Innovation Sandbox

A two-person start-up builds a new tool for investors. It wants to know whether the tool really works before anyone pays for it. But the start-up is not registered with SEBI. So it cannot go near the live market.

The Innovation Sandbox exists for exactly that firm. SEBI set up an industry-wide facility and opened it to FinTech firms, start-ups and entities not regulated by SEBI, including individuals.

The testing is offline. It happens in isolation from the live market. No real orders go out. No investor's money is at risk if the code is wrong.

SEBI's other sandbox is the opposite. In the Regulatory Sandbox a SEBI-registered firm tests live, with real customers, under SEBI's own supervision. The workbook presents the two as a pair, and the paper tests the pair rather than either one alone.

Why regulators built these at all. The workbook frames it as global practice: regulators across the world have recognised the importance of encouraging innovation in FinTech and in financial inclusion. SEBI's answer was two frameworks, not one.

Who runs it. The Steering Committee is drawn from the enabling organisations, and the workbook names them: stock exchanges, depositories and qualified RTAs. So the facility is operated by market infrastructure rather than by SEBI directly, even though SEBI notified the framework and has also notified a detailed framework of its operational aspects.

The natural sequence. An unregistered start-up tests offline in the Innovation Sandbox. If the idea survives, it needs a SEBI-registered participant to carry it into live testing, because the Regulatory Sandbox door is shut to unregistered firms. There SEBI may grant partial or comprehensive relaxation from certain regulatory requirements during the testing period — but never from the investor protection, KYC and AML rules — and the FinTech applicant must tell its clients about the risks involved in testing the product. On completion, SEBI decides whether the innovation may be introduced in the market on a large scale.

What the workbook does not give for the Innovation Sandbox. No cohort size, no testing period, no fee, no eligibility criteria, and no description of what the facility actually holds beyond naming the enabling organisations. The strict eligibility criteria, the value-addition test, the designated officer and the relaxations all belong to the Regulatory Sandbox in this section — do not lift them across. Apart from the date of the circular, this paper attaches no figure to the Innovation Sandbox at all.

Illustrative. The applicants and the costs below are invented to show where each one belongs; the workbook gives no eligibility or cost figures for the Innovation Sandbox.

Three applicants arrive with the same idea — automatic detection of overlapping holdings across a household's mutual fund schemes.

What the offline route saves Tarang. Its alternative is to build a test environment of its own. Assume data licences of Rs 18 lakh and servers and tooling of Rs 12 lakh — Rs 30 lakh spent before a single test runs, out of Rs 40 lakh of seed money. The Innovation Sandbox is the industry's shared facility instead, so that money can go into the product.

What it does not buy. However well the tool performs offline, Tarang still cannot sell it to live investors on the strength of that test. To reach real clients it partners with Konkan Securities, which applies for the Regulatory Sandbox in its own name. Konkan, not Tarang, then carries the duty to inform its clients about the risks of testing the product — and no relaxation Konkan is granted can touch KYC or AML.

The rupee point of the whole structure is that Rs 40 lakh is far too small to absorb the cost of a live failure. The Innovation Sandbox is how the system lets a firm of that size fail for free.

Chapter 1 (Understanding Securities Markets and Performance), section 1.5.2 (Innovations in Financial Technology (FinTech) and Regulatory Sandbox), immediately after the cyber security and cyber resilience block. The Innovation Sandbox is the first of the two frameworks described there.

The question form is almost always the contrast. Expect: which sandbox allows offline testing in isolation from the live market; who may use the Innovation Sandbox (entities not regulated by SEBI, including individuals); who supervises it (a Steering Committee drawn from stock exchanges, depositories and qualified RTAs, not SEBI); and which sandbox permits live testing by registered entities.

One tell is worth knowing. The workbook's glossary at the end of the book defines Regulatory Sandbox and does not define Innovation Sandbox at all. So the Innovation Sandbox is examined through the contrast, and a stem that reads like a glossary definition of a regulator-supervised live experiment is pointing at the Regulatory Sandbox.

• Innovation Sandbox is offline; Regulatory Sandbox is live. Reversing these is the standard error on this section.
• The Innovation Sandbox is for entities not regulated by SEBI — FinTech firms, start-ups and individuals. The Regulatory Sandbox is for SEBI-registered participants. A start-up cannot enter the Regulatory Sandbox on its own.
• A Steering Committee supervises the Innovation Sandbox, not SEBI, and its members come from the enabling organisations: stock exchanges, depositories and qualified RTAs.
• The UK Financial Conduct Authority coined the term Regulatory Sandbox in 2015, and regulators in more than 20 countries have since adopted that concept. Neither fact belongs to the Innovation Sandbox.
• The circular dates run the other way round to the text. The workbook introduces the Innovation Sandbox first, but the circular it cites for it is a Revised Framework of 2 February 2021, later than the Regulatory Sandbox framework of 5 June 2020. Read the footnote, not the order of the paragraphs.
• Relaxations, the genuine-and-value-adding test and the designated officer are Regulatory Sandbox features. So is the rule that nothing is exempted from investor protection, KYC and AML. None of it is stated for the Innovation Sandbox.
• This section is SEBI's. Other Indian regulators run sandboxes of their own; this paper does not cover them, so do not import their conditions.