Testing Of Tomorrow's Finance: IFSCA's Draft FinTech Sandbox Framework- Key Features, Eligibility & Regulatory Implications

Introduction

On September 19, 2025, the International Financial Services Centres Authority (“IFSCA”) issued the Draft FinTech Sandbox Framework,¹ (“Draft Framework”), a strategic initiative designed to empower both domestic and international entities to test disruptive financial technologies in a controlled, live environment. The Draft Framework seeks to promote the growth of fintech innovations at International Financial Services Centres (“IFSCs”) from Indian and foreign jurisdictions. This proposed framework aims to enhance financial services innovation by establishing structured facilitators such as Regulatory/Innovation/ Inter-Operable Regulatory Sandbox/Overseas Regulatory Referral Mechanism(s) for fintech activities spanning across Banking, Capital Market, Insurance, Funds, etc. The Draft Framework also addresses technology-enabled fintech/ techfin use cases pertaining to the financial products, financial services and financial institutions which are regulated or likely to be regulated in the IFSCs. The Draft Framework is now open for stakeholder feedback until October 10, 2025.

Introduction to Key Terminologies

The Draft Framework introduces the following key-terminologies:

1. Regulatory Sandbox: It refers to a controlled live environment with a limited set of real customers for a limited timeframe. Under the same, the entities operating in the capital market, banking, insurance and other financial services space in IFSCs shall be granted exemptions from regulatory provisions for experimenting with fintech ideas.²
2. FinTech Sandbox Entity: This refers to an entity that has been granted Limited Use Authorisation by the Authority under this Framework and shall include both Domestic and foreign fintechs.³
3. Innovation Sandbox: This refers to a testing environment where fintech entities can develop and/or test their ideas, products, and solutions in isolation from the live market. These ideas and solutions may add value to the financial products or financial services offered in IFSCs based on market-related data made available to them by Financial Institutions operating in IFSCs.⁴
4. Inter-Operable Regulatory Sandbox (“IORS”): A testing environment for innovative hybrid financial products and/or services falling within the regulatory ambit of more than one domestic financial sector regulator.⁵
5. Limited Use Authorisation: A time-bound and purpose-specific approval granted by the Authority to a FSE for developing and/ or testing an innovative financial product and/or solution within a controlled environment.⁶

Key Updates under the Draft Framework

1. Who Falls under the New Draft Framework

This proposed framework is applicable on eligible domestic and foreign entities, desirous of obtaining a limited use authorisation,⁷ as a FinTech Sandbox Entity (“FSE”) from IFSCA, for developing and/or testing one or more use cases of permissible activities under this framework.⁸

2. Think Big, Test Smart: Permissible Activities Unboxed

The Draft Framework proposes that an Applicant may be permitted to develop and/or test fintech ideas or products and/or solutions falling within the following activities⁹:

1. Capital Markets, including but not limited to Corporate Finance, Sustainable
2. Finance, Market Infrastructure Institutions, Investment Funds
3. Banking, including but not limited to Finance Company, Payment Services (PSs) and Payment & Settlement Systems (PSSs)
4. Insurance
5. Pension
6. Metals and Commodities
7. Foreign University
8. Financial Support Services
9. Compliance and supervision of the areas mentioned from (i) to (vii)
10. Any other area permitted by the Authority

These activities can be tested in any one of the following sandboxes:

1. IFSCA FinTech Regulatory Sandbox (FRS); or
2. IFSCA FinTech Innovation Sandbox (FIS); or
3. Inter- Operable Regulatory Sandbox (IoRS); or
4. Overseas Regulatory Referral Mechanism/FinTech Bridge offered by IFSCA.

3. The Application Process

The framework proposes a streamlined two-stage application process. The Applicant must first submit a Preliminary Application, and if the preliminary application is accepted, the Applicant shall submit the Final Application through the SWIT portal.

4. Approval Mechanism

The Authority may issue an “In-principle Approval” letter to the Applicant necessitating specific conditions to be met before the grant of Limited Use Authorisation, within ninety (90) days, unless extended by the Authority. One of the In-principle Approval conditions shall require the Applicant to have at least one Testing Partner. Upon obtaining the Limited Use Authorisation, the FSE shall proceed to the “Testing Stage,” which shall operate within the specified boundary conditions. ¹⁰ The FSE shall disclose to its users:¹¹

1. Product and/or solution is being tested within a sandbox environment;
2. Inform them in writing of the potential key risks involved;
3. obtain acknowledgement from users by confirming that they have read and understood the associated key risks.

The duration of the sandbox testing stage shall be a maximum of twelve (12) months, which may be extended by a further six (06) months at the discretion of the Authority upon receipt of a written request from the FSE in this regard. ¹²

5. Evaluation Criteria Within Sandbox¹³

The FSE may be evaluated within the Sandbox by the Authority, based on the following factors:

1. Profile of the FSE;
2. Usage of innovative solutions, including technology and/or processes;
3. Identified benefits to the customers/investors and/or the Capital Market, Funds Management, Banking, Insurance, etc.;
4. Compilation of meaningful test scenarios and expected/desired outcomes;
5. Risk measured/graded testing conditions and parameters to ensure safety and protection of the markets/investors;
6. Appropriate disclosure requirements and protection to their users;
7. User grievances;
8. Clearly defined grievance redressal mechanism and user rights;
9. Adequate disclosure of the potential risks to participating users;
10. Prior confirmation from users that they fully understand and accept the attendant risks
11. Intent and feasibility to deploy the proposed fintech product(s)/ solution(s) post testing;
12. The deployment and monitoring strategy post testing (in the event the sandbox tests are successful) or the exit strategy (in the event the sandbox tests are unsuccessful);
13. Any other factors considered relevant by the Authority.

6. Submission of test-related information

The Draft Framework proposes that during the testing stage, the FSE must submit the information or interim reports and such additional information or reports as the Authority may specify.¹⁴

7. Obligation of the FSE towards the Users

The Draft Framework suggests that the FSE must ensure that users have read, understood, and acknowledged the associated risks of using the product and/or solution in the sandbox prior to onboarding. The FSE shall disclose whether any compensation will be provided for potential losses during the sandbox testing stage, along with the applicable protection and compensation terms, and obtain informed consent from the users before engaging them in the sandbox testing.

8. Exit

The Limited Use Authorisation as FSE granted to the Applicant including the legal and regulatory exemptions/ relaxations by the Authority shall expire at the end of the testing stage or the FSE may choose to exit prior to the expiration.¹⁵

9. Revocation of Limited Use Authorisation

The Authority may revoke the Limited Use Authorisation to participate in the sandbox at any time prior to completion of the duration of the sandbox, if the FSE if there is a breach of certain conditions by the FSE.¹⁶

Conclusion: Building a Resilient and Scalable Fintech Future

The Draft IFSCA FinTech Sandbox Framework introduces a forward-looking regulatory architecture designed to accelerate innovation and global integration in financial services. A standout feature is the Overseas Regulatory Referral Mechanism (FinTech Bridges), which, once operational, can enhance cross-border market access by allowing Indian fintechs to expand globally and enable foreign fintechs to test and launch their solutions within IFSC. The framework offers a structured, time-bound testing environment, which can accelerate product development cycles and reduce time-to-market for innovative solutions. Overall, the framework's emphasis on transparent oversight and coordinated risk mitigation will likely boost investor confidence, making fintech ventures more attractive for funding and partnerships.

Footnotes

1. Pursuant to Clause 7 of the International Financial Services Centres Authority (Procedure for Making Regulations) Regulations, 2021

2. Paragraph 3(p), Draft IFSCA Fintech Sandbox Framework

3. Paragraph 3(i), Draft IFSCA Fintech Sandbox Framework

4. Paragraph 3(k), Draft IFSCA Fintech Sandbox Framework

5. Paragraph 3(l), Draft IFSCA Fintech Sandbox Framework

6. Paragraph 3(m), Draft IFSCA Fintech Sandbox Framework

7. ‘Limited Use Authorisation' Means A Time-Bound and Purpose-Specific Approval Granted By The Authority To A Fintech Sandbox Entity For Developing And/Or Testing an Innovative Financial Product And/Or Solution Within A Controlled Environment; Page 5, Draft IFSCA Fintech Sandbox Framework

8. Page 4, Draft IFSCA Fintech Sandbox Framework

9. Annexure I, Draft IFSCA Fintech Sandbox Framework

10. These may include but are not limited to, restrictions on geography, number and type of customers, thresholds on transaction values or volumes to proportionately manage financial risks, and specific regulatory reporting requirements, and other such conditions specified by the authority; page 4, Draft IFSCA Fintech Sandbox Framework

11. Paragraph 12, Draft IFSCA Fintech Sandbox Framework

12. Paragraph 13, Draft IFSCA Fintech Sandbox Framework

13. Paragraph 15, Draft IFSCA Fintech Sandbox Framework

14. Paragraphs 17, 18 and 19, Draft IFSCA Fintech Sandbox Framework

15. Paragraphs 21, 22 and 23, Draft IFSCA Fintech Sandbox Framework

16. Page 11, Draft IFSCA Fintech Sandbox Framework

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