Sebi revises eligibility criteria for regulatory sandbox

Markets regulator Sebi on Monday came out with revised eligibility criteria for the regulatory sandbox, laying down requirements to apply for the two stages of sandbox testing.

The revision has been done in order to enhance the reach and achieve the desired aim, Sebi said in a circular.

Besides mentioning that all Sebi-registered entities are eligible for testing in the regulatory sandbox, it added that the entity may apply either on its own or in partnership with any other entity.

In either scenario, the registered market participant shall be treated as the principal applicant and will be solely responsible for testing the solution, it added.

During the stage-I testing, the applicant would use a limited and identified set of users; while in stage II, there will be a larger set of identified users.

In both stages, there will be a maximum cap on users based on the requirement of the applicant duly approved by Sebi.

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For stage II, an applicant will be eligible after completing a minimum of 90 days in the regulatory sandbox testing.

Laying down the detailed eligibility conditions for stage-I, Sebi said there needs to be genuine need to tests and a genuine need for relaxation.

The solution should offer identifiable direct or indirect benefits and the solution should either be a new innovative one or should improve the existing processes or facilitate inclusion.

Also, the applicant has to demonstrate well-developed testing plans and must have appropriate safeguards to mitigate potential risks to the financial system.

For an applicant to be eligible for stage-II, among others, it has to demonstrate adequate progress, present users' feedback, and also present the intention and ability to deploy the solution on a broader scale.

"To this effect, the applicant should share a proposed sandbox exit strategy," Sebi said.

The applicant, upon ensuring that the eligibility criteria is satisfied, is required to submit the application form in the format prescribed by Sebi. It also gave a detailed application, approval, and evaluation process.

The total duration of the sandbox testing stage (including Stage-I and Stage-II) will be a maximum of 12 months and extendable upon request of the applicant duly approved by the regulator.

The applicant is also required to submit an exit strategy, which would be applicable during successful testing, and a withdrawal strategy which would be applicable during unsuccessful testing.

Sebi has also come out with a framework for the submission of test-related information and reports.

"At the end of the Stage-II testing period, the permission granted to the applicant as well as the legal and regulatory requirements relaxed by Sebi, shall expire," Sebi said.

The regulator has also mentioned the conditions under which approval can be revoked.

"To encourage innovation with minimal regulatory burden, Sebi shall consider exemptions/ relaxations, if any, which could be either in the form of a comprehensive exemption from certain regulatory requirements or selective exemptions on a case-by-case basis, depending on the Innovative solution to be tested," Sebi said.

No exemptions would be granted from the extant investor protection framework, Know-Your-Customer, and Anti-Money Laundering rules, it further added.

In June 2020, Sebi had released guidelines for the regulatory sandbox, enabling entities regulated by the watchdog to test their new solutions in a live environment and on a limited set of real customers with necessary safeguards.

The move, it said, was aimed at encouraging the adoption and usage of financial technologies to further develop and maintain a transparent securities market ecosystem.