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The market regulator, Securities, and Exchange Board of India (SEBI) introduced the framework for regulatory sandbox on 5th June 2020. Under it, the entities regulated by SEBI will be granted certain facilities and flexibilities to experiment with Fintech solutions in a live environment and on a limited set of real customers for a limited time.
Table of Contents
The circular issued by the SEBI allows all registered entities with SEBI under Section 12 of the SEBI Act to apply for testing in the regulatory sandbox. It further states that it may apply on its own or engage the services of a Fintech firm. Before this, SEBI allowed Fintech start-ups and entities that were not regulated by SEBI to test their proposed solutions offline.
SEBI has prescribed the applicant to go through three stages of evaluation.
The regulatory sandbox was set up with a view to encouraging innovation with minimal regulatory burden. Therefore SEBI has allowed certain exemptions and relaxations from certain regulatory requirements or selective exemptions depending on case to case.
However, it may be noted that the circular states that no exemptions will be granted from the extant investor protection framework, KYC (Know Your Customer) and AML (Anti-money Laundering) rules with a view to assure market integrity and investor protection.
The entities wanting to participate in the sandbox should make an application, including the exemption or the relaxation sought from the relevant provisions of the regulatory framework applicable. The regulatory relaxations from various SEBI regulations can be provided once the sandbox testing applications are analyzed.
The SEBI may require the participants to submit information /reports during the testing period. Such information/report includes:
Further, the sandbox participants are required to submit a final report having the following information to SEBI within 30 days from the expiry of the testing period:
The sandbox participants must protect the users participating in the testing by ensuring that the user has read the full documentation provided by the applicant and that they have the knowledge of risks to the solution. The applicant is also required to ensure that the users participating in the sandbox have similar protection rights as with the ones participating in the live market.
SEBI can revoke the approval at any time before the end of the testing period on the following grounds:
It may be noted that further appropriate actions will be taken against the applicant if Fintech solution facilitates the following:
The SEBI will give prior notice to the applicant regarding its intention to revoke the approval, and it will also give the applicant an opportunity to respond to SEBI.
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