Can States have Additional Restrictions on Online Gaming?

This article deals with the question regarding whether the States can have additional restrictions under the latest draft amendments to the Rules relating to online gaming i.e. the Information Technology (Intermediary Liability and Digital Media Ethics Code) Rules, 2021¹.

The Government of India notified the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2022² on 28-10-2022 (hereinafter referred to as “the draft Rules”) and they were open for public consultation until 17-1-2023. Various stakeholders, and industry counterparts, are now on the quest to decipher the probable impact on both industry as well as players or consumers. Gaming startups, companies, investors, and players will be part of the discussions.

Some of the vital aspects required to be considered under the draft Rules includes — exposure pertaining to applicability of the draft Rules to games of skill or chance, the draft Rules do not reveal if they are related to games of skill or chance, which has been a topic of debate among the industry stakeholders, all the gaming companies will have to register with the self-regulatory body (SRO) comprising of Board of Directors with five members from fields i.e. online gaming, public policy, information technology and medicine. Prescription of a registration mark on all online games registered by SRO, additional due diligence by online gaming companies such as know your customer (KYC) and transparency in withdrawal/ refund of money, appointment of Grievance Officer, Chief Compliance Officer, Nodal Officer in the online gaming company, among most important aspects, also requires consideration.

The Centre’s draft remains ambiguous on the question of whether the States can have additional restrictions. In the past, there were several prohibitions, and industries have staved them off by arguing that they offer games of skill and not those purely dependent on chance. This distinction between the game of chance and skill is tenuous one for real money games (RMGs). Under such circumstances, it was expected from the draft Rules whether the States are empowered to prohibit these games online as they do offline.

Looking at the historical background and fundamental legal aspects of “online gaming”, it is indeed clear that, the States will and certainly can impose additional restrictions and it is dealt with in brief as follows: firstly, the foundational aspects of real money games and their legality is discussed, and then the constitutional aspects dealing with the online gaming moving onto the aspect of dealing with real money games, under the draft Rules.

Firstly, wagering is a generic term that encapsulates within its ambit, both gambling and betting. Wager or bet is a promise to give money or money’s worth upon determination or ascertainment of an uncertain event³, in this context, it is worth referring to the definition provided under Section 65-B(15)⁴ of the Finance Act, 1994:

… means putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring.

However, the Finance Act, 2017⁵ does not define either betting or gambling. According to the Oxford Living Dictionary, betting is “The action of gambling money on the outcome of a race, game, or other unpredictable event”, thus can be construed as act of putting valuable or liquid cash on the prediction of occurrence or non-occurrence of an event. It is always done against a second party who places his stake against the one placed by the first party. Neither of the parties that have put at stake their wagering amounts should have any control over the event on which the amount is wagered. On the other hand, gaming includes a game of chance or skill or a combination of both, examples include poker, pool, billiards, fantasy football, internet games, crap, roulette, etc.

Though both betting and gambling are basically wagers, the difference is explained by the High Court of Madras in Public Prosecutor v. VerajlalSheth⁶ as —

3. The principal distinction between gaming and betting or wagering is thus immediately apparent; in gaming the stake is laid by the players upon a game, the result of which may depend to some extent upon the skill of the players, but in a bet or wager, the winning or losing of stake depends solely upon the happening of an uncertain event.

This clarifies the point that in gambling, the stakes or wager is placed on an event without any clue of the outcome; whereas, in betting the stakes are placed on an event, the outcome of which is based on the performance of the players, influenced by their skill. 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. This distinction is important because, games of chance in India are generally prohibited, while games of skill, falling outside the ambit of gambling are usually exempted.

Dr Ambedkar during the Constituent Assembly Debates stated that if Entry 45 under List II were to be there, it would either be used for the purpose of permitting betting and gambling or for the purpose of prohibiting them. If the entry did not exist, the Provincial Governments would be absolutely helpless in these matters. Another consequence that Dr Ambedkar pointed out was that in the absence of the proposed Entry 45 of List II, “betting and gambling” would automatically find a place in List I under Entry 91. He was of the opinion that if there is a strong objection to adding Entry 45 under List II, then there must be an article in the Constitution itself explicitly declaring betting and gambling as an offence. He explained that the entry would act as a preventive measure and the States would have full power to prohibit gambling. Hence the entry on “betting and gambling” was included in the State List to empower the States to make laws either to prohibit betting or gambling or to regulate it, according to the socio-economic requirements of the State.

In this context, legislative powers are distributed between the Centre and the States under Article 246⁷ of the Constitution of India, on various subject-matters enumerated in three legislative lists of Schedule VII.⁸ As per Entry 40 of List I⁹, Parliament has the powers to enact laws on “lotteries organised by the Government of India as well as the Government of any State”. Article 249¹⁰ on the other hand, empowers Parliament to legislate with respect to a matter in the State List in the national interest. Therefore, if Parliament legislates on the subject of gambling and betting, it will withstand the test of law in terms of possible competency and infringement.

The State Governments have the power to make laws on gambling under Entry 34 of List II of Schedule VII¹¹ to the Constitution. Therefore, the States have exclusive power to make laws on this subject including the power to prohibit or regulate gambling, etc. in their respective territorial jurisdictions. Further, under Articles 38¹² and 39¹³ under the Directive Principles of State Policy, the State is expected to oversee that children and youth are protected against exploitation, both moral and material.

In this context, it is worthwhile to consider the aspect of illegal activities that definitely cause and that would cause damage to society, contraband can be an example of the former and gambling and betting for the latter. This is directly linked with the prohibition and regulation of any activity in question. Legalising gambling has been argued by a class of society on the ground that primacy to individual autonomy and minimum State interference is most important. On the other hand, those who are against gambling argue immorality is a justifiable ground for restricting individual liberty because restriction helps in maintaining societal order.

It will be curious to consider the notion of morality in gambling in parlance with that of sports betting. Sports are “games of skill” and parameters like physical skills, strategy, tactics, an essential purpose, etc. require due consideration. On the other hand, gambling necessarily entails the determination of a result based on eventualities beyond human control. Also, in sports, the determination of results is primarily based on skill and not chance. In parlance to this, in any event, if there is a need for a substantial amount of skill to place bets, the argument of immorality of such an event or activity cannot survive. It is indeed clear that “Immorality”, per se, cannot be a ground to challenge the constitutional validity of enactment as morality is a subjective concept. But, if any or 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 21¹⁴ of the Constitution. Also, if any custom or usage has been deemed “immoral” by a particular demography, it can be challenged by them as such. At this juncture, it is worth noting that morality and criminality are not necessarily coextensive. What can be said is morality is a ground for imposing reasonable restrictions on an individual’s freedom.

Considering the issue at hand — the “online gaming”, real money games,in particular, it is vital to understand that there are two kinds of wrongful conduct, malum in se i.e. conduct that is inherently wrongful and malum prohibitum i.e. conduct that is wrong because it is prohibited. It is always seen that those who advocate the regulation of betting and gambling believe that it is to be an inherently immoral activity because it disrupts ethical conduct leading to the commission of a crime, and often addictive. This may even lead to the exploitation of vulnerable classes, is the other argument, and it is against the principles of morality. Linked to this aspect — the doctrine of res extra commercium seeks to exclude certain activities from the ambit of freedom of trade and profession guaranteed under Articles 19(1)(g)¹⁵ and 301¹⁶ of the Constitution of India.

In State of Bombay v. R.M.D. Chamarbaugwala¹⁷, the Supreme Court observed that:

41. … We find it difficult to persuade ourselves that gambling was ever intended to form any part of this ancient countries’ trade, commerce, or intercourse to be declared as free under Article 301 … the real purpose of Articles 19(1)(g) and 301 could not possibly have been to guarantee or declare the freedom of gambling. Gambling activities from their very nature and essence are extra-commercium although the external forms, formalities and instruments of trade may be employed, and they are not protected either by Article 19(1)(g) or Article 301 of the Constitution.

In this case, the Supreme Court remarked that, even though these activities essentially employ external forms, formalities and instruments of trade, such activities cannot be considered commerce. Based on the reasoning that whether any such activity is involved with an element of skill or chance alone the protection under Article 19(1)(g) of the Constitution has been conferred, thus creating a distinction between the activities in question. Any such activities involving the substantial element of skill or chance thus afforded constitutional protection whereas, without this, such an activity is illegal.

Another place where we find the scope of “immorality” is under Section 23¹⁸ of the Contract Act, 1872. In this context, it is worth noting that in a case before the Delhi High Court¹⁹ it was 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. Also, the High Court in North Delhi Municipal Corpn. v. Prem Chand Gupta²⁰, considered the third part of Section 23 of the Contract Act and dealt with the question whether the clause of the contract between the parties that prohibited the payment of interest can be said to be immoral or against public policy.

It is clear that though gambling and betting both are morally questionable, it was the intention of the framers of the Constitution and considerate that it would be nearly impossible to completely prohibit such activities. Also, in recent times, the use of computers, technology and the internet has engulfed all the facets of life, and thus the complexity has increased to higher degrees. Under such circumstances, empowering the States to regulate such activities considering vast differences in the socio-economic conditions by putting gambling and betting under the State List and allowing the States to regulate such activities, stands right decision by the framers of the Constitution. In this context, though the draft Rules appear to be ambiguous, based on the discussion above, it is crystal clear that the States will be regulating the online gaming business, real money games in particular.

The online gaming industry being a nascent industry, concerns are being expressed that loss-making startups may get further pressurised. On the other hand, from the taxation angle, if the gamblers are driven underground, tax revenues are lost, and a parallel clandestine ecosystem for laying bets inevitably develops. In this context, such regulations are expectedly going to have far-reaching consequences on the online gaming business in the near future.