 25, the Securities and Exchange Board of India asked depositories to use distributed ledger or blockchain technology to record and monitor security creation as well as non-convertible securities covenants. Compared to traditional centralized databases, distributed ledger technology has the potential to provide a more resilient system. Because of its distributed nature, which eliminates the single point of attack, it provides better protection against various types of cyber-attacks, as per Sebi.

For the uninitiated – The Securities and Exchange Board of India (SEBI) is a statutory regulatory body that was established on April 12, 1992. It monitors and regulates the Indian capital and securities markets, ensuring that investors’ interests are protected by developing regulations and guidelines.

SEBI’s decision to embrace blockchain technology marks yet another significant step forward for the emerging technology’s adoption within the Indian financial system. According to SEBI, the use of DLT for financial instruments is expected to increase system efficiency multifold.

Debentures are financial instruments that recognize the issuer’s debt obligation. Normally, a debenture functions as a long-term debt instrument with the added feature of being redeemable for shares at the owner’s discretion at a later date.

Similarly, non-convertible debentures (NCDs) are those that cannot be converted into shares.

Furthermore, the proposed blockchain-based system will keep track of covenants, which are important terms included in a debt agreement, as well as the credit ratings of the NCDs.

The move is intended to strengthen the process of security creation and monitoring of security-created asset cover and non-convertible securities covenants.

The system will keep track of covenants (terms inserted into a debt agreement) and the credit ratings of non-convertible debentures. The system will grant trustees, issuers, and credit rating agencies the necessary permission to update transaction data. As a result, the data will be available to stock exchanges and depositories, resulting in a more transparent process.

Data will be cryptographically signed, time-stamped, and sequentially added to the ledger, leaving a verifiable audit trail of transactions behind. According to SEBI’s statement, the ledger’s transaction history and data will be “fully” encrypted and only those stakeholders who have a “need-to-know” basis are given access to the information.

As per SEBI, Distributed Ledger Technology (DLT) allows for the programming of pre-agreed-upon conditions that are automatically executed once certain conditions are met. As a result, it will be possible to program logic that will not allow any additional charge on any asset if the charge has already been created up to its current value.

“Thus this system will be a quasi-registry of charges on full implementation and will achieve the objective viz – what is the value of the security that a charge holder has and who all does it shares with,” SEBI noted.
The new system is expected to be operational by April 1, 2022, according to Sebi. Exciting times for the blockchain as it continues to find its way across applications and industries in our world, with many more to come!

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