25 August 2021
Introduction
The online gaming industry is among the few industries that have survived the onslaught of the Covid-19 pandemic, and is projected to witness a compounded annual growth rate (CAGR) of 21% over FY21-FY25. Today, online gaming platforms host a diverse variety of games – ranging from rummy and poker to ‘fantasy sports leagues’ relating to cricket.
While this industry has witnessed rapid growth, regulation of online gaming platforms has been a vexed issue for state governments in India. Many state governments have expressed concerns in relation to reports of suicides resulting from financial losses suffered while playing online games, online financial frauds, and the potential effects of youngsters getting addicted to such games.
There has also been significant public debate on whether the games conducted on online gaming platforms involve a predominant element of skill, or whether they solely comprise of activities that amount to betting or gambling. This distinction assumes significance, as activities in the nature of betting or gambling may solely be based on chance or luck, and may not involve a predominant element of skill.
This issue has also been litigated before various High Courts, where individuals have challenged the legality of online fantasy sports leagues relating to cricket. While High Courts have upheld[1] the validity of such online fantasy sports leagues on the ground that they involve competitions based on skill, there is still no conclusive pronouncement from the Supreme Court.
Meanwhile, states such as Andhra Pradesh[2], Telangana[3] and Tamil Nadu[4] have recently passed legislations for imposing an absolute prohibition on online gaming. Some of these legislations have also been challenged before the respective High Courts. In this context, a recent judgment of the Madras High Court (“the HC”), which struck down the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 (“Amendment Act”), assumes relevance.
Background
In Junglee Games India Private Limited and Ors v. State of Tamil Nadu[5] (“Junglee Games”), the petitioners challenged the constitutional validity of the Amendment Act, which substantially revamped the Tamil Nadu Gaming Act, 1930 (“1930 Act”).
The Amendment Act revamped the 1930 Act in three significant ways:
(i) Definition of “gaming” – Section 3(b) was amended to provide that ““gaming” does not include a lottery, but includes any game involving wagering or betting in person or in cyber space”. The Explanation to Section 3(b) expanded the ambit of the expression “wagering or betting”, and provided that – “wagering or betting shall be deemed to comprise the collection or soliciting of bets, the receipt or distribution of winnings or prizes, in money or otherwise, including through electronic transfer of funds, in respect of any wager or bet, or any act which is intended to aid, induce, solicit or facilitate wagering or betting or such collection, soliciting, receipt, or distribution”.
(ii) Prohibition of gaming in “cyberspace” – Section 3A was inserted, which provided that no person shall wager or bet in cyberspace (by using a computer resource, communication device, ) for playing rummy, poker or any other game. Violation of Section 3A was made a punishable offence.
(iii) Inclusion of games of “mere skill” – Section 11 was amended to state that the absolute prohibition on gaming shall also apply to “games of mere skill”, if played for wager, bet, money or other stakes.
Contentions
A. Petitioners
The petitioners referred to the principle laid down in RMD Chamarbaugwala v. Union of India[6] (“RMDC”), where the Supreme Court (“SC”) held that ‘gambling’ is not a ‘trade’, and does not fall within the purview of ‘freedom of trade and business’ guaranteed by Article 19(1)(g) of the Constitution. On the other hand, competitions involving ‘substantial skill’ form a distinct category, and are business activities protected by Article 19(1)(g).
Reference was also made to K.R. Lakshmanan v. State of Tamil Nadu[7] (“Lakshmanan”), where the SC relied on the RMDC decision to conclude that competitions involving substantial skill are not ‘gambling activities’. The SC also held that while a ‘game of chance’ is determined entirely or in part by pure luck (like shuffling cards or throwing a dice), a ‘game of skill’ is one where success principally depends on superior knowledge, training and adroitness of the player. While a ‘game of skill’ may not completely omit possible elements of chance, the element of skill should predominate the element of chance – which is the case with games such as chess or rummy.
Relying on the above, the petitioners made two primary arguments. First, it was argued that the Amendment Act obliterates the distinction between ‘games of skill’ and ‘games of chance’, and state governments do not have the legislative competence to regulate ‘games of skill’. Reference was made to Entry 34 of List II of the Seventh Schedule of the Constitution – which confers the states with the legislative power to regulate “betting and gambling”. It was argued that Entry 34 of List II only confers State Legislatures with the power to regulate games which are predominantly based on chance, and this does not cover games that are predominantly based on ‘skill’ of the participant. Second, it was argued that imposing a blanket prohibition on skill-based games is manifestly arbitrary, and fails to satisfy the test of proportionality.
B. State
The State referred to the Statement of Objects and Reasons of the Amendment Act, which provided that playing online games is addictive in nature, and has resulted in incidents of suicides, along with cheating of innocent participants. In order to prevent such incidents, it was decided to ban wagering or betting in cyberspace. Reliance was also placed on the 276th Report of the Law Commission[8], which stated that vulnerable individuals should be protected from the ill-effects of betting and gambling. Relying on the above, it was argued that the Amendment Act struck a proper balance between social control and individual rights, and was proportionate to the evil sought to be remedied.
Analysis of the HC’s reasoning
The HC held that as games based on a ‘preponderance of skill’ are protected under Article 19(1)(g) of the Constitution, the restrictions imposed by the State on conducting or playing such games should satisfy the tests of reasonableness and proportionality.
It noted that although Section 3-A of the amended statute only applies to gaming in cyberspace, Section 11 effectively makes this prohibition applicable to even physical games based on skill — if such games fall within the expanded definition of “wagering or betting”, which was deemed to include “any receipt or distribution of winnings or prizes”, or “any electronic transfer of funds”. The HC agreed with the petitioners’ contention that the Amendment Act failed to distinguish between a ‘game of chance’ and a ‘game of skill’, and incorrectly equated skill-based games with wagering or betting.
Pursuant to the all-encompassing ambit of the legal fiction created by the statute, even a football tournament that awards any cash prize/ trophy would be prohibited by the statute. Hence, while the objective of the Amendment Act was to prohibit online gaming, it effectively prohibited even physical skill-based games. For this reason, it was held that the Amendment Act was manifestly arbitrary, and the objective of the amendments did not have any nexus with the ultimate effect of the same.
Further, as the Amendment Act imposed a blanket ban on all forms of gaming, irrespective of whether the game is based on skill or chance, the State failed to adopt the ‘least-intrusive’ measure for infringing the ‘fundamental right of trade and business’ guaranteed by Article 19(1)(g) of the Constitution. Hence, the Amendment Act did not satisfy the proportionality test laid down in landmark decisions such as K.S. Puttuswamy v. Union of India[9].
One interesting aspect of the HC’s reasoning is in relation to Entry 34 of List II of the Seventh Schedule, where the HC held that the State’s power to legislate on “betting and gambling” should be interpreted in accordance with the SC decisions in RMDC and Lakshmanan – which held that the activity of ‘betting’ does not include games of skill. Hence, according to the HC, Entry 34 of List II only confers state legislatures with the power to regulate games of chance, and does not envisage regulation of games of skill.
This view raises an important question, relating to whether States have legislative power to regulate online skill-based games, such as rummy, fantasy sports leagues, etc. The HC provides a partial answer by making a passing reference to Entries 1, 26 and 33 of the State List, which inter alia confers the State Legislature with the authority to legislate on matters relating to “public order”, “trade and commerce within the state”, and “sports, entertainments and amusements”.
As online skill-based gaming platforms involve activities in the nature of trade, commerce, sports or entertainments, at a prima facie level, state governments clearly have the authority to legislate in relation to the said fields, for regulating online gaming platforms. However, as conducting or playing skill-based games falls within the purview of Article 19(1)(g) of the Constitution, the regulations framed by the State should satisfy the proportionality test, and should not be manifestly arbitrary.
Concluding thoughts
As state governments have legislative power to regulate online skill-based gaming activities, the Junglee Games decision should not be interpreted to imply that online skill-based gaming platforms have an absolute immunity from legal and regulatory scrutiny. State governments are accordingly free to enact legislations that impose proportionate and non-arbitrary restrictions on the manner in which gaming platforms are accessed within the state. This assumes relevance due to the unique nature of the business of online gaming platforms. While an online gaming company may operate its platform from a single state, the platform can be accessed by any user across the length and breadth of India, who has access to a mobile phone or a computer.
In the near future, if different states enact their own legislations for regulating online gaming, the gaming platforms may have to comply with a different legal regime in each state where they have a user base. For instance, an online gaming company that has a user base in Tamil Nadu and Andhra Pradesh may have to comply with different set of regulations, in relation to its user base in each state.
Another takeaway of the Junglee Games judgment is in relation to the nature and design of the gaming activities hosted on online platforms. While assessing the risk profile of any game, online gaming companies should, in accordance with this judgment, evaluate whether the game involves a predominant element of skill of the player, or whether it is solely based on chance. While many online games may involve mixed elements of skill and chance, online gaming platforms should reduce the element of chance to the lowest possible extent.
(Interested readers may also like to refer to an earlier article authored by Mr. Bharat Vasani relating to the online gaming industry, which was published on the CAM Blog in August 2019. The article is available here)
For further information, please contact:
Bharat Vasani, Partner, Cyril Amarchand Mangaldas
bharat.vasani@cyrilshroff.com
[1] See, for instance, Varun Gumber v. State of Chattisgarh, 2017 SCC OnLine P&H 5372.
[2] The Andhra Pradesh Gaming (Amendment) Act, 2020.
[3] The Telangana Gaming (Amendment) Act, 2017.
[4] Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021.
[5] 2021 SCC OnLine Mad 2762.
[6] AIR 1957 SC 628.
[7] AIR 1996 SC 1153.
[8] Law Commission of India, Report No. 276, Legal Framework: Gambling and Sports Betting including in Cricket in India, July 2018.
[9] (2019) 1 SCC 1.
