BACKGROUND

In the recent past, the advent of innovative technology has created numerous opportunities for emerging businesses to develop creative solutions to the problems posed by financial markets. It has played a pivotal role in enabling companies change an end user’s approach towards the financial services ecosystem. Despite the unprecedented disruption caused to the financial services sector by the COVID-19 pandemic, the timely adoption of emerging technology by new age Indian companies has resulted in rapid recovery of the financial markets and the Indian economy as a whole. With a view to encourage companies to continuously adopt and use financial technology (‘FinTech’) in the securities market ecosystem, the Securities and Exchange Board of India (‘SEBI’) issued a circular[1] on February 02, 2021 setting out a revised framework for its ‘Innovation Sandbox’.

An Innovation Sandbox is a controlled environment for testing new products and services developed by FinTech firms/ entities not regulated by SEBI including individuals prior to their introduction in a live environment. The concept of an Innovation Sandbox was first introduced by SEBI through its circular dated May 20, 2019[2]. The introduction of Innovation Sandbox as a concept was well-received by FinTech firms/ entities and was seen as a crucial step towards the development of an efficient, fair, transparent and inclusive securities market. In order to facilitate further transformation of the securities market ecosystem, SEBI has introduced an amendment to its existing framework to create new opportunities in the securities market and to make the existing services more efficient and investor friendly.

KEY AMENDMENTS

The key amendments proposed by SEBI in the circular dated February 02, 2021, include the following:

A. Objective – SEBI has revised the objective of the Innovation Sandbox set out in its existing framework. The revised objective of the Innovation Sandbox is to promote innovation of new products and services, which includes developing new ways of delivering the existing products and services to create new opportunities in the securities market and to make the existing products and services more efficient, inclusive and investor friendly. This objective is intended to be achieved by granting access to test data as well as test environment to FinTech firms, financial institutions, startups and entities not regulated by SEBI including individuals (‘Sandbox Applicants’).

B. Steering Committee and Enabling Organizations – While the concept of a steering committee was already embodied in the existing framework, the revised framework has introduced the concept of an enabling organization forming part of the steering committee. As per the revised framework, the steering committee comprising of representatives from stock exchanges, depositories, qualified registrar and share transfer agents (together referred as ‘Enabling Organizations’) and SEBI is primarily responsible for supervising the operations of the Innovation Sandbox. The steering committee is responsible for approving/ rejecting applications basis the graded eligibility criteria and assigning a lead Enabling Organization to each Sandbox Applicant. In addition to the steering committee, the lead Enabling Organization is also responsible for onboarding the Sandbox Applicants post approval of their application and effectively monitoring the Sandbox Applicants throughout the lifecycle of the project.

C. Stages and Eligibility Criteria – SEBI’s revised framework for Innovation Sandbox has eased the participation process for Sandbox Applicants by laying down merely a 2 (two) stage process. However, each stage sets out a separate eligibility criteria to be fulfilled by the Sandbox Applicants.

(i) Stage-I: Stage-I restricts the access of the Sandbox Applicants to the test environment and imposes a cap on the utilization of resources. To be considered for Stage-I of the Innovation Sandbox, the Sandbox Applicant must fulfil the following conditions: (a) the Sandbox Applicant must be a citizen of India or an entity registered in India; (b) the Sandbox Applicant must have Know Your Customers (‘KYC’) norms compliant with the Central Know Your Customers Registry and KYC Registration Agency’s KYC requirements; (c) the Sandbox Applicant must have a genuine need to test the solution in the Innovation Sandbox and must provide a justification for accessing the test data (depositories data, stock exchange data etc.) and the test environment.

(ii) Stage-II: In Stage-II, the cap imposed on utilization of resources during Stage-I is removed, subject to availability of resources. A Sandbox Applicant becomes eligible for Stage-II of the Innovation Sandbox, on completion of a minimum period of 60 (sixty) days in Stage-I of the Innovation Sandbox. On completion of the minimum period, the Sandbox Applicant is required to make a presentation before the steering committee for evaluation and entry to Stage-II of the Innovation Sandbox. In addition to the aforesaid, to be considered for Stage-II of the Innovation Sandbox, the Sandbox Applicant must fulfill the following conditions: (a) the purpose of the Sandbox Applicant’s project must be aligned with the objective of the Innovation Sandbox; (ii) the Sandbox Applicant must have achieved adequate progress and must be on track with its testing plan; (iii) the Sandbox Applicant must have postulated a post-testing plan; (iv) the project of the Sandbox Applicant must offer identifiable direct/ indirect benefits to investors and the financial sector as a whole.

D. Intellectual Property Rights (‘IPR’): While the existing framework provided for framing policies to protect the IPR of the Sandbox Applicants, the revised framework formulated by SEBI comprehends that the applications made by Sandbox Applicants are likely to have solutions, which are based on similar ideas. Therefore, no claims with respect to breach of IPR made by Sandbox Applicants while testing their goods and services in the Innovation Sandbox will be entertained by SEBI.

CONCLUSION

The revised framework proposed by SEBI is a positive step towards the transformation of the Indian securities market. By easing the participation process for Sandbox Applicants in the Innovation Sandbox, SEBI has created a path to bolster development of innovative solutions to the hurdles faced in the Indian securities market. Having said that, the lack of clarity with respect to the graded eligibility criteria to be adopted by the steering committee while approving applications coupled with failure to recognize the IPR of the Sandbox Applicants in the Innovation Sandbox is likely to discourage certain Fintech firm/ entities, start-ups and businesses from testing their innovative products and services in the Innovation Sandbox. Despite the aforesaid limitations, the circular is a revolutionary attempt by SEBI to encourage use of technology in the securities market and the market regulator must be lauded for the same.

For any queries or follow up, please feel free to contact the author(s) at hardeep.sachdeva@azbpartners.com; ravi.bhasin@azbpartners.com; or anurag.singh@azbpartners.com 

Authors:

Hardeep Sachdeva, Senior Partner
Ravi Bhasin, Partner
Anurag Singh, Associate 

Footnotes:

[1] Revised Framework for Innovation Sandbox (SEBI Circular No. SEBI/HO/ITD/ITD/CIR/P/2021/16 dated February 02, 2021).
[2] Framework for Innovation Sandbox (SEBI Circular No. SEBI/MRD/CSC/CIR/P/2019/64 dated May 20, 2019).