Ever wondered, what is common to Steam, Science and Digital Technology. Well, each of these changed the world we live in at different passages of time. The first industrial revolution brought the role of steam engine to the front and the second revolution brought about changes in manufacturing. The First Industrial Revolution caused the growth of industries, such as coal, iron, railroads and textiles, the Second Industrial Revolution witnessed the expansion of electricity, petroleum and steel. The third revolution, riding the wave of communication internet converged the digitized renewable energy internet and digitized transportation and logistics internet. Each of these three revolutions brought about a fundamental change in the way world functioned. But India had not much role to play in any of these three industrial revolutions.

It is happened again now, for the 4th time and India is the front runner in the 4th Industrial Revolution with all the necessary ingredients. This 4th revolution is powered by cloud, social, mobile, IoT and AI coupled with increasing use of computing data. Financial technology, or FinTech, has been opening new avenues for young entrepreneurs to experiment and develop new solutions to address the challenges we face in this digital world. And any country which wants to be at the forefront of this revolution needs to come up with the apt regulatory framework that encourages innovation and the framework at International Financial Services Center GIFT City provides robust yet light touch regulations.

As per a report by BCG and FICCI, India is strongly poised to realise a fintech sector valuation of $ 150-160 billion by 2025, translating to an incremental value-creation potential of about $ 100 billion. Riding on the back of technological advancements and the grand success of UPI, the FinTech sector is at a cusp of real transformation. Today, India has seen the emergence of ecosystem orchestrators and FinTech from all across the globe looking to step into the Indian market. IFSC GIFT is the land of immense potential and at forefront of FinTech innovation and can act as the entry point for leading global startups in the FinTech sector.

What is a regulatory sandbox?

Regulatory sandboxes or RS is a framework that allows innovative projects to undergo live testing in a controlled environment where the regulator may or may not permit certain regulatory relaxations or may provide certain additional facilities for testing. The objective is to allow new and innovative projects to conduct live testing and enable the approach of learning by doing. Sandboxes are created to facilitate the development of potentially beneficial innovations, which are otherwise barred to operated due to the construct of the existing regulatory framework of the country.

FinTech Sandbox at IFSC

IFSCA can act as the engine of this growth as being a unified regulator, it can provide a one of its kind “Financial Laboratory” to the leading FinTech of the world to develop new solutions.  With an aim to develop a world class FinTech hub, IFSCA issued the regulatory sandbox guidelines in October 2020. Under this sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities to experiment with FinTech solutions in a live environment with a limited set of real customers for a limited time frame. All entities (regulated as well as unregulated) operating in the capital market, banking, insurance and pension sectors as well as individuals and start-ups from India and FATF-compliant jurisdictions, are eligible for participation in the regulatory sandbox.  

IFSCA has taken an additional step to ensure that the fintech firms also have the access to market related data, particularly trading and holding, which is not available otherwise. This enables the participants to test their innovations effectively before the introduction of such innovations in a live environment. FinTech firms can test their solutions in isolation from the live market, based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in IFSC. The MIIs operating in IFSC shall put in place the necessary systems and infrastructure for operationalizing the innovation sandbox.

Eligibility criteria for entities -

1. Genuineness of Innovation- The solution should be innovative enough to add significant value to the existing offering in the capital market, banking, insurance or pensions sector in India/IFSC.
2. Genuine Need to Test- The applicant should have a genuine need for live testing the solution on real customers. Further, the applicant should demonstrate that the solution cannot be developed without relaxing certain regulations, if any, being sought.
3. Limited Prior Testing- Before applying for testing in sandbox, limited offline testing of the solution should have been carried out by the applicant.
4. Direct Benefit to Users- The solution should offer identifiable benefits (direct or indirect) to the investors or entities or to the capital market at large.
5. No Risks to the Financial System- The solution should have proper risk management strategy to incorporate appropriate safeguards to mitigate and control potential risks to any market participants/users that may arise from the testing of the solution and shall propose appropriate safeguards to manage the risks and contain the consequences of failure.
6. Testing Readiness of Solution- The applicant should have the necessary resources to support testing in the sandbox and must demonstrate well developed testing plans with clear objectives, parameters and success criteria.
7. Deployment Post-Testing- The applicant should demonstrate the intention and ability to deploy the solution on a broader scale. To this effect, the applicant should share a proposed sandbox exit and transition strategy.

Further details on the framework for Regulatory Sandbox are available on the IFSCA website at the URL: https://ifsca.gov.in/Legal/Index/wF6kttc1JR8=

Update: On December 3, 2021, Hon'ble Prime Minister Narendra Modi will inaugurate the Infinity Forum on fintech, which among other things will discuss and come up with actionable insights into how technology can be leveraged by the fintech industry for inclusive growth.