Industry lobby NASSCOM has asked market regulator SEBI to include virtual testing of fintech products in its proposed regulatory sandbox, as some startups may not have the scope for offline testing, reported by Economic Times. Some of the demands made by NASSCOM are:

  • Fintech startups should be allowed to test solutions virtually without entering the actual market.
  • The association has proposed that the limited offline testing should be made optional for the applicants.
  • The testing period should be extended to 12-18 months from the current 9 months, with a maximum of extension of upto 3 month

The Payments Council of India has also suggested that regulators proposing similar sandboxes should create a framework to interact with each other. Through this, the NASSCOM is looking to relax SEBI’s “offline testing” feature of the regulatory sandbox, which is a mandatory for eligibility for the fintech startups to apply for the regulatory sandbox, according to the discussion paper. “Before applying for testing in the regulatory sandbox, limited offline testing of the solution should have been carried out by the applicant,” the paper noted. According to NASSCOM, many startups may not have the scope to complete offline testing.

What is SEBI’s regulatory sandbox?

On May 28, SEBI had released a discussion paper on a regulatory sandbox. The SEBI has proposed two sandbox frameworks, an “innovation sandbox” to be used by fintech startups and entities not regulated by SEBI to test their solutions offline. And a second framework, simply called “regulatory sandbox” for financial institutions regulated by SEBI will experiment with fintech solutions in a live environment and on real customers. For this initiative, SEBI has defined the regulatory sandbox as a live, testing environment where new products, processes, services and business models can be deployed on a limited set of eligible customers for a specified period of time with certain relaxations in the extant SEBI regulations and guidelines. The SEBI laid down the following eligibility criteria for both sandboxes:

The eligibility criteria for applying at the SEBI’s regulatory framework are as follows:

  1. Genuineness of innovation: The solution should be innovative and different from existing offerings and will add value to the Indian market.
  2. Genuine need to test: The applying startups should show how a certain solution cannot be developed without relaxing norms in the sandbox.
  3. Limited prior testing: Limited offline testing of the solution should be carried out by the applicant before applying for the sandbox.
  4. Benefits to users: The solution should offer direct or indirect to the investors or capital raising entities and to the capital market.
  5. No risks to the financial system: The solution should have a proper risk management strategy to control potential risks and limit the consequences of any failures.
  6. Testing readiness of the solution: The startup should have necessary resources to support testing in the sandbox and show developed testing plans with clear objectives, parameters and success criteria.
  7. Deployment post-testing: The applicants should also show the intention and ability to deploy the solution in India on a broader scale and is also required to share a proposed sandbox exit and transition strategy.
  8. Fit and proper person: The applicants shall meet the fit and proper criteria including:
    • Integrity, reputation and character;
    • Absence of convictions and restraint orders;
    • Competence including financial solvency and net worth;
    • Absence of categorization as a willful defaulter.

Other regulatory sandbox initiatives

  • RBI: The RBI had also released a draft document “Enabling Framework for Regulatory Sandbox” in April to allow startups to test innovative models in a controlled environment. It is used to “collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks”.
  • IRDAI: The insurance regulator had released a draft on regulatory sandbox in May to help the companies experiment with fintech solutions and also contain the failure consequences.