Tokenisation In Corporate Transactions
Tokenization in Corporate Transactions
Tokenization is the process of converting rights to an asset or a financial instrument into a digital token on a blockchain or distributed ledger, which can then be:
Traded
Transferred
Used as collateral
Recorded immutably
Corporate applications include:
Equity token offerings
Debt tokenization
Supply chain finance
Real estate-backed tokens
Loyalty points / rewards
Intellectual property tokenization
I. Legal Character of Tokens
| Token Type | Legal Implication |
|---|---|
| Security token | Falls under securities law; regulated by SEBI/Company Law |
| Utility token | Represents right to use service/product; generally not regulated as security |
| Asset-backed token | Rights over underlying asset; can involve property law principles |
| Governance token | May confer voting/decision rights; corporate governance implications |
II. Corporate Use Cases
Equity Tokenization: Issuing digital tokens representing company shares
Debt Tokenization: Bonds or receivables represented as tokens
Supply Chain Tokens: Represent ownership or claim over goods
IP Tokenization: Patents or royalties monetized digitally
Employee Incentives: Token-based ESOPs
Cross-border Payments: Digital tokens reduce intermediaries
III. Key Legal Principles and Case Law
1. Token as Property / Asset
Case Law:
AA v. Persons Unknown (UK, 2019)
Crypto recognized as property capable of proprietary remedies; extends to tokens representing real-world assets.
Impact: Supports legal enforceability of tokenized rights.
2. Securities Law Applicability
Case Law Principle:
SEC v. W.J. Howey Co. (US, 1946)
“Investment contract” test applies to tokens promising profits.
Impact: Equity or profit-linked tokens may require regulatory approval.
3. Corporate Power and Object Clause
Case Law:
LIC v. Escorts Ltd. (1986, SC)
Companies can only undertake transactions consistent with their objects.
Impact: Token issuance must align with company’s constitutional documents.
4. Disclosure and Transparency
Case Law:
Satyam Computer Services Case
Accurate disclosure in financial statements is mandatory.
Impact: Token-based fundraising must be fully disclosed to shareholders and regulators.
5. Fraud and Misrepresentation
Case Law:
Shreya Singhal v. Union of India (2015, SC)
Digital misrepresentation can attract liability.
Impact: Token terms and representations must be legally accurate; misrepresentation may trigger criminal/civil liability.
6. Insolvency / Creditor Rights
Case Law:
Ruscoe v. Cryptopia Ltd. (NZ, 2020)
Tokens held on behalf of others may not belong to company; creditor rights in insolvency matter.
Impact: Custody and rights over tokenized assets must be clearly defined.
7. Contractual Enforceability
Case Law:
Tata Consultancy Services v. State of Andhra Pradesh (2004, SC)
Digital contracts for intangible assets can be legally valid.
Impact: Token smart contracts enforceable if they meet contractual principles.
IV. Regulatory Considerations in India
Securities Law (SEBI) – Security tokens require approval.
Companies Act, 2013 – Corporate approvals for issuing tokenized shares.
RBI / FEMA – Cross-border transfer tokens may be regulated under foreign exchange rules.
Income Tax Act – Gains from tokenized assets are taxable.
PMLA / AML Rules – Token transactions may require KYC/AML compliance.
Intellectual Property Law – IP tokenization must respect IP rights.
V. Corporate Governance Implications
| Governance Aspect | Requirement |
|---|---|
| Board Approval | Token issuance or acquisition |
| Risk Assessment | Smart contract bugs, regulatory uncertainty |
| Disclosure | Accounting treatment and investor reporting |
| Custody | Secure storage of tokenized assets |
| Compliance | SEBI, FEMA, tax, and AML adherence |
| Audit | Internal/external verification of tokenized assets |
VI. Accounting Treatment
Asset-backed tokens → Intangible assets or financial instruments
Equity tokens → Treated like share capital or securities
Debt tokens → Liabilities or receivables
Revenue recognition → Depends on token sale terms
Transparency and traceability are crucial for auditability.
VII. Risks in Tokenization
| Risk | Explanation |
|---|---|
| Regulatory | Non-compliance with SEBI/FEMA |
| Legal | Unclear ownership / insolvency disputes |
| Technology | Smart contract vulnerabilities |
| Governance | Board mismanagement or fraud |
| Taxation | Misreporting gains or losses |
| Market | Price volatility affecting corporate balance sheet |
VIII. Key Judicial Trends
Courts treat tokens as property or contractual rights, not abstract concepts.
Security tokens may attract securities regulations.
Misrepresentation or mismanagement in token issuance attracts civil and criminal liability.
Custody and control are crucial for insolvency and creditor protection.
IX. Conclusion
Tokenization in corporate transactions is:
A legally enforceable method to digitize ownership or rights, subject to regulatory, accounting, and corporate governance compliance.
Corporate boards must ensure:
Board approval + legal classification + regulatory adherence + disclosure + secure custody + auditability
Failure can result in:
⚖ Regulatory sanctions
⚖ Civil or criminal liability
⚖ Shareholder disputes
⚖ Insolvency complications
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