New regulation for online gaming has some gaps

There are also concerns about how this new framework will align with the authority of the states to regulate the sector

Online gaming regulation in India has been notoriously uncertain and fragmented. Indian courts tend to disallow games of “chance”, involving real money, while permitting games of “skill”. To complicate matters further, gambling and betting are regulated by state legislatures, as a result of which, what constitutes a game of “skill” and a game of “chance” differs across states. This confusion has been a central obstacle to the growth of the gaming industry in India.

The ministry of electronics and information technology responded to this need for uniformity by amending the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (IT Rules) to introduce a new regulatory framework for online gaming. (AFP)

The ministry of electronics and information technology responded to this need for uniformity by amending the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (IT Rules) to introduce a new regulatory framework for online gaming. Online games are now classified as either casual games or real money games, where users provide a deposit and have the ability to earn winnings on this deposit. While all casual games are permitted, only real money games that do not involve “wagering” are allowed. Creators or publishers of online games are required to register as members of self-regulatory bodies (SRBs), which are responsible for verifying the permissibility of a real money game.

To implement this framework, the amendment introduces a new category of intermediaries called online gaming intermediaries (OGI), which are platforms that enable users to access third-party games. OGIs must observe existing compliances applicable to all intermediaries, as well as additional compliances specific to online games.

The general sentiment within the gaming industry appears to be one of relief. A concrete legal framework lends much-needed legitimacy to real money games and serves as a reliable bedrock for faster innovation and greater investment in the industry. Permitting light-touch regulation through SRBs has also been well received and can allow the industry to develop rapidly. This is yet another example of Indian policymakers moving away from prescriptive regulations to a more permissive and industry-friendly framework, as we have recently seen in draft bills on data protection and telecommunications. A nimble and agile framework with minimal bureaucratic hurdles is especially critical for online gaming, which sees constant innovation, new features and new technologies.

But is this enough to provide the industry with the certainty that it needs?

The IT ministry has used this opportunity to create a new regime based on “wagering” — attempting to try and sidestep the confusion around what constitutes a game of chance and a game of skill. It has also made it clear that the IT Rules are intended to co-exist with an existing divergence between gambling and betting. It will be interesting to see how this new construct of “wagering” fits into that debate.

There are also concerns about how this framework will align with the authority of the states to regulate the sector. What happens if an SRB permits a game that has been banned under state law? If state laws are still in force, games that have been verified by an SRB will continue to be banned in states where they are illegal. Will this new regime deliver on uniformity and certainty as intended? That said, this new legal construct of “wagering” should be seen as an opportunity to build a national consensus on what constitutes a permissible game, one that all states should be encouraged to adopt.

The amendment has also sparked debates around legislative overreach and the nature of entities intended to be regulated by the amendment. It has been made clear that the IT Rules do not intend to cover gaming companies which create and publish games, but only intermediaries who provide access to them. However, certain obligations placed on OGIs appear to indirectly regulate gaming companies.

For instance, gaming companies have to become members of SRBs in order to verify their real money games. Since gaming companies are not regulated, OGIs will now be required to ensure that partner gaming companies are members of an SRB and that they have verified all real money games hosted on their platform. Similarly, OGIs are required to ensure adequate grievance redressal and will now be the only point of contact for all online gaming grievances, including in-app grievances that they have no control over. They will become responsible for ensuring that partner gaming companies respond to such grievances. OGI’s are also required to conduct user KYC in all cases, even when they may not be involved in the payment process. This obligation may lead to OGIs having to ensure that partner gaming companies conduct user KYC.

In the absence of a separate regulation for gaming companies, the IT ministry’s approach seems to place an unfair burden on OGIs, leaving them open to liability if gaming companies fail to fulfil certain requirements. An independent central legislation to regulate online games is essential to be able to allocate liability between actors more appropriately. This is the case for most other online services. For example, Practo is an intermediary operating under the IT Rules to connect users to clinics and doctors.

However, the health care industry is not regulated under the IT rules, and professionals are required to certify themselves separately and comply with legislations such as the Indian Medical Council Act. In the absence of a similar independent law for online gaming, state laws on gambling and betting remain the only sector-specific legislations, which leads us back to a very uncertain square one.

Rahul Matthan is partner, Trilegal and Shreya Ramann is consultant, Trilegal The views expressed are personal