Two years on, Sebi's sandbox initiative yet to find its feet

Most applications have either been withdrawn or stand rejected

The regulatory sandbox framework approved by the Securities and Exchange Board of India (Sebi) board in February 2020 has remained a slow starter.

Restrictive regulatory framework, conservative approach towards innovative ideas, and lack of inter-regulatory coordination are key reasons why the initiative — aimed at boosting innovation and futuristic ideas — has failed to take off, say industry players. Regulatory officials said they are working on concern areas to give the initiative a fresh push.

Since 2020 when the framework was introduced, the markets regulator has received 10 applications for its approval. Of this, three have been rejected, five withdrawn, one under process, and one approved, reveals data on the Sebi website.

Among the concepts rejected by Sebi are the one on stock market fantasy games and another on enabling investment in fractional shares. The sandbox on fantasy games would have popularised stock market investing but created concerns around gamification, observed industry players.

The concept of owning fractional shares — which allows investors to buy shares of any amount — is popular in the US. Sources said approving the framework — even for sandbox — would have required special regulatory dispensation. Last month, the Sebi chairperson said amendments to the Sebi Act are in the works, allowing a more liberalised sandbox framework.

Legal experts said tweaks to the existing framework are needed to give a fillip to the initiative. “The idea is to bring the best international practices onboard. Sebi is a very democratic organisation and engages all participants to ensure any relaxation or amendment considers the macro impact. It is a good effort to expand beyond financial technology (fintech). 

However, the success and openness to consider this system will be gradual since sandbox in India is still in a transitional phase,” said Moin Ladha, partner, Khaitan & Co. The only approved application so far by Sebi is that of the Association of Mutual Funds in India for an incubation plan for qualifying new mutual fund distributors.

Sandbox initiative facilitates companies and fintech entities to test their product or service on select participants and do live experiments in a controlled environment under a regulator’s supervision.

Joint regulatory effort

Earlier this month, key financial sector regulators — Sebi, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India, International Financial Services Centres Authority, and Pension Fund Regulatory and Development Authority — came together to allow an interoperable regulatory sandbox.

Under this, lacunae arising out of inter-regulatory approvals are likely to be removed and applicants expected to be provided further relaxations for limited purposes. The inter-regulatory standard operating procedure for fintechs will help them launch hybrid products and services which may need overseeing by more than one regulator. The fintech department of the RBI will act as a nodal point for receiving applications. Based on the dominant features of the product, the principal regulator’s eligibility and networth criteria will be applicable. The regulator, under which features other than the dominant features fall, will be the associate regulator.

Applicants will have to state the regulatory relaxations that they seek and the expected use-cases of the product, service or technology they intend to test.

In September, the RBI announced the fifth cohort of the regulatory sandbox. Based on feedback received from various stakeholders, the RBI has kept the theme neutral unlike the previous cohorts which were theme-focused like cross-border payments, prevention of financial frauds, and micro, small and medium enterprise lending. The central bank has had a few successful cases under its sandbox initiative. While the RBI released its framework in 2018, Sebi came up with a regulatory sandbox framework in June 2020. Separately, depositories and exchanges, too, are taking initiatives to boost innovation. At a recent discussion, a National Securities Depository executive shared that it has received over 200 applications which have been scrutinised by a panel and are planning a hackathon to promote innovation.