'Unreasonable' KYC, No Clarity On Skill Vs Chance Debate Bone Of Contention For Online Gaming

The Ministry of Electronics and Information Technology released its draft rules on online gaming earlier this month as part of amendments to the IT Intermediary Rules.

The draft rules propose a self-regulatory mechanism, with "strict" provisions against betting and wagering. The rules also mandate verification of players and physical Indian addresses for online gaming companies.

Rajeev Chandrasekhar, the minister of state for electronics and IT, has said the rules envision a bigger role for startups in the online gaming industry.

But gaming companies have taken issue with:

• One, the level of Know Your Customer regulations they have to adhere to, branding it at the same level as the RBI's mandates for financial institutions.

• Two, the rules fail to settle the game of skill versus game of chance debate.

• And finally, the concern is the rules might result in squabbles between ministries as a fine line will have to be drawn between e-sports and online gaming.

Speaking to reporters earlier this week, Chandrasekhar had said the new rules should be notified by Jan. 31.

Since the rules opened for public consultation, lawyers, gaming company representatives and policymakers have come forth with views on various aspects of the draft rules. In one such closed-door roundtable discussion organised by the think-tank, The Dialogue, several stakeholders put forth views on certain issues they foresee.

The draft rules state that an online gaming intermediary will only register Indian users that will identify and verify users via procedures that are required to be followed "by an entity regulated by the Reserve Bank of India", that too at the commencement of account registration.

Currently, accounts are registered based on email or mobile number verification.

Lawyers involved in the public consultation process said these KYC regulations are "excessive".

Ranjana Adhikari, partner at IndusLaw, said most online gaming companies in India were startups and "imposing RBI-compliant KYC standards (as applicable to regulated financial entities like banks) at the commencement of the user relationship itself may be disproportionate and impact user acquisition," Adhikari said.

She argued that companies operating on a 'freemium' model shouldn't have to deal with a full-fledged KYC at the start of the user journey. "Ideally, a proportionate and staggered KYC requirement should be imposed when money is deposited or withdrawn by a user."

Shivani Jha, director of the E-Sports Players Welfare Association, said a single KYC process should be put in place that can be used across platforms.

"We need to keep into account that users will have to go through multiple KYC processes with each platform. These regulations will open doors for many new formats and new game developers. Users would want access to it and multiple KYCs will only lead to a regulatory burden," Jha said.

Shahana Chatterji, partner at Shardul Amarchand Mangaldas, termed the KYC requirements "unreasonable and untenable."

"Gaming companies typically don't accept cash deposits and only accept funds from KYC-verified accounts, such as bank accounts, wallets.... This will absolutely become a barrier for startups that have to operate with limited resources as they focus on growth," Chatterji said.

The longstanding debate over games of skill versus chance will continue since the draft rules still don't bring in a uniform central regulation for online gaming and fail to clarify on the distinction.

Most states don't criminalise online poker or similar games. However, online games based on chance have been banned in some states like Karnataka, Andhra Pradesh and Telangana. The Madras High Court has also struck down a similar amendment after Tamil Nadu banned such games.

As per Dream11's website, laws in Assam, Andhra Pradesh, Odisha, Telangana, Nagaland and Sikkim are unclear on games of skill that may be played for a fee. "Hence, residents of these states are not permitted to join any cash contests on Dream11," it said.

The lack of clarity on when a game qualifies as skill-based vs chance has consequences under the goods and services tax as well.

The proposed amendment still doesn't settle the debate, but the rules do give power to the self-regulatory bodies to determine what games of skill are within the conformity of existing betting and gambling laws, according to Kazim Rizvi, founding director of policy think-tank The Dialogue.

According to Adhikari, the ideal approach should be that a game format compliant with the draft rules "should be exempt from any adverse action or ruling under the state laws, thereby offering a safe harbour".

Chatterji said these amendments "implicitly require self-regulatory bodies to make the determination of what is a game of skill and what is a game of chance. "So yes, in a manner of speaking this debate will persist for some time," she said, echoing Rizvi's thought.

She added that it is "impossible to prescribe one uniform test" to settle the debate, given the plethora of formats and the ever-evolving nature of online gaming.

"Such determination will always be subjective," Chatterji said, hoping that over a period of time, there would be a body of principles, which would be used by the self-regulatory bodies to register online games.

In November last year, the MeitY was appointed as the nodal ministry for online gaming, but the ambit of regulating e-sports fell on the Ministry of Ministry of Youth Affairs and Sports.

Chatterji doesn't believe that these amendments create a conflict in terms of jurisdiction of the central government vs the state government or, in fact, between ministries.

She said state governments would continue to regulate gambling and betting, but there would be a possibility of states objecting to certain formats of games that would receive registration from a self-regulatory body.

Similarly, she said, the division of power between the MeitY and the Ministry of Youth Affairs and Sports shouldn't result in a conflict as there is an existing and a set precedent.

"This is similar to what was done with OTT platforms, where the Ministry of Information and Broadcasting was made responsible for content, while the electronics ministry continued to regulate intermediaries," Chatterji said.

Rizvi added that without any specific guidance about how self-regulatory bodies would determine online games within the confines of the proposed legislation, they would have to refer to the Supreme Court judgments that have been delivered over the years.

"However, the state would still have the power to categorise the games, recognised by self-regulatory bodies, as betting and gambling," Rizvi said.

"So, the jurisdictional conflict would persist and, in that case, judicial remedy is the only option with online games until a central law is passed that establishes the definition of games of skill."