SEBI Allows Startups To Test Fintech Innovations On Live Market Investors

Securities and Exchange Board of India (SEBI), on Friday (June 5), rolled out a circular to pave way for financial innovations in stock exchanges through regulatory sandboxes.

In the notification, the markets regulator laid the norms for fintech startups on how they can test, without hassles of registering in a controlled environment, on actual customers for promoting innovations.

SEBI believes that encouraging adoption and usage of technologies can act as an instrument to develop and maintain an efficient, fair and transparent securities market ecosystem.

For this, SEBI is looking to grant certain facilities and flexibilities to fintech platforms to test technologies in a live environment on a limited set of real customers for a limited time frame. “These features will be fortified with necessary safeguards for investor protection and risk mitigation,” SEBI said.

The framework of the sandbox is based on a discussion paper issued by SEBI on May 29, 2019. Under this, SEBI laid out certain criteria for shortlisting the companies. At that time, however, SEBI only allowed startups to test their solutions in an offline environment.

For instance, SEBI allowed all entities registered with SEBI under Section 12 of the SEBI Act 1992, shall be eligible for testing within the regulatory sandbox. An entity can participate on its own or use the services of a fintech firm.

Meanwhile, applicant firms will also have to prove that their solution is innovative and how it can add value to the existing offerings of the Indian securities market. The firms will have to mention the need for which they require live testing on real customers. SEBI will pass on the ideals to respective teams for the proper evaluation of such ideas and projects. A designated officer will oversee respective submissions.

The norms also make it mandatory for firms to build a test ready product which can be scaled up easily. The entities are also required to layout a risk management plan to mitigate and control potential threats to any of the traders. They will have to ensure that the investors, on which the test is going on, enjoy the same protection right as other traders on the market platform.

SEBI had formed a committee on financial and regulatory technologies to develop an efficient ecosystem and form a framework for innovation sandbox. The committee was led by Aarin Capital partner TV Mohandas Pai as chairman and members from the startup industry and other experts.

The market regulator has also partnered with eight IT companies to incorporate data analytics in its functioning to tackle discrepancies in trading markets of India. The regulatory body has shortlisted Infosys, Wipro, and IBM, among others, to prevent unethical practices such as insider trading and front running to occur on the trading platforms. Using data analytics, the project will predict market manipulations.