SEBI & IRDAI Introduces Regulatory Innovative Sandbox Regulations

Neelansh Gupta

05 Jul, 2019

Financial sector regulators are taking a lot of initiatives to encourage startups in their segments by making data and systems available to them. Last month, RBI had announced administrative innovative sandbox regulations where startups could test out new financial products in real-time with limited regulations. Now, on Monday, i.e. 21^st May 2019, insurance regulator IRDAI and stock market regulator SEBI also announced similar kind of initiatives.

Purpose of introducing Regulatory Sandbox Regulations

The purpose of introducing Sandbox Regulations is to:

• Provide financial technology firms and unregulated market participants with an environment to test their new solutions with markets data.
• The framework can be utilized by any entity that intends to innovate on the products, services, and solutions for the securities and commodities market in India.
• The entities would have access to markets data but not live data to test their solutions.
• To create an ecosystem which promotes modernization in the securities market

What is Innovation Sandbox?

Innovation Sandbox is a shared workspace to conceive, discover new subjects, expand technologies and share knowledge. It is a framework to share market data with financial technology firms to brainstorm and create innovative solutions for capital markets.

SEBI will allow Fintech firms which are not registered with it to be a part of the sandbox. Fintech firms meeting SEBI criteria will have access to anonymous, historical data from exchanges, depositories and mutual funds. 

Features and Structure of Innovation Sandbox Regulations

Let us try to discuss the above categories in detail now:

Design Components:

Design Components includes Data Sets and Infrastructure. The most significant components of an Innovation Sandbox is access to securities market-related data, which will allow participant to test and improve their FinTech solution. The datasets given to the market will be chronological and anonymized. Further, it will contain data related to periodic market events. But, live data will not be made accessible to participants.

Access to such datasets will be provided in a phased manner, starting with a limited amount of data and based on validations, more exhaustive data would be provided to participants. Such data sets will be shared through APIs (application program interface). 
A steering committee comprising of market infrastructure institutions (MIIs) and qualified registrar and share transfer agents will develop the operating guidelines for the framework, and will also include members from Fintech startups, academia, angel investors and the likes.  

Legal Components:

Some of the legal components of Innovation Sandbox include:

• Flexibility
• Not-for-Profit
• Compliance
• Legally Robust
• Intellectual Property Rights (IPR) Protection
• Prevention of Data Misuse
• Restriction from Fraudulent Purposes
• Secured

Administrative Components:

This component includes:

• Assessment of Application received for participating in the Innovation Sandbox, and further rule-based self-assessment process shall be formalized to allow the applicants automatic entry into Innovation Sandbox.
• Secondly, a governance body shall be formed constituting of representatives from Stock Exchanges, Depositories and Qualified Registrar and Share Transfer Agents who will supervise the operations of the Innovation Sandbox for the benefit of its contributors, users and securities market. This governing body will ensure that the sandbox fulfils its stated objectives.
• An operational team should be formed for day to day activities of the Innovation Sandbox.
• Rules of participation shall be framed to regulate the rights and responsibilities of the participant for Innovation Sandbox and other participants
• A grievance redressal process shall be formulated to deal with grievances of any applicant in the Innovation Sandbox

Interface for Innovation Sandbox

The complete lifecycle of Innovation Sandbox shall be digital to ensure transparency and efficiency.

Eligibility Criteria for inclusion into Innovation Sandbox

• Any entity who wants to innovate on the products, services or solutions for the securities and commodities markets in India.
• The applicant should have a authentic need for testing the solution using the resources available in the Innovation Sandbox
• The applicant should be able to claim that the solution cannot be adequately developed without testing in the Innovation Sandbox
• The applicant should have the necessary capital to support testing in the sandbox
• Applicant should be able to describe their post testing strategy
• The solution should have qualities that could offer direct benefits to consumers, capital market and the Indian economy at large.
• The applicant is required to present a cyber-security compliance certificate as per SEBI’s Cyber Security Guidelines.

Benefits of SEBI’s Innovation Sandbox

• Innovation Sandbox will help in showcasing the working prototype of the solution, which may help FinTech firms secure more funding.
• It will help in assessing compliance and readiness with SEBI’s regulations.
• Developers can explore industry challenges and use cases for innovative technologies linked to the information of new solutions across the industry.

Also Read: RBI Releases Draft Framework for Regulatory Sandbox to Create Innovation Test Lab for Fintech

Comments of IRDAI on Innovative Sandbox Regulations

• IRDAI said that with this approach, Fintech’s would have a secure and favorable space to research and where the cost of failure can be contained.
• Further, IRDAI said that the sandbox would help to improve growth in the fintech space and increase the speed of new solutions are developed with help from the regulator and industry experts on meeting regulatory requirements and ensuring policyholder protection.

Our Take

The Sandbox Regulations will help entities to test their innovations effectively before introducing them in a live environment and will further create an ecosystem which will promote innovations in the stock market.