SEBI and IRDAI Launch Innovation Sandbox to Boost Start-ups

Swetha Dhinesh

30 May, 2024

The Reserve Bank of India established a innovation sandbox for companies to test their goods and services in an effort to boost the fintech industry. Currently, the market regulator Securities and Exchange Board of India (SEBI) and the insurance regulator, that is Insurance Regulatory and Development Authority of India (IRDAI), have made a similar initiative. SEBI introduced its framework for an innovation sandbox to foster an environment that encourages innovation in the securities market. The seed, angel, venture, and private equity funds, along with government, incubator, and accelerator funding, have all played a significant role in the rapid expansion of the Indian startup ecosystem. Through its flagship startup India project, which went into effect in 2016, the government, for its part, is fostering an environment that is favourable to start-ups.

Innovation Sandbox

A sandbox is an enabling infrastructure or interface which is made available to an outside innovator or fintech by a bank so that they can test their product and services in real time. This live testing reduces the time to get to the market and also allows room for failure without actually going for a commercial launch. A collaborative workplace called an “innovation sandbox” allows people to discover new ideas, expand technologies, and share knowledge. It is a framework for exchanging market information with financial technology companies in order to come up with original ideas and solutions for the capital markets. 

Unregistered fintech companies will be permitted to participate in the sandbox by SEBI. Access to anonymised, historical data from exchanges, depositories, and mutual funds would be available to fintech companies that meet SEBI criteria.

Eligibility Standards for the Innovation Sandbox

• Any organisation looking to develop new goods, services, or solutions for India’s commodities and securities markets.
• The applicant should have a genuine need to test the idea using the innovation sandbox’s resources.
• The applicant needs to be in a position to argue that the solution cannot be appropriately developed without being tested in the innovation sandbox.
• The applicant should have the money available to support sandbox testing.
• The applicant must be able to explain their post-testing plan.
• The solution must possess attributes that could directly benefit consumers, the capital market, and the Indian economy as a whole.
• According to SEBIs Cyber Security Guidelines, the applicant must show a certificate of compliance with cyber-security measures.

Sandbox stages

The purpose of the Innovation Sandbox Guidelines is to inform applicants about the application procedure and evaluation/eligibility requirements.

The stages’ specifics are as follows: 

• Stage I: There will be a cap on the number of resources (processing power, memory, storage, etc.) used during Stage I, and there will be restricted access to the test environment. 

• Stage II: Depending on the availability of resources at that time, Stage II will see the removal of the resources of cap utilisation.

Key Initiatives

The primary purpose of introducing sandbox regulations is to improve the opportunities to boost start-ups. They are as follows:

• Fintech will have a safe and conducive space to experiment where the consequences of failure may be limited using the innovation sandbox method.
• With advice from the regulator and industry experts regarding complying with regulatory standards and guaranteeing policyholder protection, the sandbox will aim to accelerate growth in the fintech sector and quicken the pace at which innovative solutions are produced.
• IRDAI stated that depending on the solutions offered by fintech, it might also consider easing parts of the rules to make room for new developments.
• SEBIs sandbox develops a platform for offline testing of startup companies’ suggested solutions from the active market. It also intends to assist fintech companies in obtaining additional investment and give developers the opportunity to explore market difficulties.
• In accordance with the SEBI criteria, applicants must have a genuine requirement for testing solutions. Applicants must be able to demonstrate that the solution cannot be adequately developed without doing a sandbox. 
• Accessing data about the securities market is one of the most important features of this sandbox because it will enable users to test and enhance their fintech solutions.
• The data set comprise depositories’ holding data, KYC information, and transaction data such as order log and trading log.
• Participants in the market must be aware of and be able to specify explicitly the datasets that will be made available to applicants. Data on holding, KYC, and transactions such as order logs, trade logs, and mutual fund transactions are indicative datasets that may end up in the innovation sandbox.
• Phased access to datasets would be given to applicants, starting with a small amount of data and increasing the amount of data after validations.
• A detailed confidentiality agreement that includes an “end-user agreement” that expressly states that the datasets made available will not be sold, rented, shared, or used improperly in any other way with any other entities and will only be used for the specified purpose will regulate how they are used. The datasets to be shared for testing solutions should ideally be made available to all qualified candidates via published application programme interfaces (APIs).

In accordance with the SEBI criteria, applicants must have a genuine requirement for testing solutions. Applicants must be able to demonstrate that the solution cannot be adequately developed without a sandbox. 

Similarities between the Sandbox Initiatives by Financial Regulators

According to the criteria for the three regulatory sandboxes, when a product or service has undergone testing, the applicants must submit the final report to the appropriate “Chairperson” for the product or service’s approval. According to the guidelines established by the three financial regulators, any exemption granted to a product or service shall expire once the product or service has completed its sandbox phase.

Benefits

There are a number of advantages to creating an innovative sandbox to boost start-ups, some of which are major and are listed below:

• The regulatory sandbox promotes “learning by doing” on all sides, first and foremost. Regulators can make informed decisions about the regulatory modifications or new regulations that may be required to support practical innovation while containing the associated risks when they have first-hand empirical evidence of the advantages and risks of emerging technologies and their implications. Banks and other existing financial service providers gain a better grasp of how new financial technologies might operate, which makes it easier for them to integrate such new technology into their business plans. FinTech businesses and innovators can improve their understanding of the rules that govern their offerings and modify their products accordingly. Final point: End-user input from customers informs both the regulator and the innovator about potential costs and advantages for customers from these improvements.
• If a regulatory sandbox looks to have the potential to succeed, users can test the product’s feasibility without the need for a broader and more costly roll-out. Before the product is released to the general public, necessary changes can be made if any issues are discovered during the sandbox phase.
• FinTechs offer solutions that can significantly increase financial inclusion. The innovation sandbox can significantly increase innovation and technology adoption rates as well as financial inclusion and financial reach. Microfinance, innovative small savings, remittances, mobile banking, and other digital payments are among the areas that could benefit from the regulatory sandbox which will boost start-ups.
• The regulator’s reliance on industry/stakeholder consultations alone is proportionally diminished by offering a structured and institutionalised framework for evidence-based regulatory decision-making.
• A more comprehensive selection of goods and services, lower costs, and easier access to financial services are all potential benefits of the regulatory sandbox for consumers.

Conclusion

Despite the progress that has been made so far, there are still many obstacles that Indian businesses must overcome. These obstacles include the unorganised and fragmented market in most sectors, a lack of clear policy initiatives that startups can quickly access, a lack of infrastructure, knowledge and exposure, and difficulties in conducting business. Creating more awareness of initiatives and incentives will help to improve opportunities to boost start-ups in India. Creating such regulatory “sandboxes” will promote the expansion of the financial industry. It will also address business concerns and present cutting-edge technological solutions.

Also Read:
SEBI & IRDAI Introduces Regulatory Innovative Sandbox Regulations
RBI Releases Draft Framework for Regulatory Sandbox to Create Innovation Test Lab for Fintech
Impact of Artificial Intelligence (AI) on Financial Service Landscape