Context: Recently, the International Financial Services Centres Authority (IFSCA) has introduced a framework for “Regulatory Sandbox”.
About “Regulatory Sandbox”

• It is a safe harbour, where businesses can test innovative products under relaxed regulatory conditions.
• Typically, participating companies release new products in a controlled environment to a limited number of customers for a limited period of time.
• These features shall be fortified with necessary safeguards for investor protection and risk.

Its inception

• The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
• The panel submitted its report in Nov 2017 has called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
• If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.

What is the new framework?

• IFSCA has introduced a framework for “Regulatory Sandbox”.
• Under this Sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities.
• It will experiment with innovative FinTech solutions in a live environment with a limited set of real customers for a limited time frame.
• These features shall be fortified with necessary safeguards for investor protection and risk mitigation. The Regulatory Sandbox shall operate within the IFSC located at GIFT City (Gandhinagar).
• IFSCA shall assess the applications and extend suitable regulatory relaxations to commence limited purpose testing in the Sandbox.

Other propositions

• As additional steps towards creating an innovation-centric ecosystem, the IFSCA has proposed the creation of an “Innovation Sandbox”.
• It will be a testing environment where Fin-tech firms can test their solutions in isolation from the live market.
• This would be based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in the IFSC.
• The Innovation Sandbox will be managed and facilitated by the MIIs operating within the IFSC.

About the International Financial Services Centres Authority

• It is a statutory body established in 2020.
• It works under the Department of Economic Affairs, Ministry of Finance.
• Headquartered in Gandhinagar, Gujarat.

Roles and functions

• Its main function is to develop and regulate the financial products, financial services and financial institutions located/performed in the International Financial Services Centres in India.
• The Authority is empowered to exercise the powers of RBI, SEBI, IRDAI and PFRDA in respect of financial services, financial products and financial institutions performed/located in the international financial services centres in the country.

Composition

• Chairperson, one Member each to be nominated by the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA), two members to be dominated by the Central Government and two other whole-time or full-time or part-time members.
• They will have a three-year term subject to reappointment.