Capital market regulator Sebi is planning to take a “sandbox” approach that allows the testing of technological innovations in financial markets before it is implemented for the general public.

Through a sandbox approach, companies can experiment and test innovative products even before filing for approval or registration. Depending on the success of the experiment, companies can decide whether they would want to go ahead and seek approval for the product. Apart from promoting innovation in the industry, this would help to contain the impact of failures.

“We will come out with a policy of sandbox and we will also examine whether any changes in laws are required. We will also examine whether without any change in legislation, anything new can be tried before implementation on a larger scale,” Sebi chairman Ajay Tyagi said on the sidelines of a conference organised by IIM Calcutta on Thursday.

Sebi’s decision to push for such an approach comes close on the heels of insurance regulator Irda forming a committee to examine the use of such an approach in the insurance sector.

“A regulatory sandbox approach can be used to carve out a safe and conducive space to experiment with fintech solutions, where consequences of failure can be contained,” Irda had said in a circular.

Stressed MF assets

Sebi will issue a directive soon on the terms and conditions for mutual funds to separate their distressed debt assets, a process widely known as “side pocketing”.

Sebi will ensure adequate safeguards for investors and look into it that fund managers do not misuse it.

“We will come out with a circular that will put terms and conditions to safeguard the investors and not be misused by the MFs,” Tyagi said.

“Side pocketing” is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio. It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.