Being home to nearly 500 million gamers and close to 900 million gaming companies, and an industry estimated to be worth approximately $3 Billion USD, it is abundantly clear that the online gaming regime in India is in a dire need of regulation.The online gaming regime in India has often been a bone of contention, with an ongoing tussle between the Centre and the states to regulate the online gaming space.
At the outset, the question of whether ‘online gaming’ should remain a subject of the ‘states’ (as betting and gambling have traditionally been), or a subject of the ‘Centre’, has long been unresolved. The Ministry of Information and Technology [‘MeitY’] had earlier, in affidavits before various Hon’ble High Courts, consistently stated that online gaming was not within its purview and the power to legislate on the subject, rests solely on the states.
In light of this, adopting a new approach, the Central Government has rightly planned to legislate on this contentious matter by introducing draft online gaming rules [‘the Rules’] via a proposed amendment to the IT [Intermediary Guidelines and Digital Media Ethics Code] Rules, 2021 [the ‘Guidelines’]. The move will give a semblance of safe harbour to the players in the online gaming industry with the introduction of self-regulatory bodies as well as mandatory appointment of Compliance Officers and Grievance Redressal Officers. The major purpose behind the introduction of the Rules is to protect and safeguard users, many of whom are minors, from the harms involved in playing such skill-based games.
It will also help spur growth in the industry with venture capitalists and investors being more eager to invest, owing to the above-mentioned safe harbour mechanisms, as well as enhance user safety for online gamers – a majority of whom are still in their teens and early twenties. Many have brought forth legitimate concerns regarding the perceived lacunae in the Draft Amendment, the most common of which have been discussed below.
Vaguely Framed and Defined Terms
The Guidelines state that an “online game” means a game that is offered on the Internet and is accessible by a user through a computer resource, if they make a deposit with the expectation of earning winnings. “Winnings” in this context denote any prize in cash or in “kind”.
While it is understandable that the Government wishes to keep a broad definition when regulating the ever-expanding online gaming landscape, it would be desirable that Government specify in a clear manner what exactly the term “kind” denotes. The inability of Government to deliver on the same may lead to great ambiguity and excessive litigation. The nature of prizes in ‘kind’ would lead to varying interpretations of the law by both companies and players, leading to unnecessary legal disputes and litigation. This ambiguity could also empower online gaming companies to take advantage of the loopholes offered by a broad interpretation of the word and leverage the opportunity to offer non-cash prizes such as gift cards, vouchers, or other types of rewards to incentivise players to continue playing their games.
Additionally, lack of preciseness in definition might also increase the risk of illicit activities such as money laundering, fraud, and other financial crimes. Online gaming companies could possibly exploit the ambiguity in the law to offer untraceable non-cash payouts, which would make monitoring and regulation more difficult. However, one of the possible solutions to this issue may be found in the Guidelines themselves, which require firms to undertake a string of due diligence measures, including KYC requirements, ensuring the fair distribution of winnings, implementation of a transparent system of money withdrawal and refunds, and so forth.
Further, these firms, in order to ensure that the outputs of their games remain statistically unpredictable and bear a degree of randomness, must obtain a ‘random number generation certificate’, in addition to a ‘no-bot certificate’ to ensure the absence of AI or non-human players determining the outcome of the games.
In any case, the Guidelines would be better served by explaining in a clear and concise manner which games shall be included under the ambit of the new legislation proposed without leaving any scope for ambiguity.
Due Diligence Requirements
The Guidelines require the gaming platforms and customers to fulfil KYC requirements at the time of registration on the platform. While some form of KYC is essential, it could prove to be detrimental to perform KYC at the same level as required while opening a bank account. Currently, a user must furnish proof of identity and address in the form of any official document such as Aadhaar Card, Pan Card or Driving license.
This would make it difficult for start-ups to acquire customers and thus potentially act as a barrier to market entry. In addition to this, making KYC mandatory at the time of registration may prove to be counter intuitive as the customer may not even be making any deposit.
Furthermore, it is highly possible that a user may not be willing to furnish their personally identifiable details like residence proofs for merely accessing an online game. This is further bolstered by the fact that a large number, if not a majority of users, would be minors below the age of 18 years. Even if such users did agree to provide such information, this would bring with it a plethora of data privacy and consent-based risks that would have to be contended by gaming companies.
Where the gaming companies themselves are concerned, the cost of conducting KYCs may not be feasible for smaller organisations or startups, since the process of KYC involves a significant amount of time and resources, including the purchase and implementation of specialised software and staff training.
It would be more prudent if the Government eased the KYC requirements to be observed by the platforms and the users while accessing online games, and further restrict such requirements to those online games which meet a certain threshold of financial inputs or investments on the part of the users.
Self – Regulatory Organisations
The Guidelines make it mandatory for online gaming platforms to register with Self-Regulatory Organisations. While such a norm is necessary to ensure good efficiency and quality of the services provided by such platforms, it has not specified the constitution, procedure, timeline, and mode of the appointment of Self-Regulatory Organisations.
Leaving such important details out of the Guidelines may prove to be detrimental for such a dynamic sector which does not have any centralised form of regulation and control. It is imperative that the Government specify these important details in a timely manner.
In addition to this, the Self-Regulatory Organisations may come to be dominated by the large online gaming platforms due to their extravagant resources and market power. This may prove to be extremely problematic for a sunrise sector like online gaming which is currently bursting with start-ups and small and medium enterprises. The Government must notify a roadmap to ensure that the smaller companies have their fair share of influence in such bodies, lest the dominant players establish a monopoly. Adequate checks and balances must be implemented in order to ensure uniformity and diversity in the composition of the Self-Regulatory Organisation, along with the establishment of an unbiased oversight mechanism.
Cost of Compliance
The Guidelines mandate the appointment of a Grievance Officer, who shall be an employee of the online gaming intermediary. Furthermore, the online gaming intermediary shall appoint a Chief Compliance Officer, who shall be a key managerial personnel or such other senior employee of the online gaming intermediary.
Moreover, a nodal contact person must be appointed for 24×7 coordination with law enforcement agencies and officers to ensure compliance to their orders or requisitions made in accordance with the provisions of law.
The above-mentioned provisions, coupled with the strict KYC regime and mandatory registration with Self-Regulatory Bodies may increase the cost of compliance exponentially.
As discussed above, multiple small and medium sized companies and startups with fewer resources would find it difficult to establish and maintain such personnel on a continuous basis. The cost of compliance would also be amplified for smaller firms in the event that fines or penalties for non-compliance are imposed on them. Unlike larger organisations, these firms might not have the financial cushion to absorb these costs.
It is important to ensure grievance redressal and compliance, but such extensive and inflexible provisions may introduce huge market entry barriers as well as jeopardise the finances of these smaller firms.
All things considered, it is imperative that the Central Government expand consultation and bring all stakeholders to the table such as civil society, consumers, intermediaries, small companies, large companies, and state authorities to create a holistic legislation which enables the online gaming industry to reach its true potential – which can only be possible if all the above-mentioned issues are addressed adequately.
Shiv Mehrotra, Intermediary Guidelines and the Regime of Online Gaming in India, Metacept- Communicating the Law, accessible at https://metacept.com/intermediary-guidelines-and-the-regime-of-online-gaming-in-india .