10 Points- On SEBI's Regulatory Sandbox

On June 5^th SEBI released a cirular to  introduce a  framework  for  “Regulatory  Sandbox”. Under  this  sandbox  framework,  entities regulated  by  SEBI  that shall be granted certain exemptions and flexibilities to experiment with FinTech 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.

1. APPLICABILITY- All entities registered with SEBI under section 12 of the SEBI Act 1992, shall be eligible for testing in the regulatory sandbox. The entity may either on its own or engage the services of a FinTech firm. In either scenarios, the registered market participant shall be treated as the principal applicant, and shall be solely responsible for testing of the solution.
2. ELIGIBILITY – The SEBI has provided requirements for a company to be eligible for the application process and high probabilities of approval which include a set of strict requirements that are related to the Genuineness of Innovation, and pre/post testing of the solution, and Direct benefits to the users.
3. APPLICATION/ APPROVAL PROCESS- After the all the eligibility criteria have been reached and the CEO or duly authorized officer of the applicant has signed the form, it is moved to the SEBI processing department which take the time limit of 30 days. SEBI may   issue   guidance   to   the   applicant   according   to   the   specific characteristics and risks associated with the proposed solution. SEBI may also consult its Committee on Financial and Regulatory Technologies  (CFRT),  if  necessary,  to  evaluate  the application. Upon approval it leads to the evaluation process. The duration of sandbox shall be for a maximum of 12 months.
4. EVALUATION CRITERIA – In the criteria for evaluation, the use, need and risks of the technology and/or processes are critically analyzed for their strength and weaknesses, for which the SEBI shall work with the applicants to meet the specific regulatory requirements, like- Usage of innovative solution, Identified benefits, Risk mitigation et al.
5. REGULATORY EXEMPTIONS - To encourage minimum regulatory burden, the SEBI shall consider providing certain exemptions/relaxations in accordance with Annexure 3. However, no exemptions would  be  granted  from  the  extant  investor  protection  framework,  Know Your Customer (KYC) and Anti Money Laundering (AML) rules.
6. REGULATORY RULES DURING AND AFTER THE PERIOD OF SUBMISSION OF TEST RELATED INFORMATION AND REPORTS - During the testing process the, the SEBI may require the participant to submit information and reports to keep firm checks on the companies. These reports and information may include key performance indicators, key issues arising and actions/steps taken towards solving the key issues.
7. OBLIGATIONS OF THE APPLICANT TOWARDS THE USER - The applicant shall ensure that before signing   up, the   user   has   read   the   full documentation provided by the applicant and confirm that he/she is aware of the risks of using the solution. Moreover, The applicant shall ensure that users participating  in  the  sandbox  have  the  same  protection rights as the ones participating in the live market
8. EXTENDING OR EXITING THE SANDBOX- Upon completion SEBI shall decide whether to permit the FinTech innovation to be introduced in the market on a wider scale based on the applicable licensing regime and approvals. The applicant may also devise an exit strategy and exit the sandbox or in some cased request SEBI for an extension.
9. REVOCATION APPLICATION-The SEBI may revoke an approval to participate in the sandbox if any eligibility or/and evaluation criteria are not met during or after completion of the testing. In addition to revocation of approval for participating in the sandbox appropriate actions under relevant regulatory framework may be initiated against the applicant in case Fintech solution facilitates any violations and/or wrongful promotion.
10. REGULATORY SANDBOX APPLICATION WITH DESCRIPTION AND GUIDELINES - The SEBI requires submission of application in the format provided in Annexure 1 of the framework. Further, under Annex 3 SEBI lists down the requirements for which relaxation may be considered which includes Net worth, Track record, Registration fees, SEBI Guidelines,  such  as  technology  risk  management  guidelines  and outsourcing guidelines; and Financial soundness.

Authored by Aayush Bulani (Virtual Intern) with inputs from Akshata Namjoshi (Lead: Fintech, Blockchain, Emerging Tech)