Gaming Laws In India: Will Self-Regulatory Bodies Work?

[…]The rules cast an obligation on intermediaries, including social media platforms and app stores, to make reasonable efforts to not host, publish or share any online game that causes user harm or which has not been verified as a permissible online game by an online gaming self-regulatory body (SRB) designated by the Central Government. The rules even disallow intermediaries to host or display any advertisement or surrogate advertisement or promotion of an online game that is not a permissible online game. This will help to address the growing menace of online ads of illegal betting and gambling operations targeting Indian users. […]^[1].

In the year 2018, a Chinese company, M/s Beijing Tomorrow Power Company and its promoters Ling Yang, Ming Yang, Jinling Wan and other directors Liu Yang and Yan Hao with the help of some Indian Chartered Accountants floated multiple Indian Companies. In fact, in brief, they lured many gullible Indians to play online games by depositing amounts into the accounts of online games. They were lured to deposit a certain sum of amount at the point of subscription and they had an option to deposit money in their wallets.

Initially, dummy Indian directors were used to incorporate the companies and after some time, Chinese nationals came down to India and took directorship in these companies. Some Locals were hired and opened bank accounts with HSBC Bank and trade accounts with online wallets namely Paytm, Cashfree, Razorpay etc. These online wallets lacked diligent mechanisms and their non-reporting of suspicious transactions to the regulatory authorities helped the aforesaid Company to launch Pan India operations. Once Bank Accounts were opened, the Internet access credentials were couriered by the Indian Employees to China and major payment instructions came from the beneficial owners who were ensconced in China. The Company floated a large number of similar-looking websites, which were hosted through Cloudflare, USA.

These websites attracted gullible persons to become members and to place bets on various online APPs, which promised attractive rewards on simple games of chance. Further, networks of agents were hired to attract new customers/members. These agents created closed Telegram and WhatsApp based groups and attracted lakhs of gullible Indians. Referral codes were used to privately invite new members. This also helped the sponsoring member to earn commission. Paytm and Cashfree were used to collect money and pay commission to all these agent members. Hundreds of websites were created to promote online betting under the garb of e-commerce. All websites were not activated daily and some were activated for placing bets and the information on daily active websites was shared to members using Telegram. Out of these funds, around Rs.104 Crore was illegally transferred to related foreign companies. Beneficiaries of the other amounts so deposited into the accounts of these companies are being investigated. During the course of investigation, it is found that the ultimate beneficiaries of these Indian companies are Chinese Nationals and their Companies.

This case was unearthed by the Telangana Police and the Enforcement Directorate and several arrests were made in this matter. Around Rs.104 Crore was illegally transferred to related foreign companies based in the Cayman Islands. The Government of India must be cautious whilst allowing the gaming apps to flourish in India and to have a check and balances through SRBs and also by their own direct monitoring of these activities, otherwise these gaming apps may open plethora of cases of money laundering off-shore using the very same modus operandi.

It is pertinent to mention that, there is a Writ Petition (C) No. 9436 Of 2020 titled Avinash Mehrotra v. Union of India and Others, pending before the Hon’ble High Court of Delhi at New Delhi. The writ petition seeks a direction in the nature of a Writ of Mandamus from the Hon’ble Court to the Authorities to take appropriate steps to ban/prohibit gambling/betting/wagering/gaming websites from operating in India. The Petitioner has submitted that gambling i.e., wagering on games of chance is per se illegal according to the laws of our country and most state legislations have expressly forbidden the same.

The matter before the Hon’ble High Court of Delhi contradicts the landmark judgment of the Hon’ble Supreme Court in Dr K.R. Lakshmanan v State of Tamil Nadu (AIR 1996 SC 1153) where the Supreme Court distinguished between “games of chance” and “games of skill” and stated, albeit as its obiter dictum, that: “a game of chance is one in which the element of chance predominates over the element of skill, and a game of skill is one in which the element of skill predominates over the element of chance”. The Hon’ble Apex court stated: [In a] game of skill [...] although the element of chance necessarily cannot be entirely eliminated, is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player. In this case, the court was considering whether horseracing was a game of skill or chance. It observed that the outcome in a horse race depends on several factors like form, fitness and inherent capacity of the animal, the ability of the jockey, the weight carried and the distance of the race, which are all objective facts capable of being assessed by persons placing the bets. Thus, unlike lottery, the prediction of the result of the race is an outcome of knowledge, study and observation.

I have discussed various cases, which settle the law relating to gaming and gambling. The State of Andhra Pradesh v K. Satyanarayana and Ors (AIR 1968 SC 825) held that rummy is preponderantly a game of skill and not of chance. The Court further observed that, “it requires certain amount of skill because the fall of the cards has to be memorized and the building up of rummy requires considerable skill in holding and discarding cards”. The expression ‘mere skill’ means the presence of skill of a substantial degree.

In Pleasantime Products v. Commissioner of Central Excise, Mumbai-I, (2010) 1 SCC 265, the Supreme Court, while considering whether ‘scrabble’ is a puzzle or a game, held that scrabble is a game. It was also observed that, unlike puzzle where the outcome is fixed, scrabble is a game of skill as the skill of player influences the outcome.

The Hon’ble High Court of Andhra Pradesh in the case of D. Krishna Kumar v. State of Andhra Pradesh, 2003 Cr LJ 143 held that games of skill like rummy, even when being played for stakes, are outside the ambit of the Andhra Pradesh Gaming Act, 1974. However, the Division Bench of the Madras High Court in the case of Director, Inspector General of Police v. Mahalakshmi Cultural Association, (2012) 3 Mad LJ 561 had taken a contrary view holding that a game of skill for stakes falls within the definition of gaming under Section 3 of the Madras City Police Act, 1888. However, the Supreme Court vide order dated 18th August, 2015 allowed the poker club Mahalakshmi Cultural Association to withdraw its Special Leave Petition as the members of the club had been acquitted of all the criminal charges in this regard by the trial court. Further, in its order, the Court clearly mentioned that the writ petitions before the Madras High Court stood withdrawn and therefore observations contained in the High Court order did not survive.

In the Canadian case of Rex v. Fortier, 13 Q.B 308, the distinction between a game of chance and a game of skill was set out by the Court stating that, “[A] game of chance and a game of skill are distinguished on the characteristics of the dominating element that ultimately determines the result of the game.”

In Philip D. Murphy, Governor of New Jersey v. National Collegiate Athletic Association etc. (case no. 16-476 and 16-477) decided by the Supreme Court of the United States on 14 May 2018, the Professional and Amateur Sports Protection Act 1992 (PASPA) was under scrutiny, as to whether it is in conflict with the Constitution of the United States of America or not. The provisions of the Act provided that neither the States nor the non-state actors can indulge in the activities surrounding sports gambling, such as sponsorship, promotion, advertisement and licensing the same. The Supreme Court of the United States, with a ratio of 6:3 declared the Act unconstitutional. It opined that the scheme of the Act is “anti-commandeering” in nature, the Congress could not directly control the States, rather regulate the action of the individual, directly. Therefore, prohibiting the States from regularizing sports gambling was unconstitutional. While dealing with various constitutional and legal issues, the Court took note of both sides’ arguments, left the policy-making to Congress. In case Congress does not wish to do so, the States are at liberty to regulate sports gambling.

The Court of Justice of the European Union in the case of The English Bridge Union Limited v. Commissioner for Her Majesty’s Revenue and Customs in ECLI:EU:C:2017:814, while deciding whether ‘duplicate bridge’ would constitute a “sport” within the meaning of an exemption provision under the Council Directive on Value Added Tax, opined that even though an activity promotes physical and mental health, it is not, in itself, sufficient to conclude that such activity would be covered within the term “sport” in the said provision; and even if it were so, activities of pure rest and relaxation are not included within the purview of ‘sports’. The Court further noted that the concept of ‘sport’ appearing in the said provision is limited to activities satisfying the ordinary meaning of the term ‘sport’, characterized by a “not negligible physical element”, and does not cover all activities that may, in one way or another, be associated with that concept of ‘sports’.

Without going much into the merits of the case, since the matter is subjudice, in my considered view and on the analysis of the aforementioned decisions brings out two principles. Firstly, prize competitions and contests, where the winner is determined by draw of lots are in the nature of gambling and cannot be extended protection under Article 19(1)(g) of the Constitution of India. Secondly, games where preponderance of skill dominates cannot be considered gambling and are protected under the Constitution. Henceforth a complete blanket ban on gaming websites as prayed in the abovementioned Writ Petition, is against the protection granted by the Indian Constitution and Principles of Natural Justice.

The State governments have the right to legislate on “betting and gambling” pursuant to Item 34, List II (State List) under the Seventh Schedule of The Constitution of India, 1949. The States have exclusive power to make laws on this subject including power to prohibit or regulate gambling etc. in their respective territorial jurisdiction.

In H. Anraj v. State of Maharashtra, AIR 1984 SC 781 the Hon’ble Supreme Court observed: ‘...there is no dispute before us that the expression “Betting and gambling” includes and has always been understood to have included the conduct of lotteries. Quite obviously, the subject ‘Lotteries organized by the Government of India or the Government of a State’ has been taken out from the legislative field comprised by the expression ‘Betting and gambling’ and is reserved to be dealt with by Parliament. Since the subject ‘Lotteries organized by the Government of India or the Government of a State’ has been made a subject within the exclusive legislative competence of Parliament, it must follow, in view of Act (sic) Art. 246(1) and (3), that no legislature of a State can make a law touching lotteries organized by the Government of India of (sic) or the Government of a State... This, as we said, is but recognition of the prevailing situation under the Constitution. The Constitutional position cannot be altered by an act of the State legislature.’

Pursuant to such right, the Governor of the State of Telangana has recently promulgated the Telangana State Gaming (Amendment) Ordinance, 2017 (Gaming Ordinance). The Gaming Act (much like the central Public Gambling Act, 1867, and the gambling laws applicable in other States and Union Territories) specifically excludes the applicability of “games of skill” under Section 15. The most important change brought about by the Gaming Ordinance is the insertion of the 3 (three) explanations to Section 15, especially clarifying that rummy is not a game of skill. A skill game is a game, which is totally based on the skill and ability of the person and not otherwise. Any game which depends partly on skill and partly on luck or chance cannot be termed as a skill game. Rummy is not a skill game as it depends partly upon skill and partly on luck or chance. It is submitted that the there is a lack of clear policy and split of regulatory powers in relation to the State Gaming Laws in India. The aforesaid Ordinance has been challenged in various Jurisdiction that includes the Hon’ble High Court in Telangana.

The Government generally prohibits such activities to prevent societal harm. The Governmental policy may, not necessarily be in tune with existing social values. Despite being illegal, there are a few activities that the public at large, continues to indulge in. Illegal activities can be divided into two categories (A) activities, which definitely cause damage to the society viz. trade in contraband substances, and (B) activities like gambling and betting, which cause damage to the individuals but whose social impact varies.

Whether the State has the right to regulate private morals is a question that has often underpinned gambling prohibition laws. J.S. Mill discussed the extent to which State should be allowed to restrict liberty of individuals and highlighted the conflict between liberty of individuals to carry trade of their choosing and be involved in desired activities and the effect of such choice on society at large. While he was indecisive on the justifiability of prohibiting activities like gambling, he implicitly recognized the need for regulation of those activities that may cause harm to others. He remarked: A person should be free to do as he likes in his own concerns; but he ought not to be free to do as he likes in acting for another, under the pretext that the affairs of another are his own affairs. The State, while it respects the liberty of each in what specially regards himself, is bound to maintain a vigilant control over his exercise of any power, which it allows him to possess over other.

The notion of morality involved in gambling can be distinguished from that in sports betting. Sports are ‘games of skill’ where tentative parameters like physical skills, effort, strategy and tactics, essential purpose, etc. are also taken into consideration. Gambling necessarily entails the determination of a result based on eventualities beyond human control. In sports, however, determinations of results are primarily based on skill rather than chance. If in an event, substantial amount of skill is required to place the bets, the argument of immorality of the activity does not survive.

The immorality, per se, cannot be a ground to challenge the Constitutional validity of an enactment, as morality is a subjective concept. If, however, some form of morality is reflected in any provision of the Constitution, for example, if an enactment compromises the dignity of an individual, it may be challenged as being violative of Article 21 of the Constitution. Additionally, if a custom or usage has been deemed ‘immoral’ by a particular demographic it may be challenged by them as such. It should also be noted that morality and criminality are not co- extensive. Morality is a ground for imposing reasonable restrictions on individual’s freedom. It is said that the law remains in a state of flux while defining morality, for it is required that the law must continuously evolve to accommodate the needs of changing time.

Section 23 of the Indian Contract Act, 1872 stipulates that consideration or object of an agreement would be lawful unless regarded as immoral, or opposed to public policy, by the Court. Public policy is a Common Law Doctrine that is invoked whenever an action affects/offends the public interests or where harmful result of permitting the contract in terms of injury to the public at large, is evident.

Public policy varies from generation to generation and even within the generation and therefore it does not remain static. Social circumstances and societal needs change with time and so changes the public policy of a society.

The Supreme Court in Central Inland Water Transport Corporation Limited & Anr. v. Brojo Nath Gangly & Anr., AIR 1986 SC 1571 while considering the scope of the essentials of Section 23 opined: the Indian Contract Act does not define the expression “public policy” or “opposed to public policy”. From the very nature of things, the expressions “public policy”, “opposed to public policy” or “contrary to public policy” are incapable of precise definition...Public policy, however, is not the policy of a particular government. It connotes some matter, which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. Henceforth, there lies a distinction between public policy and policy of law; and they are not co-extensive.

The Courts in India have been unwilling to extend the scope of “immorality” under Section 23 of the Contract Act. However, in Union of India v. M/s N.K. Garg & Co., O.M.P. No.327/2002 [2016 (155) DRJ 197] decided on November 2, 2015, the Delhi High Court held that any agreement by which a party is deprived of interest (any legitimate claim) would be rendered void for being immoral and violative of public policy. The Delhi High Court in North Delhi Municipal Corporation v. Prem Chand Gupta AIR 2017 Delhi 71, examined the third part of Section 23 of the Contract Act to determine whether the clause of the contract between the parties that prohibited the payment of interest can be said to be immoral or against the public policy. The Court observed: “Therefore, in today’s date and age to say that moneys can be retained for years and years and decades is clearly immoral and has to be held against public policy otherwise there will be gross injustice to the existence of the commercial world which cannot survive without payment of moneys in time”. Therefore, it can be seen that though gambling and betting might be considered morally questionable, the framers of the Constitution were cognizant of the fact that it would be nearly impossible to completely prohibit these activities. This difficulty has increased manifold with the advent of the World Wide Web and Internet Technology. Thus the decision to put gambling and betting under the State List, empowering the States to regulate these activities as per the socio-economic conditions of that particular State has proven to be a right decision.

The States like Gujarat and Maharashtra, Meghalaya, Rajasthan, Tamil Nadu, Sikkim among many others have resorted to enacting their own gambling legislation.

The 276th Law Commission Report suggested a delineation of power between the Centre and the State to ensure uniformity in legislation. It advised the Parliament to adopt a model law that would subsequently be adopted by the states. However, since there have been attempts by states such as Telangana to initially deviate from the definition of games of chance under the central legislation (Public Gambling Act), it does not seem feasible that a model law would be sufficient to ensure uniformity.

The main test to determine whether a game amounts to gambling or not is, what dominates/preponderates, whether skill or chance. Games of chance are those where the winner is predominantly determined by luck; the result of the game is entirely uncertain and a person is unable to influence such result by his mental or physical skill. The person indulging in game of chance wins or loses by sheer luck and skill has no role to play. On the other hand, the result of a game of skill is influenced by the expertise, knowledge and training of the player. In India, games of chance fall under the category of gambling and are generally prohibited, while games of skill, falling outside the ambit of gambling are usually exempted.

Gambling and betting is a State subject. Every State has its own legislation on gambling and most States have an exemption for games of skill. However, these statutes are pretty archaic and they do not clearly define or enumerate which games fall within this skill category. For instance, Nagaland has a separate legislation, which details what are games of skill. But for the most part, most States do not have that kind of clarity. So it falls within the judiciary’s ambit to interpret whether a particular game falls within the ambit of skill or not.

Despite the presence of state enactments, the incidence of online gaming and betting is fairly ubiquitous in India and the betting industry is worth billions of rupees currently. The need is to regulate the online gaming market by making the activity legal. One effective model can be to legalise gaming and betting. Till the time there is no uniformity in the law and an effective model of gaming law, the self-regulatory body (SRB) designated by the Central Government even after having regulatory power may not verify and regulate the online games which may be permissible in one state and may not be permissible in another.