The Telecommunications Act, 2023 (Telecom Act) was published in the official gazette on 24 December 2023, to amend and consolidate the law pertaining to the operation of telecommunication networks services. While several provisions of the Telecom Act are likely to come into force in January 2024, select provisions of the Telecom Act have already been enforced by the Union Government including the provisions pertaining to the ‘Regulatory Sandbox’.

What is a ‘Regulatory Sandbox’?

‘Regulatory Sandbox’ refers to a live environment where products, services and business models may be deployed on a limited set of users to determine their viability. The ‘Regulatory Sandbox’ may also provide leeway with respect to select compliances under the relevant regulations as an incentive for the entities conducting such experiment.  

Why are ‘Regulatory Sandbox(es)’ necessary?

While existing mechanisms such as pilot testing, trial environments, and innovative testbeds established by the Centres of Excellence have been used to test products and services in the past, there is no guarantee that such products or services will scale as complex, real-world conditions are difficult to simulate in other forms of testing. Further, collaboration with other industries is essential to determine the viability of several digital communication products and services, which is a resource and time intensive process, which may not be feasible for several smaller entities. This is mainly beneficial to novel products/ services which are directly impacted by licensing or regulatory requirements (such as eligibility criteria to obtain a license).

A ’Regulatory Sandbox’ provides a common platform for interacting with stakeholders of other sectors, while also providing access to a live network and real time data of several participating customers. This: (i) facilitates the exchange of ideas and feedback; (ii) helps identify potential issues and streamlines the testing process to improve the overall quality of the product or service; and consequently (iii) reduces the risk of monetary losses.

Regulatory Sandbox under the Telecom Act

The Department of Telecommunications (DoT) vide its letter dated 10 March 2023, sought the recommendations of the Telecom Regulatory Authority of India (TRAI) on framework for the ‘Regulatory Sandbox’ to be implemented under the Telecom Act for the emerging technologies, services and business models in the distribution communication sector.

Recommendations of TRAI

TRAI inter-alia recommended that: (i) only Indian nationals or entities, who have previously conducted the testing of the product, and who have provided details including exit strategies, risk mitigation, and consumer protection eligible; (ii) the applicant must keep records of all testing and data consents for atleast 1 year after the Regulatory Sandbox, and the applicant will solely be liable for culpability arising out of a Regulatory Sandbox; (iii) DoT/ TRAI (or any authorized organization thereby) should exercise oversight and have access to the product or service during testing; (iv) the government should promote and provide funding for innovations that bridge the digital divide and advance socio-economic development.

While the recommendations are detailed and address several crucial facets of the Regulatory Sandbox,  they do not proactively address issues that may arise on the implementation of a Regulatory Sandbox mechanism. Pertinently, the recommendations do not adequately address issues of anti-competition that may arise if dominant firms in the market exploit the Regulatory Sandbox to achieve equivalent economic outcomes while availing benefits of exempted compliance. Bottom of FormFurther, the requirement for entities to submit detailed reports on consumer protection, exit strategies, regulatory exemptions, and risk mitigation may restrict entry of smaller players to Regulatory Sandboxes.

The recommendations also do not address the convergence of technologies, or the possibility that certain products or services may require regulatory exemptions from more than 1 regulator. Accordingly, TRAI or DoT must formulate a ‘Standard Operating Procedure’ for interoperability of Regulatory Sandbox, akin to the documents issued by the RBI and SEBI which detail the application process and eligibility while ensuring that interested participants are not discouraged from excessive compliance requirements.

Stakeholder views

Most stakeholders in the telecom industry are in favour of the ‘Regulatory Sandbox’ construct as they believe that it will encourage innovation, specifically amongst start-ups and young entrepreneurs who will access to affordable testing facilities to conduct live trials, and real time market data to facilitate market readiness of products or services. The Regulatory Sandbox also allows the government to test more light touch regulation to reduce the burden on start ups and young entrepreneurs to further enable the development of emerging technologies.

Stakeholders have additionally requested that: (i) all necessary permissions to conduct tests on products and services in the Regulatory Sandbox be automatically granted to applicants that satisfy the eligibility criteria; and (ii) DoT / TRAI provide economic aid to entities testing products and services which have the potential to bring about socio-economic development and entities testing products and services yet to be launched the market.

The opposing view among minority stakeholders is that the Regulatory Sandbox is effective for the financial technology sector as the sector had stagnated for decades relying on archaic banking and lending which have been drastically impacted by digitization. The Regulatory Sandbox in such cases allows for the government to gauge the efficacy of previously untested products and services and determine the associated risks of their use. For telecom products and services however, they have continued to innovate under present day testing mechanisms as mentioned above.

For example, since July 2021, the DoT has granted licenses for 5G labs which enables the licenses to carry out various experiments and test use cases using the 5G frequency bands without interfering with commercial 5G services.

Further, as this is a relatively nascent concept in India, stakeholders have raised concerns that: (i) limited technical expertise of entities operating in the Regulatory Sandbox may result in adverse outcomes for the customers and interference with other applicants in the Regulatory Sandbox; (ii) the waiver of regulatory compliance may result in adverse effects on competition in the relevant market; and (iii) the intellectual property, confidential and personal data of customers and entities may be compromised if they are unable to secure against cyber security risks, if such data is not anonymized.

Conclusion

The Regulatory Sandbox, if implemented transparently and efficiently, will ensure that entities that intend to launch disruptive products or services are encouraged and provided support, rather than burdened with significant research and development costs and regulatory requirements. The Regulatory Sandbox also provides an avenue for entities looking to launch telecom product/ services to test such products or services, despite not having an existing tie-up with a telecom operator.

Since the objective of the government as well as the participants in the Regulatory Sandbox should be economic advancement while keeping consumer interests in mind, it would also be beneficial for an independently constituted advisory committee with adequate representation from the telecom service providers, licensees and any other relevant stakeholders to oversee the Regulatory Sandbox, rather than the DoT or TRAI, to prevent overregulation which may result in potential applicants being disincentivized. Further, the Right to Information Act, 2005 should not be applicable to Regulatory Sandboxes to ensure that the confidential information and intellectual property of applicants is adequately protected.

The DoT and TRAI must find a perfect balance between promoting innovation through reduced burdens and increased aid and support while also ensuring that entities do not exploit the waiver of regulatory conditions to gain a competitive edge in the relevant markets. The DoT must also ensure that testing of products and services in a Regulatory Sandbox must mainly be preferred for emerging technologies and services such as 5G/6G, machine to machine communications, artificial intelligence, virtual reality, internet of things etc, where there is a lacuna of regulations.

The DoT (or the entity authorized thereby) must necessarily scrutinize the application and determine whether: (i) there are any regulatory barriers that prevent deployment of a product or service; (ii) regulation is absent for the product/ service; (iii) whether there is additional utility over and above other products/ services in the market; (iv) ensure strict test conditions are enforced to consumer personal data, prior to accepting application to ensure that the benefits of the Regulatory Sandbox are maximized and that any adverse on the consumers or on competition within the market is reduced.

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Bharucha & Partners – Kaushik Moitra and Shashank Venkat