The capital market has been an early adopter of technology. SEBI believes that encouraging the adoption and usage of financial technology (‘FinTech’) would profoundly impact the securities market’s development. FinTech will act as a catalyst to develop and maintain an efficient, transparent, fair, and inclusive securities market ecosystem. Intending to operationalize the endeavour, SEBI had proposed the concept of “Innovation Sandbox.”
It is to create an ecosystem that promotes innovation in the securities market. SEBI has felt that start-ups, including FinTech firms, must have access to market-related data and test environments otherwise not readily available to test the innovations effectively before introducing such innovations in a live environment.
What is the concept of the Innovation Sandbox?
Innovation Sandbox facilitates access to an environment provided by Enabling Organizations such as Stock Exchanges, Depositories, and (QRTAs) Qualified Registrar and Share Transfer Agent wherein innovators would be able to test their innovations in isolation from the live market. It would be used for offline testing of the proposed solution of an applicant.
For driving the Innovation Sandbox, a steering committee has been formed comprising the enabling organizations’ representatives.
Some of the responsibilities of this committee are as follows:
- The steering committee will supervise operations of the Innovation sandbox. SEBI representative will be included as a member of this committee.
- The steering committee will process the applications submitted by sandbox applicants for approval or rejection, assign a lead enabling organizations, etc.
- The secretariat for the particular application can be the assigned lead enabling organization.
- The lead enabling organizations will also be responsible for on-boarding the applicant post-approval of an application and monitoring an applicant throughout the lifecycle of the sandboxing.
On review of the existing framework, to encourage innovation and make it even more convenient for participation in the Innovation Sandbox, the objective & eligibility criteria of the Innovation Sandbox have been revised with graded entry norms.
Objective of Innovation Sandbox that is revised
For promoting innovation both in terms of new products and services as well as new ways of delivering existing products and services to:
- Create new opportunities in a securities market; and
- For making existing services more efficient/investor friendly/ inclusive.
It would be achieved by giving access to both test data and test environment to Financial Institutions, startups, FinTech firms, including entities not regulated by SEBI, including individuals.
Stages of Innovation sandbox
The details of the stages are as mentioned below:
- Stage I: During Stage – I, limited access to the test environment shall be provided, and there shall be a cap on the utilization of resources in terms of processing power, memory, storage, etc.
- Stage II: During Stage – II, the cap on the utilization of resources shall be removed, subject to resources’ availability then.
The eligibility criteria are as follows:
Stage I Eligibility Criteria
An applicant is required to be an Indian Citizen or entity registered in India. (KYC) Know Your Customers norms must be in line with the Central Know Your Customers Registry (CKYCR).
The KYC requirements comprising of the following:
- Name of Financial Institution/Fintech/Start-up/Individual.
- Name of the Directors, Partners.
- Address of Registered Head Office / Correspondence Address.
- Date & Year of establishment / Registration.
- Contact Number and Email Id.
- Website, if applicable.
- Government-issued Identification Details like Passport, Voter Id, Driving license, PAN Aadhaar Card, etc.
- Letter of undertaking that an applicant is not blacklisted or debarred by any government department due to breach of general or specific instructions, fraudulent, or corrupt or other unethical business practices.
- Any other information may be required to process the application.
Stage- II Eligibility Criteria
An applicant will be eligible for Stage-II after completing minimum of 60 days in the Stage-I of Innovation Sandbox testing. Applicants must make a presentation before the steering committee to evaluate and enter Stage-II either physically or through virtual mode.
The Stage-II criteria are as follows:
- Purpose: The purpose of the project must be aligned with the objective of the innovation sandbox.
- Adequate Progress: An applicant should demonstrate that they have achieved adequate progress and are on track with their testing plan.
- Post-testing strategy: The applicant should present their post-testing plan.
- Benefits to investors: The solution must be offered identifiable benefits (direct or indirect) to investors and capital market and financial sector as a whole.
Features and Structure of Innovation Sandbox
The components & structure of the Innovation Sandbox are broadly classified into the following categories:
There are two design components:
- One of the important components of an Innovation Sandbox is access to securities market-related data, which will enable applicants to test and improve the FinTech solutions.
- The datasets that can be made available to applicants must be clearly defined & also known to market participants. Indicative datasets which will become part of the Innovation Sandbox are as follows:
- Depositories data: Holding data, KYC data
- Stock exchange data: Transactions data such as trade log, order log
- RTA data: Mutual fund transactions data.
- The datasets must be historical and anonymized data and must contain data related to episodic market events. Live data must not be made available to applicants.
- Access to datasets must be provided in a phased manner, starting with a limited amount of data, and based on validations, more exhaustive data it would be provided to applicants.
- The use of datasets must be governed by a comprehensive confidentiality agreement which must include an ‘End User Agreement’ clearly specifying that datasets made available must not be sold or sublet or shared or misutilized in any manner with other entities and must be used only for the stated purpose.
- The datasets for testing solutions in the Innovation Sandbox shall be shared preferably through an (APIs) application program interface, which it would be published and made available to all eligible applicants.
- The existing test platform shall be made available by the enabling organizations to the eligible applicants to ensure that an innovative solution is working in the enabling organization’s environment.
- Enabling organizations shall also provide an Innovation Sandbox test kit (comprising Test data, test environment, APIs, configurable access rights, etc.) to an eligible applicants.
Intellectual Property Rights (IPR)
It is envisaged that there shall be multiple applications with similar ideas in the innovation sandbox. Hence, no claim for the IPR must be applicable in the Innovation Sandbox.
There are two administrative components:
Applications received for participating in an Innovation Sandbox will be assessed by the steering committee. It would follow graded eligibility criteria.
- Interface for Innovation Sandbox
Enabling organizations will endeavour to make the entire sandbox participation lifecycle (tracking, applying, onboarding, reporting, monitoring, etc.) completely digital to ensure transparency & efficiency.
The circular has been issued while exercising the powers conferred under Section 11 (1) of the SEBI Act, 1992 & Section 19 of the Depositories Act, 1996 to protect investors’ interests in securities and promote the development and to regulate securities market.
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