NITI brings reality to the fantasy industry

By Vaibhav Kakkar and Paayas Pandit, L&L Partners
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The National Institution for Transforming India (NITI Aayog, a government think tank) has released a discussion paper on the regulation of online fantasy sports platforms. It comes at a crucial time. The gaming sector has attracted significant foreign investment and, despite regulatory uncertainty, has posted multimillion-dollar valuations. The industry provides thousands of direct and indirect jobs, and will contribute billions in tax revenues over the next five years. The exponential growth of the sector will be fuelled by a young population, increasing internet penetration and covid-related isolation.

Vaibhav Kakkar, Partner, L&L Partners
Vaibhav Kakkar
Partner
L&L Partners

Light-touch regulation and a self-regulation body will ease the issues facing the industry.

The greatest impediment to the growth of the online gaming industry is an ambiguous regulatory framework applied inconsistently by states. The conflation of skill-based games and gambling has obstructed the unlocking of the potential and valuation of companies in this sector. The lack of legal recognition makes skill-based games dependent on exceptions to state gambling and public order laws. States have jurisdiction over gambling and betting but whereas real money games of chance are almost uniformly prohibited nationwide, individual states treat skill-based games inconsistently.

Since the 1950s, Supreme Court decisions from Chamarbaghwala to Satyanarayan and Lakshmanan, have distinguished games of chance and games of skill, the latter being accorded the protection of the right to trade and business under the constitution. To constitute gambling, games must include ele- ments of consideration, chance and reward. Games with a preponderance of skill over chance are not gambling. The high courts of Maharashtra, Punjab and Rajasthan have held fantasy sports to be games of skill and therefore permitted.

Moral and practical considerations have caused some states to adopt conservative attitudes towards money-based games, including the control of addiction and the protection of minors. The southern states of Andhra Pradesh, Tamil Nadu and Telangana have banned all real-money skill-based games. No rational explanation exists for failing to distinguish between skill-based gaming and gambling. Instead of adopting solution-centric approaches, states have chosen the easier and more politically popular route of banning such games.

Such actions deter investors and reduce the valuations of gaming companies. Legal principles and jurisprudence established in line with global legal practices have been disrupted. This impacts investment into the sector. The unpredictable attitude of states and possible public interest liti- gation discourage companies from scaling up their operations. In fact, experience suggests that blanket bans fail to solve the problems they address, leading to the proliferation of illegal websites. There is also a significant loss of tax revenue.

Paayas Pandit, Associate, L&L Partners
Paayas Pandit
Associate
L&L Partners

A better solution would be a uniform self-regulatory framework that balances the states’ concerns and the interests of gaming companies and users. The self-regulatory authority proposed in the paper would encourage a culture of ethical gaming. A licensing framework providing payment of reasonable fees could prove attractive to states.

The paper is a step in the right direction, but its biggest disappointment is that it makes an artificial distinction between online fantasy games and other online games of skill. The selective treatment of fantasy sports could breach the constitutional principle of equal treatment and is inconsistent with the realities of the skill-based gaming industry. NITI should view the sector holistically and create a uniform framework. This would maximize the growth of this sector, following the example of e-commerce.

The paper proposes the creation of safe harbour provisions for fantasy sports platforms. These should also apply to entities such as internet service providers and payment gateways, who play a critical role. As online gaming involves various laws and state-specific legislation, collaborative efforts by ministries and state governments will create a uniform nationwide framework.

While the paper is an admirable first step, there must be stronger political will to encourage this homegrown industry consistent with the support of the prime minister in his radio addresses.

Vaibhav Kakkar is a partner and Paayas Pandit is an associate at L&L Partners

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