To make best use of latest technologies, regulator SEBI is considering a ‘regulatory sandbox’ approach to allow greater but well-regulated use of new innovations such as blockchain and artificial intelligence in the securities markets. Globally, regulators in major financial markets have established regulatory ‘sandbox’ or testing environment for furthering financial technology and adoption of the same.
Officials said the Securities and Exchange Board of India (SEBI) is of the view that innovation in financial technologies like blockchain for settlement, artificial intelligence including robo-advisory, e-wallets, security systems for intermediaries and market infrastructure institutions, resolution of complaints, outsourcing and development of new technology can be better done through a ‘sandbox’ mechanism.
Such a mechanism will allow the regulator to assess and test the module and grant specific exemptions from the applicable laws for a specified time period, subject to necessary conditions in the interest of markets and investors. Jurisdictions like the UK and Australia provide for regulatory sandbox while granting exemptions from rules for a specified period, which is maximum two years in case of the UK and maximum 12 months by Australia.
According to a proposal, which will be first presented before the SEBI’s board and then sent to the Finance Ministry, the SEBI Act needs to be amended to “enable SEBI to lay down a platform for a regulatory sandbox in India, which will enable adoption of newer technologies” with all necessary safeguards towards protecting the integrity of the markets and the investors.
Officials said the Finance Ministry is broadly in agreement with the proposal. The proposed conditions include an applicant clearly defining the scope and phases of trial, types of customers, services, timing and termination of the trial. For the exemptions, the product, service or solution has to be innovative and must improve provision of services in the market, enhance the efficiency and effectiveness of risk management and also open up new opportunities.
Also, the applicant will need to have resources to support the testing and a realistic business plan to deploy it on a commercial scale in India after the exemption period. Also, the applicant will have to be led and managed by persons who are “fit and proper” to meet regulatory guidelines and they would need to put in place appropriate procedures to select and service customers.
The exposure of an investor, which is not a qualified institutional investor or a registered market intermediary, cannot exceed Rs 1 lakh, while the applicant would also need to put in place necessary risk management controls. The proposal is likely to be discussed by the SEBI board in its next meeting along with a score of other proposals, including easing of norms for startups and REITs, higher penalty against violations and allowing mutual funds, portfolio managers and certain alternative investment funds in commodity derivatives market.
Besides, the SEBI will also consider new norms for valuation of money market and debt securities by mutual funds in the wake of recent liquidity concerns due to defaults on debt obligations by some entities. The proposals also include provision for permanent registration for custodians and a review of regulatory framework for debenture trustees.
The SEBI has also prepared a memorandum of proposals to amend various laws — SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Depositories Act, 1996, Companies Act, 2013 and Economic Offences (Inapplicability of Limitation) Act, 1974 to streamline various rules and regulations and do away with certain age-old terms and phrases that are no more relevant.
After approval from its board, SEBI will submit this memorandum to the Finance Ministry for further action. Apart from proposing higher penalty under the SEBI Act, the regulator wants changes in the SCRA to amend the definition of ‘commodity derivative’ in order to enable launch of new products like option contracts, officials said.
Another proposal to change the definition of term ‘securities’ to include units issued by pooled investment vehicles registered and regulated under the SEBI Act, following introduction of products like REITs and InViTs (Real Estate and Infrastructure Investment Trusts). Further, the regulator is seeking certain amendments to prohibit manipulation of financial statements of listed companies to manipulate share prices.