The Bombay High Court (“High Court”) vide its judgement in Play Games 24x7 Private Limited v. Reserve Bank of India (W.P. No. 3047 of 2022, decided on January 18, 2023) dealt with the question of the legality of online games of chances involving money or stake.
- BRIEF FACTS:
Play Games 24x7 Private Limited (“Petitioner”), a corporate entity enabling users to play online games on its website and mobile applications, had failed to comply with reporting requirements prescribed under paragraph 9(1) of Schedule 1 of Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations 2000, whilst issuing equity shares to foreign investors between June 2006 and February 2012.
Upon the Petitioner filing a compounding application under section 15 of the Foreign Exchange Management Act (“FEMA”) and Foreign Exchange Management (Compounding Proceedings) Rules, 2000 before the Reserve Bank of India (“RBI”) for compounding the aforesaid non-compliances, it was directed by the RBI to get a clarification from the Department for Promotion of Industry and Internal Trade (“DPIIT”), Government of India, regarding its eligibility to receive Foreign Direct Investment (“FDI”) and the legality of its activities.
Despite multiple attempts, the Petitioner failed to obtain the requisite clarification from DPIIT. Meanwhile, the Petitioner approached the High Court alleging that the processing of the compounding application was being delayed by the RBI.
- CONTENTIONS RAISED BY PARTIES:
In context of above-highlighted facts, the principal issue before the Court was examination of the legality of the Petitioner’s business activity of providing online games, which would have a bearing on its eligibility to obtain the compounding order.
- Contentions put forth by the RBI and DPIIT:
The RBI contended that it could not permit compounding unless there was an assessment of the nature of business activity, which the RBI itself was not empowered to do. Therefore, the RBI found itself justified in directing the Petitioner to the DPIIT, which is the only authority empowered to make such an assessment.
On the other hand, upon examination of the Petitioner’s website, the DPIIT noted that the Petitioner was engaged in conducting online gaming viz. Ultimate Teen Patti and Call it Right (“Online Games”), which, being games of pure chance, fell under the category of gambling and betting and accordingly is a prohibited sector under the FDI Policy.
- Contentions put forth by the Petitioner:
The Petitioner contended that the Online Games offered by it are casual/social games and they do not qualify as gambling as no monetary/tangible prize or reward can be won by the players based on the outcome of these games.
It explained that the Petitioner’s revenue from the Online Games is mainly generated through in-app purchases of virtual goods by the user and in small part through placement of advertisement in these goods. While referring to terms of services of the Online Games provided to each user/player, it elaborated that these virtual goods, like chips, diamonds etc. were commonplace in such casual/social online games which could be used by the player for only in-game uses such as make cosmetic changes to game character, upgrade virtual goods in the game or progress in the game but could not be transferred or redeemed for cash or anything having monetary/tangible value. Notably, the Petitioner also pointed out that the Online Games were launched in 2013 and 2015 i.e. much later than the period of procedural contravention.
- JUDGEMENT:
The High Court was presented with the following two questions: (a) the relevant time period of contravention for considering compounding application; and (b) an assessment of the actual nature of the Petitioner’s business activity.
- Relevant time period of contravention:
The High Court noted that DPIIT’s assessment was flawed as DPIIT only visited the Petitioner’s website and on basis of the name of Online Games concluded them to be gambling. The Bombay High Court further noted the failure of DPIIT to appreciate the fact that Online Games were launched much beyond the contravention period for which compounding was sought. Therefore on this basis, the High Court held that a subsequent activity of 2013 and 2015 could not have rendered illegal or illicit previous activities for the period 2006 to 2012.
- Assessment of nature of Business Activity:
Regarding the legality of the Online Games being offered by the Petitioner, the Court took note of the submission by the counsel of the Petitioner, contending that if there is a game purely of chance and there is no element of reward, gain or a prize to be won, then it is not gambling.
The Court duly took note of the celebrated decisions of the Supreme Court rendered in KR Laxmanan v. State of Tamil Nadu, [W.P(C) No. 665 of 1986; decided on January 12, 1996] and RMD Chamarbaugwala v. Union of India, [W.P. No. 78 of 1956; decided on April 9, 1957] and observed that, whilst the predominant element of the activity, whether skill or chance, determines the character of the game, to constitute gambling, a game must satisfy the twin tests of (a) being a game of chance, and (b) played for reward.
The Court noted that, DPIIT failed to establish or even ask relevant clarifications about whether any element of reward was involved in the games, especially in view of the categorical statement contained in the Terms of Service’ on the Petitioner’s website that none of its activities involved ‘gambling’, as understood in Indian jurisprudence, that is a game of chance with no element of skill, for any gain or reward.
Basis this, the High Court had directed the Petitioner to file another compounding application for RBI to consider.
- ARGUS COMMENTS:
The position of legality of online games played with or without stakes is not uniform across India and lacks clarity. Presently, there are two categories of judgements on the issue of whether involvement of stake is determinant factor in assessing legality of online games.
The first category of judgements provides that for determining the legality of online games, predominance test is only criteria. Any other criteria like involvement of stakes, over and above Predominance Test is not protected by article 19(6) of the Constitution of India and therefore unsustainable. Executive Club v. State of Andhra Pradesh, [Crl. P. No. 1559 of 1998, decided on August 10, 1998]; Head Digital Works Private Limited v. State of Kerala, [W.P.(C) No. 7785 of 2021; decided on September 27, 2021] and All India Gaming Federation v. State of Karnataka, [W.P. 18703/2021; decided on February 14, 2022] fall within this category.
The other category of judgements provides that for determining the legality of online games, predominance test is not only criteria. In case a game involves stake, a prohibition can be imposed by the appropriate government. Director General of Police State of Tamil Nadu Chennai v. Mahalakshmi Cultural Association, [W.A.No.2287 of 2011; decided on March 22, 2012] and Play Games 24X7 Private Limited v. Ramachandran K., [R.P. No. 514 of 2019, decided on October 11, 2019]; decided on fall within this category.
In effect, the present judgement by the Bombay High Court also indicates that the predominance test is not a conclusive criterion to determine whether an activity amounts to gambling.
However, the High Court only addressed limited aspects of the legality of online gaming, leaving open questions about the types of non-monetary rewards, the organizer's involvement in profits, the transferability of non-monetary rewards, and the difference between the legal thresholds of offline and online games. It is expected that the jurisprudence involving legality of online games with or without stake will evolve and provide us with more clarity.
Please find attached a copy of the judgement.
Read our earlier publication titled Online Games of Skill V. Games of Chance: The Judicial Saga Continues.
This update has been contributed by Arka Majumdar (Partner) and Ayush Chaturvedi (Associate).
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