NEWSLETTER July 2019 The article provides an insight into the framework proposed by the Reserve Bank of India (RBI) for 'regulatory sandbox' which would be an experiment space for testing new products and services by fintechs. RBI will provide requisite regulatory support for such purposes. This tool will help in testing evolving technology so that it can be used in the financial sector with required checks and balances. We continue to highlight certain key judgements passed by the Hon'ble Court as well as changes in Corporate and Commercial laws and updates on Intellectual Property. Your inputs and feedback are always welcome and we look forward to our interactions with you. This edition brings to our readers featured article - ”Regulatory Sandbox – An Emerging Tool for Fintechs” and Compliance and Audit-What sets us apart “Clasis Law’s Managing Partner Vineet Aneja is recognized as one of the leading Corporate Transactional Lawyer in India for 2019 by Acquisition International” Contents Compliance and Audit-What sets us apart Page 2 Regulatory Sandbox - An Emerging Tool for Fintechs Page 3 Legal Alerts Page 6 Corporate and Commercial Page 7 IP Update Page 9 Recent Events Page 11 Offbeat Page 12 Welcome to the July Edition of the Clasis Law Newsletter Ranked amongst the TOP 40 Indian Law Firm, by RSG Consulting Rankings 2017
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NEWSLETTERJuly 2019
The article provides an insight into the
framework proposed by the Reserve Bank of
India (RBI) for 'regulatory sandbox' which
would be an experiment space for testing
new products and services by fintechs. RBI
will provide requisite regulatory support for
such purposes. This tool will help in testing
evolving technology so that it can be used in
the financial sector with required checks and
balances.
We continue to highlight certain key
judgements passed by the Hon'ble Court as
wel l as changes in Corporate and
Commerc ia l laws and updates on
Intellectual Property.
Your inputs and feedback are always
welcome and we look forward to our
interactions with you.
This edition brings to our readers
featured article - ”Regulatory Sandbox – An Emerging Tool for Fintechs”
and
Compliance and Audit-What sets us apart
“Clasis Law’s Managing Partner Vineet Aneja
is recognized as one of the leading
Corporate Transactional Lawyer in India for 2019
by Acquisition International”
Contents
Compliance and Audit-What sets us apartPage 2
Regulatory Sandbox - An Emerging Tool for Fintechs Page 3
Legal AlertsPage 6
Corporate and CommercialPage 7
IP UpdatePage 9
Recent EventsPage 11
OffbeatPage 12
Welcome to the July Edition of the Clasis Law Newsletter
Ranked amongst the TOP 40 Indian Law Firm, by RSG Consulting Rankings 2017
The Board/Management of Indian companies have conventionally been focused on
Securities and Exchange Board of India (“SEBI”) has
also proposed an 'innovation sandbox' to provide a
testing environment to fintechs for offline testing of their
proposed solutions in isolation from the live market 3subject to fulfillment of eligibility criteria .
Pursuant to the WG Report, the RBI has issued the draft
framework for 'regulatory sandbox' on April 18, 2019 4(“Framework”) . This article focusses on the concept
of regulatory sandbox, its pros and cons and its
prospects in India if the proposed Framework is
adopted as it is.
What is a regulatory sandbox?
As provided in the Framework, a 'regulatory sandbox'
refers to live or virtual testing of new products or
services in a controlled / test regulatory environment
for which regulators may permit certain regulatory
relaxations for the limited purpose of testing. The
regulatory sandbox is a formal regulatory programme
for market participants to test new products, services or
business models with customers in a live environment.
The proposed financial service to be launched under
the regulatory sandbox should include new or
emerging technology, or use of existing technology in
an innovative way and should address a problem or
bring benefit to the consumers. The RBI may provide
the appropriate regulatory support by relaxing specific
legal and regulatory requirements on a case-to-case
basis (with the exception to customer privacy and data
protection, secure storage and access to payment data
of stakeholders, security of transactions and statutory
restrictions) for the duration of the sandbox which the
sandbox entity will otherwise be required to comply.
Functioning of regulatory sandbox
The entire process for a regulatory sandbox including
launch, theme of the sandbox, entry and exit conditions
would be communicated by the RBI through its website.
The technological innovation has led to revolutionary
changes in business operations across industry
verticals. The financial sector has also been a part of
this technological revolution. In fact, technological
innovation is considered to be one of the most
influential developments affecting the global financial
sector in the near future. The changes in financial
services industry due to technological innovation has
led to evolution of fintechs.
Fintechs, being considered as a fusion of finance and
technology, have seen a rapid growth in the recent
years across the globe. According to the Financial
Stability Board of the Bank for International
Settlements, fintech is considered as a technologically
enabled financial innovation that could result in new
business models having a material effect on financial
markets and institutions and the provision of financial 2services .
In view of the growing significance of fintech
innovations in India, the Reserve Bank of India (“RBI”)
has recently taken several initiatives for re-orienting the
regulatory framework to respond to the dynamics of
rapidly evolving fintech industry. As innovation can
create new risks for financial institutions, consumers of
financial services as well as the financial system as a
whole, it is important that the technology and
innovation is used in the financial service sector with
checks and balances.
The RBI had set up an inter-regulatory working group to
examine the granular aspects of fintech. The report of
the working group was issued in February 2018 (“WG
Report”) with one of the key recommendations to
introduce an appropriate framework for 'regulatory
sandbox' which would be an experiment space for the
pilot testing of newly developed technologies.
Regulatory sandbox is a commonly used term in the
fintech industry now. Several countries such as United
Kingdom, Australia, United States of America,
Netherlands and Singapore have already introduced
framework for regulatory sandbox. Further, in order to
RegulatorySandbox–AnEmergingToolForFintechs
1https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/WGFR68AA1890D7334D8F8F72CC2399A27F4A.PDF.2 Ibid.3 https://www.sebi.gov.in/legal/circulars/may-2019/framework-for-innovation-sandbox_43027.html4 The Framework can be accessed at https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=920.
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The regulatory sandbox would conduct end-to-end
processes with a limited number of participants having
common interest in each sandbox for testing their
products in a time bound manner. The entire process
would be overseen by the fintech unit of the RBI. Further,
the boundary conditions such as limit on number of
customers, transaction ceilings and cap on customer
losses would be clearly specified for a sandbox.
The sandbox participants would have to ensure that the
test customers are informed, and their consent is
obtained, regarding the potential risks and available
compensation during the testing process. Further,
before exiting or discontinuing the sandbox, the
participants should ensure that the existing obligations
to the customers under experimentation are fulfilled or
addressed.
Eligible participants and criteria for using
regulatory sandbox
The products / services / technology which could be
considered for testing under regulatory sandbox
include block chain technology, mobile technology
applications, retail payments, money transfer services,
smart contracts and artificial intelligence. However,
products / services / technology such as crypto
currency, credit registry, initial coin offerings and credit
information would not be accepted for testing under
regulatory sandbox.
The Framework provides for the following key
conditions to be satisfied in order to participate in a
regulatory sandbox:
(a) The entity should be a company incorporated and
registered in India and should meet the eligibility
conditions prescribed for 'start-ups' by the 5Government of India . It may be noted that an
entity formed by splitting up or reconstruction of an
existing business would not be considered as a
start-up. An entity would be considered as a start-
up:
(i) up to a period of seven (7) years from the date
of its incorporation / registration;
(ii) if turnover of the entity for any of the financial
years since incorporation / registration has not
exceeded INR 250 million, and
iii) i f i t i s work ing towards innovat ion,
development or improvement of products or
processes or services, or if it is a scalable
business model with a high potential of
employment generation or wealth creation
(b) The entity should have a minimum net worth of INR
5 million as per its latest audited balance sheet;
(c) The entity should demonstrate that their products /
services are technologically ready for deployment
in the broader market;
(d) The entity should have necessary arrangements to
ensure compliance with the existing laws on
consumer data protection and privacy and should
have a robust IT infrastructure;
(e) The proposed fintech solution should highlight an
existing gap in the financial ecosystem and the
proposal should specify how it would address the
problem or bring benefit to the consumer; and
(f) The entity should show that there is a relevant
regulatory barrier that prevents deployment of the
product / service at scale or a genuinely innovative
product or service is proposed for which relevant
regulation is necessary and is not there in the
existing regime.
Pros and cons of regulatory sandbox
As mentioned in the Framework, one of the key benefits
of regulatory sandbox for fintechs is that they will get an
opportunity to test the product's viability before rolling
out their product / services in the market to public at
large. Further, the advantage for regulator is that it will
obtain evidence on the benefits and risks of emerging
technologies enabling it to take a considered view on
the requirement of regulatory changes or making new
regulations required to support new innovation.
5The eligibility conditions prescribed for start-ups can be accessed at: https://dipp.gov.in/sites/default/files/Startup_Notification11April2018_0.pdf.
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On the flipside, fintechs may still require RBI approval for launching the product / service in the market post sandbox testing. One of the key downsides for the regulator is that it may face legal issues such as claims from competitors who are outside the regulatory sandbox especially whose applications have been / may be rejected.
Our views
The proposed Framework is a step in the right direction to evolve technology innovation in the financial services sector, however, in our view, there may be following challenges if the proposed Framework is adopted as it is: (a) Entry restrictions: The Framework only permits
companies meeting the criteria of start-ups (discussed above) to participate in the regulatory sandbox. The Framework restricts types of entities which can participate in the process. In fact, the Framework has not contemplated all types of entities which are considered as start-ups (which include l imited l iabi l i ty partnership and partnership firm if they meet the prescribed criteria) and incorporating limited liability partnership or partnership firm is a preferred legal structure by start-ups.
(b) RBI's intervention and dispute resolution: The Framework provides that the RBI shall bear no liability arising from the regulatory sandbox process and any liability arising from the experiment will be borne by the applicant. Further, the Framework does not provide for any dispute resolution framework between the consumers and the participating entities. In the absence of dispute resolution framework and intervention of RBI and considering that the testing would be in relation to financial services, it has to be seen that whether consumers would like to participate in such processes. RBI's intervention in resolving disputes between the entities and the consumer may give confidence to consumers in participating in such processes. For instance, the regulatory framework of Australia governing regulatory sandbox provides for external dispute resolution mechanism which requires engagement of the regulator.
(c) Requirement of group of entities: The Framework provides that a regulatory sandbox would require a group of entities having similar interest for conducting tests. In the event there is only one entity with a kind of product / service to be tested, will it be permitted to use the regulatory sandbox? Clarity in this regard should be provided by the RBI.
(d) Fit and proper test: The directors / promoters of the participating entity would need to clear 'fit and proper' test of the RBI which would require documents such as CIBIL score, bank account details including loan accounts and declaration relating to, amongst others, pending proceedings. As the fit and proper test lays down lot of requirements to be complied with, it may act as a barrier for the entities considering participation in the sandbox.
In order to have an effective utilization of the regulatory sandbox, the above aspects should be taken into account by the RBI while finalizing the Framework.
For any clarification or further information, please contact
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Kabaddi, the game that was nowhere in the headlines having lost its recognition, is slowly but surely gaining in popularity.
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With the Kabaddi World Cup 2019 and Pro Kabaddi League around the corner, we are sharing some interesting facts about the game:
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