Despite India’s capital market booming after Covid-19, the regulatory sandbox introduced by SEBI in 2020 has struggled to gain traction even after almost four years. SEBI introduced the regulatory sandbox framework to encourage innovation in the securities market, providing a platform for experimenting with solutions in a live market environment with a limited set of real users and a specific time-frame for testing. One of the primary advantages for entities participating in the sandbox is relaxation of stringent regulatory requirements and testing in a live market environment with certain restrictions.

SEBI introduced it initially in a June 2020 notification. In this initial framework, only entities registered with SEBI were allowed to apply for testing in the regulatory sandbox. As of April 7, 2021, only eight entities had applied to SEBI under the regulatory sandbox framework. Only one application was approved, three were rejected, and four were withdrawn. After the initial struggle, SEBI introduced a revised framework for the regulatory sandbox on June 14, 2021. This revision allowed registered entities to apply independently or in partnership with other entities. The framework introduced two stages of testing. In stage one, the number of testing users would be limited, with a further increase in stage two by allowing a more extensive set of testing users.

Stages I and II

In the initial stage of evaluation, entities applying for the regulatory sandbox are required to demonstrate a genuine need for testing by providing comprehensive details on the relaxations sought under the framework, anticipated benefits to users, the readiness of the proposed solution, and the risk safeguards incorporated by the entity.

After the successful passage of stage I, stage II requires entities to showcase the progress achieved during the initial testing phase and an understanding of observed risks, strategies to mitigate them, user feedback received, and a well-defined post-testing implementation strategy. This multifaceted evaluation process aimed to ensure a thorough examination of the entity’s preparedness and the potential positive impact of the proposed solution.

Even though SEBI made careful improvements to the framework, only four entities applied to test new financial ideas from June 2021 until now. Unfortunately, two of these ideas were rejected; one entity changed its mind and withdrew, and another still needs to be reviewed. Surprisingly, only one idea has been given the green light by SEBI so far, and this comes almost four years after the whole programme started. This suggests that despite SEBI’s efforts to improve things, not many entities are willing to try their financial innovations.

The possible reasons for this, as cited by SEBI Chairperson Madhabi Puri Buch at the Global FinTech Fest in Mumbai, are that entities are not submitting any new ideas or the ideas submitted are not permitted under the existing laws. Fractional shares was quoted as an example, where she said that SEBI is willing to implement that concept, but the Companies Act and SEBI Act prohibit it.

This further underscores the need to amend the statutes to welcome innovation in the Indian capital market.

If we compare SEBI with RBI’s sandbox facility, the latter has approved many fintech innovations. For instance, in December 2023, HDFC Bank was allowed to operate its offline (without internet) retail payments facility, enabling customers and merchants to transact in offline mode.

Furthermore, in its notification on February 28, 2024, the RBI included provisions of the Digital Data Protection Act of 2023, demonstrating its responsiveness to changing technological trends. The RBI has updated its framework three times since 2019 (in 2020, 2021, and 2024), highlighting its effectiveness and willingness to contribute to advancing FinTech innovations in the country. In contrast, SEBI has not kept pace and remains tied to a traditional approach towards innovative ideas by maintaining status quo for four years.

To address this, SEBI could reconsider its current approach and be more lenient and friendly towards innovation, especially in capital markets, while making statutory changes wherever required. This shift could better align with the objectives of the regulatory sandbox and foster a more conducive environment for financial innovations in the capital markets.

Shekar is Program Head – PGDM BFS, Institute of Public Enterprise, and Kajal is Law Student, Indian Institute of Management Rohtak