1. Regulatory Framework - 2026 Position

A. RBI - Primary for settlement finality

1. Payment and Settlement Systems Act (PSS Act) 2007 - Section 2(1)(i) defines settlement, Section 10 gives RBI power to determine settlement finality.

The Act empowers RBI to regulate and supervise payment systems, including electronic funds transfer, to ensure efficiency, safety, and additionally establishes legal validity of electronic payment instructions and settlement obligations.

This is critical: Only a system authorized by RBI under PSS Act gets settlement finality protection. If your DLT system is not authorized, settlement can be unwound by a court.

RBI Stance: RBI has not approved cryptocurrency for settlements; it supports CBDC under Digital Rupee project. RBI is testing tokenized company bonds, certificates of deposit and programmable digital rupee settlement.

Draft Guidelines 2024-2026: RBI issued draft guidelines on use of DLT in financial markets and is expected to finalise soon. Approach:

• Security token = securities leg on DLT
• Cash leg = must settle in central bank money - Wholesale e-Rupee (e₹-W)
• Result: DvP - Delivery vs Payment atomic.

1. Operational Guidelines for Digital Transactions: RBI's operational guidelines include strong authentication, restrictions on storing sensitive data, clear customer consent, and compliance with PSS Act 2007 for settlement finality and dispute resolution.

B. SEBI - Securities leg

SEBI Chairman Tuhin Kanta Pandey, May 2026:

We are saying whether we can use the DLT and tokenisation method for... Once you do that, there will be greater possibility of more liquidity and instantaneous settlement. RBI has already issued draft guidelines on the subject and is expected to come out with final norms soon.

SEBI Pilot - Demat 2.0 + Tokenised Bonds (Live in 2026):

SEBI launched Demat 2.0 pilot, which successfully utilized DLT for securities records while settling cash legs through central bank money. Tokenized bond issuances by REC, Larsen & Toubro, and IIFL totaled ₹1,025 crore, demonstrating practical application.

The pilot combines tokenised corporate bonds with RBI's wholesale CBDC for settlement. The approach is designed to allow securities and payment legs to settle simultaneously, reducing settlement risk and need for sequential processing.

Participants: REC (PSU), L&T ₹500 crore 3-year tenure, IIFL Finance ₹25 crore - first Non-PSU NBFC - at Global Fintech Fest 2026.

This is under SEBI's sandbox under SEBI (Regulatory Sandbox) Regulations.

C. IFSCA - GIFT City
IFSCA allows DLT settlement for tokenised assets under IFSCA (Capital Market) Regulations. Settlement finality recognized within IFSC.

D. Digital Rupee - e₹-W for DLT Settlement
RBI designed e₹-W to offer Settlement Finality similar to physical cash, reducing need for interbank settlement and use of Distributed Ledger Technology for tracking issuance of tokens.

2. What Are Your DLT Settlement Obligations?

If you run a DLT platform (bank, fintech, corporate bond issuer), you must ensure:

1. Obligation to Obtain Authorization
Under PSS Act Sec 4, no person can operate payment system without RBI auth. DLT that does settlement = payment system. Penalty: Sec 26 - up to 10 lakh + jail.

2. Settlement Finality Obligation
Once e₹-W moves on DLT, you cannot reverse. Under PSS Act Sec 23-24, settlement final in authorized system, even if participant insolvent next minute. You must design smart contract to be irrevocable after finality point.

3. DvP Obligation - No Principal Risk
SEBI pilot mandates atomic DvP. You cannot deliver tokenised bond without receiving e₹-W simultaneously. Smart contract must have escrow logic.

4. KYC/AML Obligation
DLT is pseudonymous, but Indian obligation: You must maintain off-chain identity mapping. RBI's Master Direction on KYC, PMLA - FIU issued notices to 15 crypto platforms in Sept 2024 for violating AML.

5. Data Localization & Audit Trail
RBI requires DLT nodes storing payment data to be in India (Data localization circular 2018). Every DLT transaction must have audit log for 10 years under Companies Act.

6. Customer Protection & Dispute Resolution
Even on DLT, transaction alerts, consent, cybersecurity obligations under RBI digital lending guidelines apply. If DLT settlement fails due to bug, bank liable.

3. Case Laws - How Courts Treat DLT Settlement

Case 1: Internet and Mobile Association of India vs RBI (Supreme Court 2020 - WP 528/2018)
The landmark. RBI Circular 6 April 2018 banned banks from dealing in crypto - effectively banned DLT settlement for private crypto.
SC struck it down as disproportionate under Article 19(1)(g). Held: RBI can regulate DLT settlement, but cannot blanket ban without showing harm.
Ratio for DLT: DLT settlement obligations must be proportionate, RBI must show least restrictive means. Opened door for CBDC-based DLT pilots we see today.

Case 2: SEBI vs Karvy Stock Broking (SAT 2020-21) - Settlement Misuse
Though not DLT, principle applied to DLT: Intermediary misused client securities held in pool - transferred to own account. SAT held settlement obligation is fiduciary - securities must be segregated. Same principle applied to DLT wallets: You cannot co-mingle tokenised bonds of clients in your node. Must maintain beneficial owner mapping under Demat 2.0.

Case 3: RBI vs Crypto Exchanges - FIU Notices 2024
FIU-IND issued show-cause to Binance, KuCoin etc under PMLA for failing to maintain settlement audit trail on DLT. Established: DLT settlement without KYC = violation of PMLA Sec 12.

Case 4: REC, L&T, IIFL Tokenised Bond Precedents (2026) - Regulatory Precedent, not court
At GFF 2026, RBI Governor Sanjay Malhotra and SEBI Chairman declared these as valid DLT settlements under existing law because:

• Security leg on permissioned DLT (Hyperledger Fabric)
• Cash leg in e₹-W (central bank money)
• Settlement finality achieved via RBI's e-Kuber system integration
  This creates estoppel - RBI cannot later say such DLT settlement is invalid.

Case 5: National Spot Exchange (NSEL) Crisis - 2013 - SC Judgment 2019 (63 Moons)
NSEL offered e-settlement of commodities without PSS Act authorization. Bombay HC & SC held: Settlement without authorized payment system = illegal. Pairing of contracts = violation. Applied to DLT: If you do DLT settlement of corporate bonds outside SEBI pilot without approval, you face same fate - contracts void.

Case 6: SEBI Circular on DLT in Depositories (SEBI/HO/MRD2/DDAP/CIR/P/2020/85)
SEBI mandated two depositories (NSDL, CDSL) to monitor DLT usage. Any issuer using DLT for settlement must maintain same obligations as physical: reconciliation, ISIN, settlement guarantee fund.

4. Current Legal Gaps & Obligations

Smart Contract Enforceability: Under Indian Contract Act Sec 10, smart contract is valid if offer, acceptance, lawful consideration. But IT Act Sec 10A says contract via electronic means valid. However, automatic execution without human intervention - enforceability of code-is-law not tested. Best practice: Have legal prose wrapper - Ricardian contract.

Insolvency: If DLT participant goes insolvent after DLT entry but before e₹-W settlement, under IBC, which time is settlement? RBI pilot says settlement time = time when e₹-W leg final in RBI ledger, not DLT block time. You must draft this.

Tax: 1% TDS u/s 194S on DLT crypto settlement, but for tokenised bond DLT settlement, normal TDS u/s 193 applies. Banks must deduct.

Practical Checklist for Bank/Corporate launching DLT settlement:

1. Get RBI PSS authorization or operate within SEBI Sandbox Letter
2. Use permissioned DLT with Indian nodes
3. Design atomic DvP with e₹-W, not private stablecoin
4. Implement T+0 instantaneous settlement, but disclose finality point
5. Maintain off-chain KYC mapping, file STR to FIU if needed
6. Keep audit trail 10 years, real-time monitoring