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The More Things Seem to Change, the More they Stay the Same: The Impact of India’s Proposed Online Gaming Rules

The definition of ‘online game’ might be over-broad, and classifying publishers as intermediaries may also be problematic: Here’s a deep dive

Nazara Gaming

There’s a lot to write home about on India’s proposed rules to regulate online gaming. The industry seems to like them—for now. But, according to the experts we spoke to, this is just a welcome starting step. There’s a long way to go before the rules sufficiently untie the many knots India’s gaming laws have tied themselves into.

What are these rules again?: The rules define what online games are, propose a self-regulatory mechanism to oversee the industry, and set up a grievance redressal mechanism, among other provisions. “With the user base of online games growing in India, need has been felt to ensure that such games be offered in conformity with Indian laws and that the users of such games be safeguarded against potential harm,” explained the IT Ministry when the rules were released.

“The rules lay down the minimum norms that anybody operating in this space should be aware of,” says Aditya Kumar, Partner at NKR Law Offices, in conversation with MediaNama. “It’s an important signal for the government to send across to the industry.”

But, what were past regulatory concerns?: Gambling is a state subject in India—barring some exceptions, many states have outlawed it. With the rise of online gambling-related suicides (to addiction and financial losses) and other harms states have tried to outlaw online gambling, or online “games of chance”, to ‘protect’ their residents. The problem is they’ve also inevitably ended up banning games held by courts to be legal too, called games of skill. Overarching bans could hurt the budding online gaming industry offering legal games—cutting them off from potential gaming audiences across the country. So, the industry has been asking the Indian government for a uniform framework that clearly defines what games of skill and chance are. The hope: that a pan-Indian gaming framework will stabilise the future of companies offering games of skill to Indian audiences.

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What’s the feedback so far?: The rules contain legal ambiguities that may need to be addressed before they’re finalised, said experts speaking to MediaNama. Public consultation on the rules closes on January 17th.

At the outset, the legality of the rules, a subset of 2000’s Information and Technology Act (IT Act), is suspect. “My objection remains that you cannot regulate this sector through these rules in the first place,” argues gaming and technology lawyer Jay Sayta. “They travel beyond what the IT Act was intended to do and what it provides for.”

Other experts MediaNama spoke to were concerned that the rules don’t sufficiently resolve the legal confusion over games and skill and chance. More concerningly, their compliance mechanisms and one-size-fits-all approach to regulating the online gaming industry might harm the interests of different companies, including start-ups. In part one of this two-part series we explore these foundational concerns with the rules. Part two will examine the proposed self-regulatory framework and how it addresses consumer harm.

Back to basics—are the rules’ foundations solid?

An online game is a “game that is offered on the Internet and is accessible by a user through a computer resource if he makes a deposit with the expectation of earning winnings” say the rules. The rules primarily cover games where you pay to play.

But, the definition risks being overbroad too. For example, could a company offering gamified rewards like Cred be covered by the rules, asks Kumar.

“Tokens are essentially cash converted to specific coins—you play the games with the chance of winning something,” he notes. “Is that an online game too? This kind of gamification, where you get prizes through some sort of online game, is fairly common across industries. I don’t think the rules intend to cover these companies, but they may end up doing so.”

In the financial sector, substantive business tests decide what kind of banking entity a company is. “A built-in and substantive business test can help ensure that gaming definitions are not overarching and don’t cover unintended companies,” adds Kumar.

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The rules also ask companies to make “reasonable efforts” to not host online games that violate betting and gambling laws. But, unlike online games, the rules do not define what gambling is. This leaves little regulatory certainty for an industry seeking legal clarity on games of skill and chance.

“What is gambling exactly?” asks Ranjana Adhikari, Partner at IndusLaw, speaking to MediaNama. “Is it how we understand it today—a game where there is a preponderance of chance over skill? Or is the law saying that it [through the definition of online gaming] doesn’t distinguish between the two? When the government says intermediaries must comply with gambling laws, is it somewhere implying that it won’t take a decision on the issue and defer it to states? 

India’s junior IT Minister Rajeev Chandrasekhar clearly stated recently that the rules only ban games involving wagering and betting. The legal text might need to catch up to reflect this.

“The rules should spell out whether they only apply to skill-based games [or otherwise],” says Sayta. 

The rules classify some gaming companies as intermediaries—and that might be a constitutional problem

An online gaming intermediary is an “intermediary that offers one or more than one online game,” the rules say. An intermediary status indicates the function of a platform—that is, it primarily hosts and transmits third-party user content.

But, that’s not how gaming companies always work. They often create and publish their own games too—making them much more than just content aggregators.

“There is no one size fits all approach [to categorising gaming companies],” Adhikari explains. “There are many different gaming models today. There are aggregator models, where you may just be an intermediary [as you only host third-party games]. But there are platform-based models too [where companies actively publish games]. There are models where players play against the house [and the house engages with the players].”

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Even app stores hosting games challenge the “intermediary” definition. In some cases, a developer simply hosts their game as an app on a store, notes Kumar. “In that scenario, an app store could be the intermediary, because they have to check that the app and game are certified [according to the self-regulatory standards laid out in the rules]. Even if you are not technically covered by the IT rules, what may happen is that players like app stores become gatekeepers.” 

If games—and the ways of publishing them are as diverse as this—then why lump everything into a singular intermediary category to regulate them?

For Kumar, the government might be trying to create space to regulate online games. “If you look at the IT Ministry’s response in court when debates on state laws [on gambling and gaming] take place, their position has been that it can’t legislate on this,” notes Kumar. “What it can legislate on is an intermediary.” Sayta adds that “the government may have no other route [to regulate online games]. Rules can only be issued for intermediaries under the IT Act.”

Adhikari foresees that this could open the rules to constitutional challenges—in that they are ultra vires, or beyond the IT Act’s intended scope. This is something Sayta has argued about in the past too.

“It is difficult to construe online gaming websites and apps as intermediaries and secondly, regulation of online gaming platforms is not contemplated within the scope of the Information Technology Act, 2000,” he noted shortly after the rules were released. “Delegated legislation cannot travel beyond the purview of the parent Act and cannot bring into existence substantive rights, obligations or disabilities not contemplated within the scope of the legislation.”

Can the rules unsettle the economics and composition of this growing industry?

In case you haven’t read our summary of the rules yet, here’s a smattering of what they expect online gaming intermediaries to do. They have to appoint a Chief Compliance Officer to make sure they’re compliant with the IT Act (and who’ll be held liable for non-compliance). They also have to appoint a nodal contact person who’s available 24/7 to coordinate with law enforcement agencies. They have to verify the identity of anyone making an account on the platform through a know-your-customer (KYC) mechanism laid out by India’s central bank.

This is just a small fraction of the changes companies have to make—but it could have large impacts on medium and smaller-sized companies.

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“There are several onerous requirements under the rules,” argues Sayta. “This requires more technological changes and manpower. Unicorns or well-funded companies may not have much difficulty in complying. But the compliance regime will likely impact smaller and medium-sized companies, especially in terms of the financial burden too.”

Even last year’s amendments to the IT Rules suggest narrow timelines to redress grievances—which raised compliance concerns for resource-strapped start-ups.

With this fresh batch of amendments though, the problem is slightly different—the rules appear to treat online gaming intermediaries and significant social media intermediaries at par. This false equivalence partly creates the burden on start-ups.

Under the IT rules, larger social media platforms are subjected to higher compliance mechanisms, because of their outsized impact on the Internet. These platforms have to have over a certain number of users to classify as “significant” and they’re subjected to all sorts of extra rules and regulations. They have to appoint a compliance officer, nodal contact person, and grievance officer too, for example.

What’s more, the rules for significant social media intermediaries target companies with deep pockets. “There is a criminal liability built into positions [like the Chief Compliance Officers] that would be absolutely unaffordable where startups are concerned today,” argues Adhikari.

Distinguishing between different types of online gaming intermediaries as a possible solution. “The rationale should be to only employ these [higher thresholds] for those online gaming intermediaries that will have that degree of impact [comparable to significant social media intermediaries]. We need to employ [extra] safeguards, perhaps, for significant online gaming intermediaries,” says Adhikari.

While acknowledging these concerns, Kumar flags the need for extra oversight.

“There are a number of industries where you have to be reasonably well funded to operate in. If you’re in an industry where you’re dealing with possibly large amounts of public money, I don’t think it’s unreasonable to be more regulated. Should small players be in this space unless they can afford to be ultra careful, or super regulated?”

But, Adhikari is clear that some of the provisions could strike at the heart of the industry’s business models—the KYC provision is a particular pain point, as it might hurt customer acquisition and ad revenues. After all, some people play online without depositing any money in their accounts. Would they want to go through identification processes to simply sign up for a service they use for free?

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Around 80% of fantasy sports players prefer to play free-to-play games [according to industry research],” says Adhikari. “There are ad revenues which flow from here—that revenue stream will be killed if you don’t have customer acquisition. Start-ups will be impacted the most. Even for online gaming intermediaries in general, this will unsettle the economics [of the industry at large].” 

Adhikari adds that there is no rationale for placing “onerous” obligations for financial-regulated entities on gaming companies—especially when best practices may already be followed by companies signing up for self-regulatory bodies’ regulatory frameworks. 

Of apples, oranges, and redundancy—a.k.a. the government’s powers to classify non-deposit games as online games

The government’s also proposed giving itself powers to notify games where you don’t put down money as online games, if the IT Ministry is “satisfied” that a game might cause harm to India’s sovereignty, integrity, security, foreign relations, public order, or if it causes addiction or other harms to children. All of the proposed IT rules apply to these notified non-deposit games “or to such extent as the notification may specify”.

But, the experts we spoke to couldn’t put a finger on why all of the IT rules should apply to non-deposit games.

“Provisions which intermediaries follow for real-money games may not be required for games not involving deposits and winnings,” notes Sayta. “For example, a KYC may not be required for a game which doesn’t involve real money. If there are [gaming-related] concerns about data, violence, and addiction, then those may need to be dealt with under separate regulations. You cannot apply the same rules to apples and oranges.”

What’s more, the threshold of what constitutes harm to children hasn’t been specified—the rules don’t explicitly define what “harm” or “addiction” is either.

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By including grounds like addiction and harms to children here, they’ve automatically given them statutory power without providing a threshold that gaming companies need to meet,” argues Adhikari. “This provision could be used to pull the plug on games without having a strong basis for that decision. That would really worry the industry.”

This isn’t the first time a gaming law has raised these concerns. Last October, Tamil Nadu passed a (now-stalled) law banning online gambling and games of chance—games that were included in the law’s schedule were “presumed” to be games of chance. The problem was the government gave itself powers to add or remove games from the schedule based on a government-appointed authority’s recommendations. As experts told us back then, “the schedule makes it easier for the Executive to ban online games without giving reasons as to why they’re doing so.”

Is a separate online gaming law required?

On one hand, the gaming industry and policy wonks can work with the rules to remedy these issues. On the other, a list of ambiguities shrouds them. India’s IT Ministry has also been somewhat reticent to change of late—last year it pushed through a different set of amendments to the IT rules with scant acknowledgement of the reams of changes suggested by stakeholders across the board.

So, instead of trying to patch the rules up—why not just regulate online gaming under a different law? But, even in this hypothetical scenario, the government will have to tread carefully.

“There are lots of provisions under the Consumer Protection Act that might be relevant for gaming companies to consider,” says Kumar. “The sector also deals with people’s money and financial data. There’s a lack of discussion on whether the rules can actually cover everything [that is, all these issues]. It’s not a full, comprehensive legislation in my opinion. The way forward may eventually be a detailed law.”  

In his previous work on the rules, Sayta recommended regulating online gaming either through a fresh law, or through the anticipated Digital India Act. To be presented in parliament soon, the law is supposed to replace the dusty 22-year-old IT Act—and will notably contain provisions related to online harm.

“If there’s a separate chapter under the [upcoming] Digital India Act which deals with online gaming exhaustively, and does not leave it [regulation] to the whims of the Executive, I am okay with that,” said Sayta. “The only point is that the law should be comprehensive and exhaustive.”

But, whether it is the Digital India Act or these new rules, both will be subject to the outcome of what happens at the Supreme Court, adds Sayta. Sayta is referring to two pending clubbed cases at the Supreme Court—where the Karnataka and Tamil Nadu governments are challenging court orders reversing their bans on “online gambling”. As is always the case in this sector, existential questions of what gambling and gaming really are, and how they should be regulated, lie at the heart of these challenges. A verdict from the top court on these issues may impact how these rules work too. 

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Part two of this series explores the rules’ proposed self-regulatory mechanism and consumer harms.

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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I'm interested in stories that explore how countries use the law to govern technology—and what this tells us about how they perceive tech and its impacts on society. To chat, for feedback, or to leave a tip: aarathi@medianama.com

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