Talking Point: SEBI plans sandbox policy for tech cos

The Sandbox policy will allow companies to test products in a closed environment, a particular geography or among a set of users, before they are allowed roll out commercially meeting all regulations. The capital market regulator was also examining whether any change in law was required in terms of its dispensation, he said. “We will come out with a policy on sandbox soon,” SEBI Chairman Ajay Tyagi said responding to a question about the regulator’s view on crypto assets. Indian regulations do not accept cryptocurrency as a valid currency.

The regulator has also set up a committee to look into the concept of a regulatory sandbox in the country. Tyagi said this will enable the tech companies to work on innovations without regulatory changes. He said there had been huge technology interventions in capital markets in the past and it would continue. Sebi plans to issue a directive soon on terms and conditions for mutual funds to separate their distressed debt assets, a process widely known as ‘side pocketing’. It has agreed in principle to the proposal put forward by the mutual funds industry, Tyagi said. 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 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.

Currently, in the case of credit events, the existing investors potentially lose all the value. Any further recovery accrues to the investors in the scheme only at the time of recovery. With side pocketing, the investors who take the hit when the credit event happens, get the full upside of future recovery. The proposal comes in the wake of a liquidity squeeze triggered by the Infrastructure Leasing & Financial Services (IL&FS) default.