INDIA: The balancing act between innovation and regulation in SEBI's regulatory sandbox

There is a “trust deficit” among the masses – deficit in trusting and subsequently using FinTech products in their daily lives.

This notion is a direct result of a spike in financial service companies that have adopted technology to improvise and automate their services. The use of FinTech – a confluence of finance and technology – in the securities market is becoming increasingly vital to ensure efficiency, transparency and fairness. However, new technological advancement and innovations comes with an array of problems and implementation issues and it is imperative to understand that straightjacket formula and the laws/regulations for brick-and-mortar companies cannot successfully be implemented and expected to regulate the FinTech industry.

In short, there is no one size fits all solution for the burgeoning FinTech industry.

And the regulator knows it well. With problems like determining the legal liability of robo-advisors, enforceability issues of smart contracts among all jurisdictions, ambiguous and loosely-worded data protection laws, etc., the need for regulation while promoting innovation had heightened. Realizing this, the Securities and Exchange Board of India (SEBI) announced their approval of a regulatory sandbox for live testing of new products, services and business models by market players on select customers for a specified period of time with certain relaxations.

With the intention to ensure that the sandboxing environment has minimum regulatory burden, it is evident that FinTech companies would get an open hand for testing products and services. Having said that, no exemptions   would   be   granted from existing principles of Investor   Protection framework, Know-Your-Customer (KYC) and Anti-Money Laundering (AML) prescribed by SEBI.

Further, the SEBI lays down several eligibility criteria for testing a project, including a genuine need to test, direct benefits to customers, no risks to the financial system, to name a few. However, testing may not be permitted if the proposed FinTech solution is similar to those already being offered in the markets, or if the applicant has no intention to deploy the FinTech solution in India.            

Once the eligibility criteria is met, the FinTech applicants are then given a testing ground for their new business models and required to submit reports as prescribed by SEBI. Thereafter,  concerned  departments  of  SEBI  may  perform  initial  evaluation  of  the  sandbox applications  and present  the  same  to  a committee  for  final evaluation and confirmation. This process enables SEBI to gauge the readiness of the FinTech solution for the market.

Global Scenario

After the United Kingdom (UK) launched the first regulatory sandbox regime in 2016, the approach was quickly transplanted to numerous other countries as a means of promoting innovation, improving competition and enhancing financial inclusion. Most companies were of the view that the sandbox helped them identify flaws early on, fine-tune their offerings and were better prepared for future challenges. Despite the sandbox’ benefits, it was found that authorization process especially challenging in the UK. Once accepted, companies were required to complete paperwork to gain authorization for their live tests, a process many found daunting. Those without previous knowledge of financial regulation in particular struggled to interpret the Financial Conduct Authority’s (FCA) handbook, creating an uneven playing field between participating start-ups.

The United States (US) also resolved to have its own regulatory sandbox to continue being a pioneer in fintech innovation. However, implementation has not been an easy ride owing to the fragmented regulation of financial markets in the US spread across multiple federal and state agencies. Realizing this, the Consumer Financial Protection Bureau (CFPB) committed to establishing a unified U.S. regulatory sandbox. Apart from the implementation hiccups, the US has ensured greater openness to fintech innovation. Notably, Arizona has recently jumpstarted fintech innovationand shall allow approved fintech innovators to test new offerings with up to 10,000 customers for two years.

Innovation sandboxes in the fintech industry are at a nascent stage in several countries around the world and only time can truly identify the challenges and roadblocks that lie ahead of such testing environments.


While the Indian capital market participants have been early adopters of technology, the SEBI is of the view that adoption and usage of emerging financial technology can be a key instrument to further develop and maintain an efficient, fair and transparent ecosystem.

In summation, this framework enables eligible entities to receive certain facilities and flexibilities to experiment with FinTech solutions in a live environment and on real customers, while ensuring that there are necessary safeguards for investor protection and risk mitigation.

It appears that SEBI’s regulatory sandbox might strike the right balance between encouraging emerging technological advancements and administering them accordingly. SEBI’s regulatory sandbox is a step in the right direction by providing an environment of balanced innovation and regulation, which will enable India to emerge as a startup haven.

Overall, this indeed is a very welcome move by the capital markets regulator and will only lead to betterment of the Indian securities market, keeping it on par with other developed economies. But, the success will depend on proper execution and implementation.

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