Online gaming rules bring regulatory certainty, but need refinement

Over the years, several bodies have recommended uniform and consistent central regulation of online gaming.

Online real-money gaming has always been a growth sector in India, but over the last few years, driven by pandemic tailwinds, it has been a sector which has seen unprecedented investment and innovation. Not all has been smooth sailing though, and online gaming operators in India have long sailed in choppy and uncertain regulatory waters.

Gambling, or staking money on games of chance, is a criminal offence in much of India. Since the late 1950s, operators of games of skill (including online) have relied on protective language in legislation, and its interpretation by various decisions of the Supreme Court and several high courts. As gambling is regulated by states, rather than the central government, operators of online real money games have to contend with complex, often contrary laws, state-specific bans, and criminal proceedings on account of their games being classified as gambling.

Various attempted bans, including in the states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, have been accompanied by criminal proceedings and arrest warrants, followed by successful judicial challenges and orders such as those in Karnataka and Tamil Nadu overturning them. At the same time, bad actors and entities based overseas have offered illegal gambling formats and even lotteries to users in India with impunity, relying on the fact that they are unlikely to face criminal action.

Over the years, several bodies, including Niti Aayog in 2021, have recommended uniform and consistent central regulation of online gaming, but this has always been faced with the thorny problem of state regulations.

Co-regulatory Mechanism

With this backdrop, the amendment of the Business Allocation Rules to assign the responsibility of regulating online gaming to the ministry of electronics and information technology (MEITY), and the ministry’s proposed amendments to the Information Technology Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to introduce a co-regulatory mechanism for online gaming (Draft Rules), have acted as a ray of hope for stability and certainty to this industry.

The draft rules regulate games that are offered over the internet and involve a deposit in cash or kind with the expectation of winnings. Entities offering these games are termed online gaming intermediaries (OGIs) and have been made subject to several direct obligations including know-your-customer (KYC) procedures, the appointment of specific personnel including a chief compliance officer, and third-party certification on random number generators and the absence of bots. They are also subject to enhanced requirements around grievance redressal and responding to law enforcement requests.

Significantly, presence in India is a key theme of the granular requirements. For instance, OGIs need to have a physical presence in India, have resident chief compliance officers and nodal officers to interact with law enforcement and resident grievance officers to deal with user complaints. All the officers are also required to be employees of the OGI. This is a welcome move and will help Indian online gaming operators and act as an effective block against offshore fly-by-night operators.

Other aspects of the operations of OGIs, such as verification that their games comply with the law, age gating, and anti-addiction measures, are to be governed by frameworks to be prescribed by one or more not-for-profit self-regulatory bodies (SRB) that will have to be registered with MEITY after demonstrating qualifications like the absence of conflict, qualified members, and capacity to deploy the technology. MEITY can review the operations of SRBs and suspend or revoke their registrations.

This co-regulatory approach allows for top-down and conventional rulemaking on certain key aspects while allowing expert bodies (which the SRBs can evolve into) to tailor industry- or format-specific norms in a dynamic and flexible manner.

Thorny Issues

All is not rosy though, some aspects of the draft rules may need a nuanced approach.

For instance, the current definition of online games can be read to include games which require participation fees. Similarly, KYC (akin to that used by banks) has been proposed for all accounts, regardless of value, which means that users who play with Re 1 to Rs 1 lakh will need to be validated in the same manner. Some obligations seem to be directed at advertisers and app stores, and can be made clearer. The ongoing public consultation on the rules may help smoothen out these rough edges.

While non-compliance with the draft rules can result in loss of intermediary safe harbour protection and result in gaming applications being blocked under Section 69A of the IT Act, the bigger risks for gaming companies - including that of arrest and criminal prosecution - will continue under state legislation.

Given the elaborate co-regulatory mechanism which will be evolved under the Rules, and the increasing regulatory practice that will be available for the sector through the operations of OGIs, one hopes that states will draw comfort from the substantial protection and certification requirements under the draft rules, and withdraw or dilute any additional or contradictory obligations under their own laws.

Arun Prabhu is Partner & Head – Technology, Media, and Telecom, & Anirban Mohapatra is Partner at Cyril Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.