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How should fintechs prepare for a crackdown? Sebi chief offers a checklist

Speaking at the Global Fintech Fest, SEBI chairperson said: “If your business model is woven around a black box that is not capable of being audited, it cannot be permitted”

September 21, 2022 / 11:17 AM IST
Madhabi Puri Buch

Madhabi Puri Buch

“I love the fintech world”: That’s how Madhabi Puri Buch, chairperson of Securities and Exchange Board of India (SEBI) began her address at the Global Fintech Fest. She said SEBI has been late to the party in the past but is now planning to narrow down the regulatory gap in the startup ecosystem.

She explained, “By construct, a regulatory gap will always exist. If startups are building something completely new, then it has not even entered the heads of those in the regulatory body. But, when we finally show up, what is it that fintech innovators should have kept in mind to avoid crackdown?”

Here’s a checklist:

If anonymity is a key selling proposition, it will not last: “Anonymity in the financial world is an absolute no-no and that should be the first guiding principle for businesses,” she said. Startups need to build on credible data.

Transparency is key: The regulator's principal job is to ensure that investors make informed decisions. “If your business model is woven around a black box, which is not open to sunlight or not capable of being audited or validated, it cannot be permitted,” she said. If your algorithm claims 350 percent returns in one year, it has to be verified!

Financial inclusion: If a fintech’s business model facilitates financial inclusion, the regulator is bound to be supportive.

Ease of exit: “We don’t want ‘Abhimayus’ in the market. Ek baar bakra aa gaya toh usko bahar jaane nahin denge.” SEBI chief stressed that such business models will not be supported by the regulator.

“Building barriers to exit for customers is unlikely to find favour with us. Customers should be able to exit, as easily as they entered your ecosystem,” she told innovators and investors.

Infrastructure for innovation will be a public good: Build on public rails. Private innovation should be over and above this. Founders cannot say that they want to own the infrastructure, she said, citing the examples of Aadhaar and UPI (Unified Payments Interface).

“If startup founders keep these principles in mind, they will not get a rude shock from the regulators,” Buch concluded.

Shailaja Mohapatra Senior sub-editor, Moneycontrol
first published: Sep 21, 2022 11:17 am