SEBI's Demat 2.0 and Graded Broker Rules Explained: Tokenised Bonds, AI Sandbox and What Changes for Investors
Key Takeaways
- SEBI Chairman Tuhin Kanta Pandey outlined the roadmap on 24 October 2026 at the ANMI International Capital Market Convention in Mumbai.
- Under the next phase of Demat 2.0, tokenised corporate bonds would be allowed to trade in the secondary market, building on a pilot that issued Rs 1,025 crore of tokenised bonds.
- SEBI is examining graded compliance for brokers, varying requirements by scale, client exposure and reliance on technology.
- SEBI is developing a market-making framework for corporate bonds and reviewing short-selling and securities lending rules.
- SEBI is exploring an AI sandbox and finalising tiered responsible-AI guidelines with accountability, data controls, kill switches and human oversight.
What Happened
India's capital markets regulator has set out its next round of reforms in a single, wide-ranging speech. On Saturday, 24 October 2026, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey addressed the 16th ANMI International Capital Market Convention in Mumbai, where he outlined plans for graded compliance for stockbrokers, a regulatory sandbox for artificial intelligence, a market-making framework for corporate bonds, and the next phase of Demat 2.0, under which tokenised corporate bonds would be allowed to trade in the secondary market.
The Hindu BusinessLine reported the speech on 24 October 2026, and NewKerala carried the same address with the same key points, including the graded compliance framework, the AI sandbox and the Demat 2.0 secondary-market plan. Both reports agree on the central message: SEBI wants market rules that vary with risk, technology that is tested under supervision before it is let loose on investors, and a corporate bond market that is easier to trade in. This article explains what was actually announced, what is still only a proposal, and what it could mean for ordinary investors.
It is important to be precise about status from the start. Pandey's speech was a roadmap, not a final rulebook. Several items are described in the reports as things SEBI is "exploring", "examining" or "working on". That means consultation papers, draft rules and implementation dates may follow, and details may change. Nothing in the speech, as reported, changes an investor's existing demat account, holdings or trading limits overnight.
Background: What Demat 2.0 Already Is
To understand the new announcement, it helps to separate Demat 2.0 into two phases. The first phase is a pilot that already exists. SEBI and the Reserve Bank of India (RBI) launched the Demat 2.0 pilot at the Global Fintech Fest, where it was unveiled by Pandey and RBI Governor Sanjay Malhotra. Under the pilot, corporate bonds are issued as digital tokens on a permissioned distributed ledger, rather than only as conventional dematerialised securities, and settlement is linked to the RBI's wholesale central bank digital currency through the Unified Market Interface.
Reports on the pilot say three companies issued tokenised bonds worth a combined Rs 1,025 crore in its first phase: REC Limited raised Rs 500 crore from 18 investors, Larsen & Toubro raised Rs 500 crore, and IIFL raised Rs 25 crore from one investor. The pilot's point was to test issuance, holding and settlement using new technology while keeping the existing legal framework for securities intact. A tokenised bond, in this model, is not a new kind of investment and it is not a cryptocurrency. The bond remains the same legal security, with the same issuer, coupon, maturity, credit rating and investor rights. What changes is how ownership is recorded and how settlement happens.
The settlement idea is the most distinctive part. In a conventional corporate bond trade, settlement can take days for funds to reach the seller or issuer after a deal is struck. Under the pilot's design, settlement is "atomic", meaning delivery versus payment: the security token and the digital currency move at the same time, or the trade fails altogether. That design, if it works at scale, removes the window in which one side has delivered and the other has not yet paid, which is a classic source of settlement risk.
What Pandey announced on 24 October is the next phase: allowing tokenised corporate bonds to trade in the secondary market. In other words, the pilot tested creating and settling these bonds; the next step is letting investors buy and sell them from each other after issuance. According to the reports, Pandey said this would improve liquidity, reduce settlement risks and speed up access to funds. That distinction matters, because a bond that can be issued but cannot easily be resold is of limited use to most investors, and a liquid secondary market is what turns a one-off issue into a functioning market.
Graded Compliance: One Size Will Not Fit All Brokers
The second major theme was how brokers are supervised. At present, compliance requirements can feel the same whether a broker is large or small, serves a handful of clients or lakhs of them, and runs simple systems or complex, technology-heavy platforms. Pandey said SEBI is examining a compliance regime that would vary according to a broker's scale, client exposure and reliance on technology.
"We are fixing this to improve capital efficiency and lower the compliance burden," Pandey said, according to the reports. The logic is straightforward. A small broker with limited client money at stake does not pose the same risk as a large broker handling huge volumes, so applying identical, heavy requirements to both can waste resources without adding safety. Conversely, a large, technology-dependent broker needs closer scrutiny of its systems, because a failure there can affect many investors at once. A graded system tries to match the intensity of supervision to the risk, freeing up capital and management time where risk is low and concentrating attention where risk is high.
SEBI is also working on related plumbing to make compliance less duplicative. The reports mention simplifying compliance for depository participants by revising existing rules, expanding the Samuhik Prativedan Manch, a common reporting platform, to depositories, and consolidating broker inspection portals into a unified digital workflow. For brokers, that means fewer separate filings and inspections saying the same thing in different formats. For investors, the benefit is indirect but real: a regulator that spends less time chasing duplicate paperwork has more time to spot genuine problems.
Two further capital-efficiency measures were mentioned. SEBI plans to fix the parallel clearing requirement for tender offers, buybacks and offers for sale, which currently adds cost, and to extend the automated give-up and take-up facility in the cash segment to custodian clients, including portfolio management services and alternative investment funds. The practical effect, as described, is that funds are not blocked while awaiting custodian confirmation. These are technical changes, but they share a theme: money that is stuck in process for no good reason is money that cannot be invested or returned.
Corporate Bonds: Why Liquidity Is the Problem
India's corporate bond market has long been described as large in issuance but thin in trading. Companies raise substantial money through bonds, yet much of that paper is held to maturity by institutions, and an ordinary investor who wants to sell before maturity can find few buyers and a wide gap between buying and selling prices. That is why SEBI is developing a market-making framework for corporate bonds alongside the Demat 2.0 secondary-market plan.
Market-making, in simple terms, means having participants whose job is to quote buy and sell prices continuously, so that an investor can trade without waiting for a matching counterparty to appear by chance. Combined with tokenisation and faster settlement, the hope is that corporate bonds become more like shares in one respect: tradeable without an outsized cost or delay. The reports are careful, however, to present this as a framework under development, not a launched scheme. Details such as who can be a market-maker, what obligations they carry, and which bonds qualify first have not been set out in the speech reports.
SEBI is also reviewing the short-selling and securities lending and borrowing framework, according to BusinessLine. Short-selling allows an investor to sell a security they do not own, in expectation of buying it back cheaper, while securities lending lets holders lend their securities to such sellers for a fee. Both mechanisms can add liquidity, but both also need rules on disclosure, risk and settlement to prevent disorderly markets. A review does not mean the rules will necessarily be loosened or tightened in a particular direction; it means SEBI is re-examining whether the current framework still fits the market it now supervises.
Artificial Intelligence: A Sandbox, Not a Free Run
The third theme is artificial intelligence. Pandey said SEBI is exploring an AI sandbox that would allow new tools to be tested in a controlled environment, giving regulators a chance to build safeguards around them. Alongside it, SEBI is finalising guidelines for the responsible use of AI, based on a tiered framework that includes accountability standards, data controls, kill switches and human oversight, in line with recommendations from the International Organization of Securities Commissions (IOSCO).
A sandbox is a useful concept to grasp. Instead of either banning a new AI tool or allowing it to be used on live client money with no oversight, a sandbox lets a firm test it on limited data, with limited clients or simulated trades, while the regulator watches. If the tool misbehaves, the damage is contained and the firm learns before a wider launch. A kill switch is the emergency stop: a way to shut the tool down immediately if it starts making harmful decisions. Human oversight means that a person, not just an algorithm, remains responsible for the outcome. Data controls govern what information the AI can use, which matters because an AI trained on biased or leaked data can produce biased or unsafe advice.
Pandey also used the speech to warn about unregistered investment advisers and social media influencers, often called finfluencers, who increasingly shape retail investment decisions. That warning connects directly to the AI theme. Much finfluencer content now reaches investors through algorithmically promoted videos and posts, and AI tools can generate investment tips at scale. SEBI's message, as reported, is that technology does not remove the need for registration, accountability and investor protection. An AI-generated tip is still a tip, and an unregistered adviser using AI is still unregistered.
On access, Pandey said SEBI would ease digital onboarding for overseas investors, including non-resident Indians, and stressed that expanding participation beyond major cities matters for the next phase of market growth. "The next wave in retail broking will not come from the big cities alone; it will come from our towns and villages," he said. That line ties the whole speech together: graded compliance lowers the cost of serving smaller towns, tokenised bonds and better bond liquidity widen the products available, and AI tools, properly supervised, could lower the cost of advice and execution. None of that works, however, if investor protection does not keep pace.
What It Means for Ordinary Investors
For an ordinary investor, the most honest summary is that this is a direction of travel, not a product launch. No new tokenised bond is available to retail investors to buy tomorrow as a direct result of this speech, and no broker's compliance category has changed yet. What investors can do is watch for the concrete steps that follow: a consultation paper on graded broker compliance, draft rules for the AI sandbox and responsible AI guidelines, details of the corporate bond market-making framework, and the terms on which tokenised bonds enter secondary trading.
There are also questions worth asking as those details emerge. First, who will be eligible to trade tokenised bonds in the secondary market at first: institutions only, or retail investors as well, and with what minimum investment? The pilot's first issues involved a small number of investors and large sums, which suggests an institutional starting point, but the reports do not confirm the retail timetable. Second, how will investor protection work for a tokenised bond: who holds the record if a ledger fails, how are disputes resolved, and what happens to a retail holder if a market-maker withdraws? Third, will graded compliance genuinely reduce costs for small brokers without weakening oversight of large ones, and how will SEBI measure whether the grading is working?
Investors should also keep a clear distinction in mind between SEBI's regulated tokenisation and the wider world of crypto assets. A SEBI tokenised corporate bond is a regulated security issued by a known company, recorded on a permissioned ledger run by market infrastructure institutions, and settled in central bank digital currency. It is not an unregulated token traded on an offshore exchange, and the fact that both use the word "token" does not make them the same thing. Anyone selling a product by blurring that distinction should be treated with caution, and Pandey's warning about unregistered advisers applies with full force there.
What to Watch Next
The next milestones are procedural, but they are the ones that decide whether a speech becomes a market. Watch for SEBI consultation papers, which invite public comment before rules are finalised, and for the final responsible AI guidelines, which will show how strict the tiered framework really is. Watch for the market-making framework's design, especially which bonds and participants it covers first. And watch for any announcement on the timetable for secondary trading in tokenised bonds, including whether retail investors are included in the first phase.
BusinessLine quoted Pandey as saying, "Tomorrow's markets will not simply arrive. We must define them." That is a fair summary of the speech's ambition: to shape the market's infrastructure, compliance and technology together, rather than letting each evolve separately. Whether that ambition succeeds will depend less on the speech and more on the rule-making that follows, and on whether the safeguards for AI, the grading of brokers and the liquidity of bonds are designed as carefully as they were described.
Conclusion
SEBI's 24 October announcements bring together four reforms that are usually discussed separately: graded compliance for brokers, a secondary market for tokenised corporate bonds under Demat 2.0, a market-making framework for corporate bonds, and a supervised path for artificial intelligence in markets. Each addresses a different friction: compliance that does not match risk, bonds that are hard to resell, and new technology that arrives faster than the rules for it. Taken together, they describe a market that is more liquid, more proportionate in its supervision, and more deliberate about technology.
For investors, the practical takeaway is patience with a purpose. These are proposals and frameworks under development, building on a pilot that has already issued Rs 1,025 crore of tokenised bonds. The details that matter — eligibility, safeguards, timelines and costs — will come in the consultation and rule-making that follows. Reading those documents, rather than reacting to headlines about "Demat 2.0" alone, is the best way to judge whether this roadmap delivers a market that is both easier to use and safer to invest in.