Markets regulator Sebi on Wednesday asked depositories to use distributed ledger or blockchain technology to record and monitor security creation as well as covenants of non-convertible securities.
The distributed ledger technology has the potential to provide a more resilient system than traditional centralised databases. It offers better protection against different types of cyber-attacks because of its distributed nature, which removes the single point of attack, Sebi said in a statement.
The regulator said that a platform for 'security and covenant monitoring system' hosted by depositories is being developed.
The move is aimed at strengthening the process of security creation and monitoring of security created, asset cover and covenants of the non-convertible securities.
The system using distributed ledger technology (DLT) will be used for recording of the process of creation and monitoring of security (due diligence, charge creation etc), continuous monitoring of covenants by debenture trustees and credit rating of the non-convertible securities by the credit rating agencies (CRAs).
"A system using block chain technology for non-convertible securities along with the underlying assets would be created and all charges and asset valuation transactions shall be recorded by the respective entities including Issuers, debenture trustees, Credit Rating Agencies, etc," Sebi said.
The system will give permissions to the debenture trustees, issuers and credit rating agencies to update the information and would be accessible to other entities like stock exchanges and depositories.
The information stored in the system will be cryptographically signed, time stamped and sequentially added to the ledger. It would provide a verifiable audit trail of transactions.
Further, as it would be a permissioned DLT, all the relevant stakeholders will have the access to their portion of information in the distributed ledger and transaction history on the DLT ledger would be fully encrypted.
The transaction data would be shared only with necessary stakeholders on a need-to-know basis.
According to Sebi, DLT enables programming pre-agreed conditions that are automatically executed once certain conditions hold. Thus, it will enable to program a logic which will not allow additional charge on any asset, if the charge is already created up to the present value of the asset.
"Thus this system will be a quasi-registry of charges on full implementation and will achieve the objective viz --what is the value of security that a charge holder has and who all does it shares with," Sebi noted.
The new system will be implemented by April 1, 2022, the Securities and Exchange Board of India (Sebi) said.
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