Upping the Game: Online Gaming

By Eximius Ventures | Posted On : 04/09/2020

Disclaimer: This research note is an analysis of information available in the public domain and is purely informative in nature. No part of this document is to be construed as legal advice or legal opinion.

As a flourishing market, the domestic outlook of online gaming shows potential to establish a lasting impact as an industry. Online gaming, both as a sector and as an industry, appears to promise great opportunities not just to users/players but to entrepreneurs and content creators alike. Currently, statistics demonstrate a database of over 360 million users participating in online gaming which is estimated to rise to approximately 500 million by 2022.

This burgeoning industry now necessitates a robust regulatory framework in order to achieve a larger economic impact.

General law on gambling in India

The main piece of legislation relating to gambling in India is the Public Gambling Act of 1867. Despite certain amendments, however, this century-old legislation remains largely intact. This Act, while making it illegal to operate or visit a gambling venue, does not specifically define the scope of gambling. However, the Constitution of India contains a specific definition for gambling, which could be applied to any reference for the term under the Public Gambling Act. The definition is as follows:

“…gambling includes any activity or undertaking whose determination is controlled or influenced by chance or accident or any activity or undertaking which is entered into or undertaken with consciousness of the risk of winning or losing (e.g. prize competitions, a wagering contract)…”

Thus, anything that involves risking money to win money may be considered gambling. This would, therefore, include sports betting, poker, and casino games. However, there are other legislations in India which contradict this to some extent.

Horse Race Betting

Contrary to most betting activities, horse race betting and venues for horse races are deemed legal. However, it can be assumed that despite its legality at state level, horse racing remains unique as a betting sport, perhaps because the sport would not seem as appealing were gambling removed. 

Lotteries

The Lotteries (Regulation) Act 1998 gives state governments the authority to organize at most one lottery draw per week. 

Casino Gambling

Goa and Sikkim are two state governments in India which have passed state level legislation to allow legalized casino gambling. 

Goa initially permitted slot machines within hotels, following it up with complete casino operations. The state now hosts several land-based casinos, while several cruise ships with in-house casinos operate under Goa’s jurisdiction, which has boosted the state’s tourism appeal.

Sikkim has also legalized casino gambling and is currently home to two land-based casinos. It is also a prime campaigner for legalizing online gambling.

Online Gambling

For obvious reasons, the Public Gambling Act of 1867 makes no reference to online gambling. The Information Technology Act of 2000 is another act which can be interpreted to comprise online betting and gaming: This makes provisions for various offences relating to online activity, although again, there’s no specific mention of online gambling being illegal. However, it does give the Indian Government the power to block foreign websites.

At state level, there are two states which have introduced legislation relating specifically to online gambling:

    • Maharashtra: It has completely prohibited online gambling.
    • Sikkim: The government now has the authority to issue licenses to operators wishing to provide online gambling services within the state. This is a notable step forward for regulated gambling in India. 

Current Legal Overview

Betting and gambling laws, both online and offline, are dictated by each state. While skill-based games are considered legal under most laws, games of chance are prohibited under most Gaming Enactments (The Public Gambling Act, 1867 and the various gaming laws enacted by states in India). 

Whether a game is a game of skill or a game of chance depends on each individual case as decided upon by judicial pronouncements. For instance, horse betting and fantasy sports have all been deemed as games of skill. Rummy and poker are deemed games of skill in some states, while others categorically prohibit them. However, whether sports betting is a game of skill is still under review pending before the Supreme Court in the case of Geeta Rani v Union of India. 
Casino games such as roulette, blackjack and slots are usually considered as games of chance. Therefore, they are treated as betting and gambling activities. Hence, these are prohibited under most Gaming Enactments (except for Sikkim, which permits certain casino games).

Game of Skill v. Game of Chance 

This distinction as to whether a game is a game of skill or a game of chance is predominantly based on case precedents. 

Online Gaming

In most states and union territories, using money or money’s worth in games of skill is legal in accordance with respective state laws based on the Public Gambling Act, 1867. It is worth noting that the usage of real money in online games is legal if it is used in a game of skill and not a game of chance. However, this provision is not all pervasive. Some states such as Assam, Odisha and Telangana have adopted a restrictive approach legislating against any use of money or money’s worth in any game as legal. Sikkim and Nagaland have established some relaxations where it is legal to organize betting on games of skill as long as the venue/club hosting is licensed.

Furthermore, using money in online games raises contractual risks, whereby a player enters into a contractual arrangement with the online gaming company under the Indian Contracts Act 1872. This mandates disclosure of personal details as any contractual arrangement with a minor is deemed void. These raise several legal complications on grounds of public policy. 

As recently as July 2020, the Madras High Court in D Siluvai Venance v State (2020) observed and acknowledged the lack of regulatory framework and judicial precedents with regards to games, especially those which exist on the internet, except for Varun Gumber v Union Territory of Chandigarh (2017 Crl. LJ 3836), Gurdeep Singh Sachar v Union of India and Chandresh Sankhla v State of Rajasthan which deal with the legality of fantasy sports.

Poker and Rummy

The question surrounding poker as a game, whether it is legal or not, continues to be a contentious subject. There are several pending judgments and those adjudicated upon are, albeit, contradictory to each other. However, two judgements – from Karnataka HC and Calcutta HC – have pronounced in favour of poker. The considerations in these two judgments were not based on the debate of whether poker was a game of chance vs skill. The Karnataka High Court judgement focuses on: if poker is played as a game of skill, it does not require a license and therefore, the police cannot interfere with a game of poker being conducted. Similarly, the Calcutta High Court judgment merely states that since the game of poker ipso facto is not included within the purview of the West Bengal Gambling and Prize Competitions Act, 1957 on betting and gambling, without there being a specific complaint, police are advised not to crack down on places where such games are organized and initiate an investigation.

To bring some semblance of clarity to the subject, the Gujarat High Court detailed in its judgment in the Dominance Games Pvt Ltd v State of Gujarat that poker is a game of chance and therefore amounts to gambling under Gujarat Prevention of Gambling Act, 1887 and made the following observations:

    • Poker originated from ‘flush’ or ‘Indian teenpatti’ which has been observed by the SC as a game of chance in its 1968 judgment and consequently, as a corollary, the game of poker is also to be construed as a game of chance.
    • The game of poker involves a process in which the players have no control or say on the cards received by them and the final outcome is based on mere luck or chance, depending upon how the cards are received by the player. 
    • Poker face to bet would be a part of bluffing or deception and the so-called strategy, cannot be considered as a skill. 
    • The outcome also depends on the ability of a player to spend money and how deep his/her pockets are. It is a game of deceiving, bluffing and duping other players.
    • Rummy is different from poker. While poker involves betting or wagering, rummy has very little to do with stakes and betting or wagering is not essential to it.

Fantasy Sports

Along the same lines, the legality of fantasy sports in India is dependent on whether the game qualifies as a game of skill or a game of chance. Fantasy sports are allowed across India, except in Assam, Odisha, and Telangana.

The question of whether the fantasy sport offered by Dream11 is a game of skill was posed in Varun Gumber v. Union Territory of Chandigarh12 and later before the Bombay High Court in Gurdeep Singh Sachar v. Union of India (collectively “Dream11 Judgements”). Both the Dream11 Judgements upheld that the fantasy sport offered by Dream11 is a game of skill premised on the following submissions made by the respondent company:

    1. Users are required to deploy considerable skill, judgement and discretion while drafting their fantasy team.
    2. Users are required to study the rules of the game and the point system deployed by the fantasy operator; for example, in the fantasy cricket game of Dream 11, a user needs to evaluate anticipated statistics for skills such as batting average, total runs, number of half-centuries and centuries, strike rate, economy rate, five wicket hauls.
    3. Success arises out of users’ exercise, superior knowledge, judgement and attention; for example, in the fantasy cricket game of Dream11, bonus points are awarded to the gamers based on the performance of the virtual team’s captain (x2 points) and vice-captain (x1.5 points).  

However, it should be noted that these courts only examined the format of Dream11 and did not offer any views or analysis on the formats and offerings of other fantasy sports operators.

Currently, there are approximately 59 other fantasy sports platforms in India and all of them have a distinctive format and points system to judge the performance of each player – all of which may or may not judge the skill of the player in drafting a fantasy team.

As there are no set of government regulations, fantasy industry standards in India are regulated by the Federation of Indian Fantasy Sports (FIFS). Self-regularisation norms for the Indian fantasy sports industry is set up by the federation until the government comes out with any standards and laws for instance, some  fantasy sport platforms alert their users of their accrued profits / losses by notifying them when their accrued losses exceed INR 25,000. This ensures that the players are aware of their financial standing and enables them to make an informed choice.

As for taxation rules, 18% GST is applicable on games that are skill-based, like Dream11’s format, and fantasy sports gaming. 

Other Relevant State Enactments

Nagaland has recently enacted the Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skill Act, 2016 (“Act”). The Act contemplates the issuance of online gaming licenses for skill games (including fantasy sports).

The Act allows a licensee to offer “games of skill” in other Indian states, where such games are not classified as gambling. The Act acknowledges the power of each state to regulate the gaming activity within its jurisdiction. If any state is of the opinion that the licensee was offering its games in that state in violation of the Act or local laws of the relevant state, the state may inform the Nagaland Government of such violation to take necessary measures.

Assam and Odisha

The activity of gaming/gambling, irrespective of the medium is an offense in Assam and Odisha. Game operators are advised to take a conservative approach and not offer games that are to be played for a fee.

Legal Framework prospects: Gambling and Sports Betting Including Cricket in India

With the view to regulate the gaming industry, the government is considering enacting a robust framework which has been proposed and is currently under consideration. The Law Commission of India chaired by Justice B.S. Chauhan (the Committee) examined whether betting may be legalised in India. The findings of the report suggest regulating gambling and betting under a federal law and imposing stricter regulations governing gambling and betting with activities permitted only to license operators in India. The Commission also recommends strict penalties for any violations along with increased transparency and state supervision. Gambling is advised to be classified into two categories namely, proper and small gambling, based on the bracket of stakes permitted. Certain class of persons should be barred from participating in online gaming and gambling including minors, those who receive government subsidies, or those who do not fall within the purview of the Income Tax Act, 1961, or the Goods and Services Tax Act, 2017

Further amendments were suggested to existing legislations such as the Foreign Exchange Management Act 1999 and FDI to encourage foreign direct investment in the casino/online gaming industry. Additionally, under the Information Technology (Intermediary Guidelines) Rules, 2011, the Commission recommends barring only those intermediaries which illegally transmit or host content related to gambling. This will ensure that intermediaries are not held liable in states which license gambling. 

Considering complaints from various sources about unauthorised data access through some online gaming platforms, the Ministry of Electronics and Information Technology has embarked on a major crackdown earlier this week, banning 118 mobile applications which include PUBG Mobile and PUBG Mobile Lite.

Final Words

Online games are not centrally regulated in India, which means it is not ascertainable what game operators and providers should do. For instance, while they could conceivably monitor changes in gaming patterns or IP use to identify accounts covertly, whether this would be necessary or proportionate is a contentious subject.

This leaves the sector with many loopholes, alluring criminals into abusing the opportunity. Money laundering through online gaming platforms remains a looming threat. In-game artefacts and currencies often have real-life value and can be used to move or invest criminal proceeds.

Self-regulation within the gaming industry becomes increasingly relevant, especially now when it is still in its nascent stage in India. It is imperative to ensure that online gaming as an industry is well equipped to educate players and stakeholders of potential vulnerabilities, whilst encouraging responsible gaming. This necessitates a need for federal law.

A key issue which is considered a significant risk is national sovereignty and security. In latest news, the Ministry of Electronics and Information Technology banned 118 mobile applications, including PUBG and other strategy and board games on 02 September 2020 on grounds of national security and protection.

Even though there is a growing use of cryptocurrency, the jurisdictional limits are still grey and scrutinising its use almost goes unchecked and unmonitored. Apart from developing regulations for cryptocurrency, focused legislative developments are expected in the cyber security, Information Technology Act 2000 and personal data protection.

 

Written by Gayatri Rawtal, Legal Counsel at Eximius.

Eximius Ventures is a pre-seed stage investment firm investing in young and dynamic Indian Entrepreneurs with a precedence for female founders. You can reach out to us at pitches@eximiusvc.com.