Deepika Vijay Sawhney
Financial services firms are increasingly using technology to improvise and automate their services. The use of fintech in the securities market is becoming increasingly vital to ensure efficiency, transparency and fairness. However, new technological advancement and innovations come with their own set of challenges and implementation issues and it is imperative to understand that straightjacket formula and the laws/regulations for brick-and-mortar companies cannot successfully be implemented and expected to regulate the fintech industry.
Therefore, with a view to promoting innovation and ensuring that the securities market is not left untouched by the fintech companies, the capital markets regulator, the Securities and Exchange Board of India (SEBI) recently came out with a framework for a so-called Innovation Sandbox on May 20.
A sandbox, as defined in the Oxford English Dictionary, is synonymous with software development and refers to a virtual space in which new or untested software or coding can be run securely. A regulatory sandbox is thus a framework set up by a regulator to allow small scale, live testing of innovations by various firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception) with the regulator’s supervision.
The first-ever regulatory sandbox was launched in 2015 in the UK and since then by early 2018, 20 other jurisdictions have also implemented the framework. In India, SEBI’s sandbox closely follows a similar announcement by the Reserve Bank of India.
Through the innovation sandbox, SEBI proposes to create an ecosystem which promotes innovation in the securities market, in which the fintech companies would be provided access to market-related data, particularly trading and holding data, which is otherwise not readily available to them. The idea is to enable them to test their innovations effectively before the introduction of such innovations in a live environment.
The circular issued by SEBI lays down the broad framework with respect to the design, legality, administration and eligibility of the participants of the sandbox. Fintech firms and entities which wish to develop innovative products, services, and/or solutions for the securities and commodities market in India can be part of the said Innovation sandbox, subject to meeting basic eligibility criteria like necessary resources to support testing, post testing plans, direct benefit to the consumers and capital market and validated cyber security system.
In addition, the applicant must be able to demonstrate that the solution cannot be developed properly without testing in the innovation sandbox.
For offline testing of the proposed solutions in isolation from the live market, market-related data related to transactions, KYC and the like are to be made available by stock exchanges, depositories and qualified registrar and share transfer agents (QRTAs) although the data so made available shall be historical and not the live ones.
Benefits of Innovation Sandbox
The proposed sandbox would provide a plethora of benefits to all stakeholders including investors, fintech firms, capital market institutions as well as the regulator.
First, the sandbox framework would not only help fintech companies reduce the cost and eliminate entry barriers, but also allow SEBI to understand the functioning of a fintech service/product in a holistic manner. This will enable the regulator to determine and make necessary modifications in the existing laws -- or make new ones -- to ensure level-playing field for all financial companies.
Second, the framework would also allow fintech firms to test their products’ viability prior to live market launch.
Third, it would strengthen the capacity of SEBI and reduce its dependence on industry/stakeholder consultations for making changes in the regulations and on completion of tests, it can determine whether full-fledged or tailor-made regulations are needed or the launch of the product or service is not to be allowed.
Last, this would promote innovation which would only lead to increased range of products and services.
Conclusion
The circular issued provides just a basic framework for introduction of the concept of Innovation Sandbox for FinTechs by SEBI and as proposed by a SEBI Steering Committee comprising of representatives from the Market Infrastructure Institutions (MIIs).
QRTAs will be responsible for developing the operating guidelines related to the functioning and structure of the innovation sandbox in the future. The need of the hour is to clearly define the objectives and challenges that should be addressed and determine whether the innovations being tested in a sandbox have the potential to improve the working of the capital market at large.
Overall, this indeed is a very welcome move by the capital markets regulator and will only lead to betterment of the Indian securities market, keeping it on par with other developed economies. But, the success will depend on proper implementation.
The writer is Partner (Securities Laws & Transaction Advisory) – Corporate Professionals. Views expressed are personal.
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