Securities Markets Code: Panel Recommends VDA Framework

For three years, one question has sat unanswered beneath almost every institutional conversation about digital assets in India: when a bond, a fund unit or a share is issued on a distributed ledger, what law applies to it?

The Standing Committee on Finance has now put that question on the parliamentary record — and answered it. Its Thirty-Sixth Report (Eighteenth Lok Sabha) on the Securities Markets Code, 2025, adopted on 21 July 2026 under the chairpersonship of Shri Bhartruhari Mahtab, examines the Code clause by clause. Two of its findings reshape the operating assumptions for anyone building, financing or supervising tokenised asset infrastructure in India. The first is a clarification. The second is a gap the Committee has asked the Government to close.

The Securities Markets Code, 2025 was introduced in Lok Sabha on 18 December 2025 and referred to the Committee the following day under Rule 331E. It consolidates and replaces three principal statutes: the Securities Contracts (Regulation) Act, 1956 (SCRA), the Securities and Exchange Board of India Act, 1992, and the Depositories Act, 1996. The consolidation was first proposed in the Union Budget for 2021–22. The scrutiny behind it has been substantial: the Committee received 1,055 suggestions from more than 70 stakeholders, took oral evidence from SEBI, RBI, IRDAI, PFRDA, IFSCA, IBBI, NSE, BSE, FICCI and ASSOCHAM among others, and conducted a study visit to Bengaluru and Mumbai in February 2026 covering nearly 50 stakeholders.

Several stakeholders had asked the Committee to clarify whether the digital form of an investment arrangement alters its legal character. The Ministry of Finance, recording SEBI's position, responded that the definition of "securities" under section 2(h) of the SCRA — carried into Clause 2(1)(zi) of the Code — is technology-neutral. A tokenised representation of an existing security, such as a unit of an investment scheme, a bond or a share, continues to fall within the scope of "securities" even where the form of record-keeping shifts to distributed ledger technology or a tokenised system.

This is the single most consequential sentence in the Report for institutional participants. It means the question facing a bank, an asset manager or an issuer contemplating a tokenised instrument is not whether securities law applies. It is how existing obligations translate to a distributed ledger environment.

The Committee's related recommendations reinforce the direction of travel. It recommends that Clause 53 be revised to align with the framework for securities held and transferred in dematerialised form, observing that the drafting still relies on concepts — lodgement, transfer deeds, registration of transfers — associated with physical certificates. Clause 55 requires all securities held by a depository to be dematerialised and in fungible form, and all fresh allotments to be made in dematerialised form. The statutory architecture is being modernised around electronic holding. Tokenisation is the next iteration of a transition the law has already made.

The Report is equally precise about what falls outside. The Ministry noted that Virtual Digital Assets such as cryptocurrencies which do not exhibit the defining characteristics of a "security" or "derivative" may remain outside the definition, notwithstanding their digital nature or the terminology used to describe them. Many categories of VDAs, the Committee noted, are increasingly traded and invested in as financial assets and exhibit characteristics commonly associated with securities and derivatives — investment for financial returns, tradability on organised platforms, price discovery through market forces, speculative trading, leverage, and in certain cases exposure to the value or performance of an underlying asset or index.

Because they are not expressly recognised unless they independently satisfy the statutory definition, the Committee found that the exclusion creates a regulatory grey area: regulatory uncertainty, heightened investor exposure to fraud, market manipulation, misrepresentation and inadequate grievance redressal, and opportunities for regulatory arbitrage.

At paragraph 20.16, the Committee makes two recommendations. First, the Government should comprehensively examine the need for an appropriate statutory and regulatory framework for Virtual Digital Assets. Second, pending a comprehensive legislative framework, the Government may consider an interim regulatory mechanism through recognised Self-Regulatory Organisations operating under the oversight of the designated regulator, prescribing minimum standards of governance, transparency and disclosure, investor protection and grievance redressal, compliance with prescribed codes of conduct, and appropriate regulatory oversight.

A third finding matters for GIFT City participants. The Committee noted concerns that certain investment structures operating in the International Financial Services Centre — sovereign wealth funds, family offices and single-investor fund structures — may not have an independent fund manager and may therefore not sit squarely within the statutory definition of an investment scheme. The Committee recommended that the Ministry ensure appropriate carve-outs for recognised IFSC structures, so that legitimate and globally accepted fund vehicles are not exposed to unintended regulatory uncertainty.

The Report includes a jurisdictional comparison submitted by the Ministry. No major jurisdiction redefines "security" to accommodate tokenisation. Each applies a technology-neutral definition and asks whether the instrument's economic substance meets the existing test. India's approach is consistent with that consensus. The jurisdictions that have moved furthest on non-security digital assets have done so through separate, purpose-built instruments — the Payment Services Act in Singapore, MiCA in the European Union, the 2026 Cryptoassets Regulations in the United Kingdom. The Committee's recommendation for a distinct statutory examination of VDAs follows the same architectural logic.

For Web3 builders and protocol teams, the compliance question for tokenised RWA products is now settled in principle. A tokenised bond or fund unit is a security, and issuance, custody, disclosure and transfer obligations attach accordingly. For VDA platforms, the recommended SRO route creates a defined pathway to participate in standard-setting — but it will require demonstrable governance, disclosure and grievance-redressal capability rather than voluntary assurance.

For financial institutions, the technology-neutral reading removes a material legal-opinion barrier to tokenised issuance and settlement pilots. The Clause 53 and Clause 55 recommendations point toward a depository and dematerialisation framework being deliberately modernised.

The Report resolves the tokenisation question and opens the VDA question. Tokenised securities sit inside the perimeter because the perimeter was drawn around economic substance, not technological form. Virtual Digital Assets sit outside it — and Parliament's Finance Committee has now recorded that this position, left unaddressed, carries costs for investors and for market integrity alike. The next phase belongs to drafting and to consultation.