SEBI finally notifies securities regulatory sandbox!

April 2020

As a major move towards encouraging innovation in fintech sector, the Securities and Exchange Board of India (SEBI) notified the SEBI Regulatory Sandbox Amendment Regulations, 2020 on April 17. The notification amends about 33 regulations including issue and listing of instruments, takeover code, foreign venture capital investor, real estate investment trusts, listing obligations and disclosure requirements, foreign portfolio investors, stock brokers, debenture trustees, merchant bankers, underwriters, share transfer agents, mutual funds and custodian regulations. A copy of the notification can be accessed at http://egazette.nic.in/WriteReadData/2020/219076.pdf.

Scope: As per the amendment:

  • SEBI may exempt any person or class of persons from all or any of the provisions of the regulations.
  • The exemptions aim at facilitating applicants to further technological innovations for testing new products, processes, services, business models in the securities market using live regulatory sandbox environment.
  • Regulatory sandbox means a live testing environment where new products and processed in securities market will be deployed on limited set of eligible customers for a fixed time period.
  • All SEBI registered entities will be initially eligible to participate in the regulatory sandbox.
  • These exemptions will be valid for a specified duration which cannot exceed 12 months.
  • For obtaining exemptions, the applicant must comply with conditions as SEBI may prescribed on a continuous basis during the exempted period.

PSA view: In February 2020, based on recommendations of the expert committee, SEBI had given a green signal for regulatory sandboxes. The amendments formalise the sandbox mechanism, and as of now, only registered entities can apply to explore new products and processes using tech innovation in a sandbox environment. Fintech start-ups cannot directly apply for inclusion in the regulatory sandbox, but can participate through a cross-domain approach where a SEBI registered entity as the main applicant can collaborate with a fintech start-up to make the most of the exemptions. Based on SEBI deliberations in its February 2020 meeting, participants may be exempted from requirements like net worth, track record, registration fees, technology risk management and outsourcing guidelines, and financial soundness. It was also indicated that participants should be obligated to maintain confidentiality of customer information, proper evaluation criteria and handling of financial assets, prevent money laundering, implement risk checks and follow KYC principles. Further, the amendment fixes the maximum duration for sandbox participation at 12 months. Some jurisdictions like Australia and Malaysia allow further time extension for sandbox participants or facilitate their registration with respective regulators as market intermediaries. As of now, it is unclear if SEBI will follow a similar approach. The details are yet to come, which will shed light on the conditions and compliances for the exempt duration as well as the future course of action. Until such time, security market and fintech stakeholders will have to wait to gauge the efficiency of the sandbox facilities and flexibility.

By:

Arya Tripathy