The Securities and Exchange Board of India (SEBI) is developing a security and covenant monitoring platform using distributed ledger technology (DLT), according to a 13 August circular by the market regulator.
The system, to be implemented from 1 April 2022, is intended to strengthen the process of security creation and monitoring of securities created, asset cover and covenants of non-convertible securities.
The system will be a quasi-registry of charges on full implementation and will show the value of a security held by a charge holder, and who it is shared with.
DLT, the same technology used in blockchains, will be used for recording the process of creation and monitoring of securities (due diligence and charge creation), monitoring of covenants by debenture trustees, credit ratings of non-convertible securities, etc.
Issuers, debenture trustees and credit rating agencies will have permission to record charges and asset valuation transactions, and update data and information on the system for non-convertible securities, along with the underlying assets.
It will be accessible to other entities like stock exchanges, depositories, etc. The information stored in the system will be cryptographically signed, timestamped and sequentially added to the ledger and it will provide a verifiable audit trail of transactions. As it would be a permissioned DLT, all the stakeholders will have access to their portion of information. The transaction history on the DLT would be fully encrypted.
Transaction data will be shared only on a need-to-know basis with the relevant stakeholders. The DLT has the potential to provide a more resilient system than traditional centralised databases and offer better protection against different types of cyberattacks because of its distributed nature, which removes the single point of attack, the SEBI has said.
DLT also enables programming of pre-agreed conditions that will automatically execute when it meets certain conditions. It can be programmed to prevent additional charges on any asset if a charge created is up to the asset’s present value.
The Business Law Digest is researched and written by Mithun Varkey.