Can MCA have its Regulatory Sandbox?

Change is the constant proposition in business. To keep pace with the everchanging business requirements, obviously laws cannot be made modified day in and day out. However, with a view to provide a regulatory and legal framework for the upcoming and new age businesses, regulators did come up with innovative ideas such as regulatory sandbox models. The sandbox model is a framework that allows for live testing of products or services in a controlled environment with relaxed regulatory norms. It allows the regulator to identify the potential risks and benefits of the innovation while enabling them to enforce the required regulatory framework for the implementation of these innovations at a large scale.

So far, RBI has introduced this mechanism in the FinTech sector with a focus on encouraging innovation where there is a lack of regulatory oversight, or there is a need for a relaxed regulatory environment to enable the proposed innovation or impact the delivery of financial services significantly and benefit ultimately in the financial inclusion. IRDAI introduced Regulatory Sandbox Regulations in 2019 to facilitate innovation in the insurance sector and SEBI has introduced this mechanism allowing the regulated entities to test FinTech solutions in a live and regulated environment.

The Company’s regulator, Ministry of Corporate Affairs had come up with a newer version of its website (v3) and introduced web-based forms. So far, MCA had not introduced the newer concepts like regulatory sandbox in the process.

The Companies Act contemplates various categorisations for companies. For accessing the funds of the public, there are public and private limited companies. Based on the nature of activity carried on, they are also bifurcated as ‘for profit’ and ‘not for profit entities’. If liability of shareholders is taken as the basis, they can be grouped into ‘limited liability’, ‘unlimited liability’ or ‘guarantee’ companies. The status of companies also creates as the basis for categorisation into ‘dormant companies’ and ‘active companies’. ??

India is home for lot of family-owned companies and there are a number of private limited companies in them. Most of the family-owned private limited companies are closely held where the directors and the shareholders can be the same and have not accessed public funds or borrowings from banks. A private limited company had to comply with various compliances including management and administration of the company, disclosure for conducting the business with related parties, conducting minimum number of board meetings in a year, complying with the requirements of secretarial standards, etc.

Given the number of compliances for these kind of closely held private limited companies and to bring in contemporary changes, MCA may consider having an enabling framework for a Regulatory Sandbox and see if there is a possibility of governing family-owned private limited companies. This will be a booster dose for the regulator to keep pace with the ever changing business environment, and also be on par with the other regulators in introducing more nuanced processes.

This article is written by Mr. Noorul Hassan, Partner.