Leading law firm Cyril Amarchand Mangaldas has said that while Indian regulators have been swift in adopting the global trend related to regulatory sandbox, the recent proposed guidelines by the Securities and Exchange Board of India may prove restrictive in nature with the results not being fully accurate due to the framework as put forth in the discussion paper.

The capital market regulator, on Tuesday, released a discussion paper on the proposed framework for regulatory sandbox that essentially provides a testing platform for new technologies and products for the capital market by SEBI-registered market participants in the initial stage and fintech start-ups at a later stage.

The regulator has proposed that the sandbox would be allowed only to test those solutions that directly benefit the investors while posing no risks to the overall capital market. This, according to the law firm, could prove to be ‘restrictive’ in the long run.

“Under the sandbox framework, fintech offerings sought to be tested in the innovation sandbox, are required to show some nexus to the securities and commodities market in India. While such nexus is important to bring the innovation sandbox within the regulatory framework of SEBI, defining eligibility of offerings through the lens of ‘securities’ or ‘commodities’ may prove restrictive in the long run,” said the law firm in a blog on Wednesday.

Further, the regulator’s proposed approach of ‘offline’ testing has also not found favour with the law firm, which is of the opinion that such an isolated approach may not yield accurate results.

“While the importance placed on investor protection is welcome, evaluating offerings as well as rolling out such offerings on the basis of “offline” or simulated test results may be not fully accurate,” stated the blog.

Mirroring market mood

While SEBI has proposed setting up virtual machines to mirror the live market environment to test the solutions in the sandbox, the law firm is of the view that the development of such machines could prove to be an expensive affair for both the regulator and the sandbox applicants.

Additionally, reliance on artificial intelligence or machine learning to ascertain the impact of a capital market offering on consumers, may not reflect the inherent behavioural aspects of human investors when investing in capital instruments, it said.

Recently, all the important regulatory bodies including the RBI and insurance regulator IRDAI, have released their respective regulatory sandbox framework to support fintech innovations in the country that is all set to become the world’s biggest fintech hub in the next few years.