Sebi approves regulatory sandbox framework for stock market ecosystem

The Securities and Exchange Board of India (Sebi) on Friday approved the so-called regulatory sandbox framework for the stock market ecosystem. The term is used for live testing new financial technology (fintech) solutions on actual customers, without having to be fully licensed, but under strict regulatory supervision.

Sebi’s new framework allows live testing on a small set of customers for a limited period of time.

“Entities regulated by shall be granted certain facilities and flexibilities to experiment with solutions in a live environment and on limited set of real customers for a limited time frame. These features shall be fortified with necessary safeguards for investor protection and risk mitigation,” said in a circular.

The new framework is based on a discussion paper floated by the regulator a year ago.

Sandeep Parekh, managing partner, Finsec Law Advisors said the ‘regulatory sandbox’ framework introduced by would really push the envelope on innovation and competitiveness in the securities

“It will allow innovators, cramped by rigid rules, to go outside them a little bit, in a strictly controlled manner. Thus allowing innovation without jeopardising investor interest,” he said.

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The market regulator has set strict eligibility criteria for participants to be eligible for live testing. These include genuineness of innovation and testing. Under this the applicant will have to demonstrate to Sebi how the proposed solution will add value to existing offerings in the Indian securities market and also the need for live testing the solution on actual clients. Further, the applicant will have to incorporate risk management strategy to mitigate and control potential risks to any market participant.

The concerned department of Sebi will evaluate and approve applications for regulatory sandbox and appoint a designated officer to oversee the project.

Sebi said applicants will make their clients aware of the risks involved during testing. They will also have to ensure that the “users participating in the sandbox have the same protection rights as the ones participating in the live market”.

Upon completion of testing, the market regulator will decide whether to permit the innovation to be introduced in the market on a wider scale.

At the time of testing, Sebi will have the powers to revoke its approval if among other things, the applicant “suffers a loss of reputation”, “carries on business in a manner detrimental to users or the public at large; and “fails to effectively address any technical defects, flaws”.

Sebi said that upon revocation, the applicant may have to compensate any users who suffer financial losses arising from the test.