Capital markets regulator Sebi on Friday 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 is aimed at encouraging adoption and usage of financial technologies to further develop and maintain a transparent securities market ecosystem, according to Sebi.

To encourage innovation with the minimal regulatory burden, Sebi said regulatory relaxations from various regulations may be provided after analyzing specific sandbox testing applications.

Under the guidelines, entities regulated by Sebi will be granted certain facilities and flexibilities to experiment with financial technologies solutions in a live environment and on a limited set of real customers for a limited time frame, a circular said.

These features will be fortified with necessary safeguards for investor protection and risk mitigation, Sebi said in a circular.

Coming out with detailed guidelines pertaining to the functioning of the regulatory sandbox, Sebi said all entities registered with the regulator shall be eligible for testing in the regulatory sandbox.

"The entity may either on its own or engage the services of a FinTech firm. In either scenario, the registered market participant shall be treated as the principal applicant," Sebi said.

On regulatory exemptions, the regulator said it 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 FinTech solution to be tested."

Within the overarching principles of market integrity and investor protection, no exemptions would be granted from the extant investor protection framework, Know-Your-Customer (KYC) and Anti-Money Laundering (AML) rules.

Regrading eligibility criteria of the project, Sebi said the solution should be innovative enough to add significant value to the existing offering in the Indian securities market and should have a genuine need for live testing the solution on real customers.

In addition, before applying for testing in sandbox, limited offline testing of the solution should have been carried out by the applicant, the solution should offer direct benefits to users and there should be no risks to the financial system.

Besides, the eligibility criteria also include the test readiness of the solution and the applicant should demonstrate the intention and ability to deploy the solution on a broader scale.

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

Sebi has also come out with a framework on submission of test-related information and reports, obligations of the applicants towards the user and extension or exit from the sandbox.

The regulator has also listed out specific conditions under which the approval to participate in the sandbox may be revoked.

In addition to revocation of approval, appropriate actions may be initiated against the applicant if it facilitates undermining of KYC principles, violation of user's or investor's privacy, promotion of the sale of fraudulent or illegal products, services, promotion of mis-selling of products or services, violation of AML norms, creation of risk to financial stability and theft of intellectual property.

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