India's Securities Watchdog to Launch System for Monitoring Financial Instruments

India's securities watchdog plans to lean heavily on distributed ledger technology for the monitoring and recording of financial instruments, beginning next year.

The Securities and Exchange Board of India (SEBI) announced Wednesday its intentions to roll out a system for "security and covenant monitoring" for non-convertible debentures (NCDs) by April 1, 2022.

It marks a significant step for the use case of blockchain within India's financial ecosystem and follows other major institutions in leveraging the technology for increased systems efficiency.

NCDs are financial instruments that recognize a debt obligation toward the issuer. Typically a debenture is a long-term instrument with a feature that allows it to be cashed in for shares at a later date at the discretion of the owner. Debentures that cannot be converted into shares are considered "non-convertible" products.

The system will also keep tabs on covenants – terms inserted into a debt agreement – and will monitor the credit ratings of the NCDs. The system will provide necessary permission to trustees, issuers, and credit rating agencies to update transaction data. In turn, the data will be accessible to stock exchanges and depositories to provide for a more transparent process.

Data stored will be cryptographically signed, time-stamped, and sequentially added to the ledger, leaving behind a verifiable audit trail of transactions. Transaction history and data on the ledger will be "fully" encrypted and will be shared only with necessary stakeholders on a "need-to-know basis," SEBI said in its statement.

"DLT has the potential to provide a more resilient system than traditional centralized databases and offer better protection against different types of cyber-attacks because of its distributed nature, which removes the single point of attack," the watchdog said.