[The Outline By Inc42 Plus] Gaming Startups In A Legal Maze

Dear reader,

One of the first ‘mobile games’ in my life was the one on my pencil box while in school. You are likely to be familiar with it — three ball bearings which need to fit in a central slot, but getting them all in meant turning the entire box upside down, and then manoeuvring the pieces.

It’s been over three decades since then, but 21st century Indian online gaming startups are still playing that game today.

As we will see, not only do regulations wildly differ from state to state, but startups also have to get new features and games cleared by legal teams. Lacking clear government regulations, startups have opted for self-regulation, a move that rings hollow given the shifting legal landscape.

Online gaming startups are facing more uncertainty with anti-gaming laws being proposed in many states. While the idea is to tackle gambling and exploitation of minors, many of these proposed laws are dangerously close to banning some forms of online games.

In the past couple of months, Kerala, Tamil Nadu, Karnataka and Telangana have proposed laws that could complicate life for startups that offer games of skill such as poker, rummy, fantasy sports gaming and other online games.

While in Kerala and Tamil Nadu, high court rulings have forced the state governments to revoke the proposals and go back to the draft stage, the situation is only now starting to develop in Karnataka and Telangana, where these proposed laws might see push back from the industry.

A Labyrinth Of Compliances

Legally speaking, online gaming startups already have to navigate an ever-changing labyrinth of compliances as each state has different rules and regulations pertaining to gaming.

Given that there is no centralised framework in this space, state laws differ wildly. Some states such as Nagaland have outrightly banned all games of skill that involve wagers unless they have the right licence, while others have no regulations in place.

Most recently, the law in Karnataka has been said to be brought in to “curb the menace of gaming through the Internet, mobile apps.” The wording of the law has set some alarm bells ringing.

While the rule covers all forms of wagering or betting in any game of chance with the exception of horse races and lotteries, the most worrisome part is that it also endangers games of skill.

The law has an exception only to the playing of any pure game of skill and not to “wagering by persons taking part in such game of skill”. This includes betting in the form of tokens paid for by cash, digital payments or virtual currency, all of which will be considered gambling.

This partial inclusion of games of skill as acts of gambling in the amended act is likely to come under scrutiny, just as it did in Tamil Nadu and Kerala. The Karnataka government is seeking to paint all games with the same brush as online gambling, but this is not going to pass the scrutiny of a court, one legal expert told us.

The regulatory maze means that lawyers are also game testers for Indian companies. Jay Sayta, legal advisor, and founder of gaming and esports website G2G News, told us that his team works with several startups to decide if their new games will pass legal muster.

“We need to check the flow and user journey to ensure that there are no violations in how users are told to play the game. We also check whether there is any precedent for this game in Indian courts or abroad and if there have been any rulings in the case of any particular game’s category,” Sayta said.

If there’s no legal precedence for such games, lawyers corroborate data from game testing to the general parameters for games of skill, before advising the company on how to tweak their game, if at all.

Does Self-Regulation Work? 

Of course, the gaming industry is pushing for self-regulation rather than legislation or bans. But self-regulation is a joke in most sectors, believes one lawyer who works with gaming companies.

With the exception of the OTT segment, which has a nodal body in the I&B ministry, no other self-regulation mechanism works in India because ultimately there is no one to compel companies to follow the self-regulation framework.

The way forward needs to be a centralised framework, which can only happen if these disparate state-level cases are clubbed and brought to the Supreme Court.

Lawyers we spoke to said that it’s possible that gaming companies are waiting for favourable rulings in state cases, which they can then take to the apex court for a final ruling. However, this is not a route that offers a guarantee of success — the SC bench is not required to consider what the high court has said in the matter.

“You only get one chance at the Supreme Court. No repeat turns,” said one of the lawyers, calling the wait and watch approach a bad strategy.

While Tamil Nadu and Kerala cases have turned out in the favour of startups, the unwillingness to take the fight to the Supreme Court at the present time might prove costly.

Other state governments might make similar moves, which would then overwhelm startups in legal costs and operational issues.

Gaming Startups Hamstrung

But the status quo benefits no company. Startups such as Dream11, MPL, WinZO, Zupee, and others have raised millions from investors to tap into the market, while Nazara has already listed publicly.

Paytm is also en route to the public markets and has recently doubled down on its gaming vertical Paytm First Games with a massive ad campaign. These are some of the biggest names in the Indian tech startup ecosystem.

The state government rulings, particularly in Karnataka, have caught them unaware. As one founder told us, if Karnataka, which is considered the most progressive state for tech in India, can do this, then we can’t have much hope for other states.

The Federation of Indian Fantasy Sports (FIFS) said the law is misguided since it penalises legitimate businesses by treating them at par with illegal online gambling, betting, and wagering platforms, while the All-India Gaming Federation (AIGF) called it highly regressive.

The AIGF believes that the online gaming sector has seen 1.5x growth year-on-year thanks to the pandemic-induced market conditions and the extensive lockdown in India. The body claims that India has over 36 Cr gamers today, with sizable participation from Karnataka, Kerala, Tamil Nadu and the other states that are seeking to ban such games.

According to a recent EY-AIGF report, online gaming was the fastest growing segment within the media & entertainment sector for the fourth year in a row in 2020, growing 18% in terms of overall industry revenue to INR 7,600 Cr, which is expected to double by 2023.

Startups are in favour of omnibus regulations that cover betting, sports and gaming, so that the fear of a ban does not hang over their heads. Founders have called for clearer distinctions for games of skill and games of chance, which would remove the layers of complexity currently bogging down the segment.

Issues such as fair play when using machine learning and AI algorithms, child and user safety, anti-fraud detection, data privacy and others are yet to be explored in the context of online games in India.

The lack of regulatory clarity does impact investor interest and confidence in the gaming sector, but gaming companies are going beyond market share these days and looking to influence other sectors too.

Dream11’s Harsh Jain has said in the past that the lack of regulations deterred many of Dream11’s potential investors from the US, given that even some Indian government officials have likened fantasy sports to betting. But it has come a long way since those days.

Despite the lack of regulations, Dream11 and MPL continue to influence the market in many ways through high-profile sponsorships. Earlier this year, Dream11 infused $250 Mn into Dream Capital, its investments and acquisition arm for sports, gaming and fitness tech startups. MPL, which turned unicorn in September, also has a dedicated game developers fund.

These moves are a testament to how significant the gaming industry can be in the grander scheme of things, if allowed to focus on the ecosystem rather than being saddled with complicated regulations.

One founder told us that gaming is one of the only truly global markets for Indian startups to tap into today — most other sectors are limited by geographic factors. But given the current uncertainty, startups are simply waiting for the tide to clear. It’s time to let them play on.

Till our next turn,
Nikhil Subramaniam