Sebi planning sandbox framework for innovations in capital markets

Irdai has also set up a committee to come out with a consultation paper on 'regulatory sandbox' approach

The Securities and Exchange Board of India (Sebi) is planning to come out with a policy on sandbox framework, which would essentially allow companies working in the capital markets space to experiment innovations in a closed environment.

The idea behind the policy on sandbox is to support technological innovations in the financial services space, popularly known as Fintech.

“We will come out with a policy on sandbox soon. We are examining whether any changes in laws are required in terms of dispensation that may be needed,” said Ajay Tyagi, Chairman of Sebi, responding to a question about his view on crypto assets. Tyagi was in Kolkata to address the 8th India Finance Conference at IIM-Calcutta. 

A sandbox framework set will allow companies to roll out products on an experimental basis, like pilot projects, under a regulator’s supervision.  “A sandbox approach will address product gaps in the mutual fund (MF) industry and more innovation will take place. MF houses need to experiment based on consumer behaviour and requirement. Additionally, sandbox  framework will give customers the comfort of regulatory supervision,” according to Jaideep Bhattacharya, chief executive officer of Srei Mutual Fund.

 Notably, almost all the regulators in India are converging towards a sandbox regulatory framework. 

Earlier this year, the Reserve Bank of India (RBI) had set up an inter-regulatory working group to look into and report “on the granular aspects of Fintech and its implications, so as to review and reorient appropriately the regulatory framework and respond to the dynamics of the rapidly evolving Fintech scenario,” according to a PIB release.

Further, a steering committee was constituted under the Chairmanship of Secretary, Department of Economic Affairs (DEA) Ministry of Finance on March 5, 2018; to consider various issues relating to development of Fin Tech space. 

According to the recommendations of the group, the regulatory actions governing sandbox framework may vary from “disclosure” to “light-touch regulation and supervision” to a “tight regulation and full-fledged supervision”.

The insurance sector regulator, Insurance Regulatory and Development Authority of India (Irdai), too, has set up a committee to come out with a consultation paper on ‘regulatory sandbox’ approach. 

 Even globally, the sandbox approach is gaining popularity. In August this year, regulators from more than ten countries, including the UK, US and Hong Kong, announced an alliance to support sandbox in Fin Tech under the aegis of Global Financial Innovation Network.

Speaking at the event, Tyagi said, “ There is now a wider consensus among technology experts that machine-learning/ artificial intelligence and block-chain are two significant technological changes that would fundamentally alter and shape our capital market going forward.”

“Regulators who were earlier comfortable in imposing basic requirements of investor protection in terms of net-worth, minimum standards of infrastructure, minimum number of qualified manpower, etc. on entities, may have to develop the capacity to vet software codes and algorithms, test those algorithms for malfunction, if any, and consider encoding checks and balances of investor protection in those smart contracts and algorithms itself,” Tyagi further said. 

This apart, Sebi will come out with a circular soon on terms and conditions for mutual funds to separate their distressed debt assets, said Tyagi.

The proposal was first put forward by the mutual fund industry, which SEBI has in principal has agreed to upon, and a circular will safeguards investors interest, said Tyagi. 

"We will come out with a circular that will put terms and conditions to safeguard the investors and not misused by the MFs," said Tyagi.