In the notification scheme, we have 'All Watchers' for all the events to get a notification emails. Still, Watchers are not getting emails when the Issue is updated.
there is not a lot left to be checked - but are you using probably "Issue Security" so (at least a part of) the watchers are prevented from seeing the particular issues?
If so, also a mail would not be sent out as they could not gain access anyway.
A double check could also be executed using the "notification helper" from Jira Admin Helpers:
As a site admin you can use it to diagnose if from Jira's perspective the mail goes out or not.
Connect with like-minded Atlassian users at free events near you!Find an event
Connect with like-minded Atlassian users at free events near you!
Unfortunately there are no Community Events near you at the moment.Host an event
You're one step closer to meeting fellow Atlassian users at your local event. Learn more about Community Events