Deconstructing the Proposed Self-Regulation For Online Gaming Companies

INDIA (May 5, 20023) — The Ministry of Electronics and Information Technology (“MeitY“) vide press release dated January 02, 2023, released the draft amendments (“Draft Amendment“) to the Information Technology (Intermediary Guidelines & Digital Media Ethics Code) Rules, 2021 (“Intermediary Guidelines“) pertaining to online gaming for public consultations. The Draft Amendment aims to streamline the regulatory framework for online gaming platforms providing online games and to ensure that the online games are offered in conformity with Indian Laws and that the users of such games are safeguarded against potential harm. This development comes soon after the release of the gazette notification dated December 26, 2022, where the Central Government notified the change in the Allocation of Business rules, appointing MeitY as the nodal ministry for ‘matters related to online gaming’.

In line with the industry demands, the Draft Amendment classifies online gaming platforms as intermediaries. It defines online gaming intermediaries as ‘an intermediary that offers one or more than one online game.‘ For the Draft Amendment to be applicable to gaming platforms, it first requires to be qualified as an intermediary. There are ambiguities around the applicability of the Draft Amendment on entities such as e-commerce platforms which, as part of offering their services to users, provide certain ramifications on their website to make the offerings attractive to users (for e.g., ‘spin the wheel/ scratch cards’), which might be used for certain rewards, cashback, discounts etc. Further, most of the gaming platforms are publishers who publish their own games and do not host games on behalf of other persons. It is unclear whether such gaming platforms are intended to be regulated. Therefore, the definition as drafted currently appears to be vague and ambiguous and hence requires clarity.

As per the Draft Amendment, the ‘online game’ is defined as ‘a game that is offered on the Internet and is accessible by a user through a computer resource if he makes a deposit with the expectation of earning winnings.‘ Hence, the essential ingredients for a game to qualify as an online game are as follows: (a) the game is offered on the internet and is accessible by a user through a computer resource; and (b) the user makes a deposit with the expectation of earning winnings. The definition of the online game is technically broad enough to include other kinds of games such as e-sports or video games which are played by the user digitally either by purchasing or freely downloading a game with monetizing aspects like ads and in-game purchases. Although, there is a contrasting difference between ‘video games’ and ‘online games played for stakes’, the Draft Amendment has kept both on the same pedestal. Therefore, this ambiguity requires to be resolved by clearly defining the scope of online games and establishing that online gaming excludes e-sports or video games from its definition.

Further, the Draft Amendment mandates that online gaming intermediaries to register themselves with the self-regulatory body (“SRB“), which must be registered with the MeitY. Notably, considerable discretion is vested upon the SRB to adopt a framework with respect to verification at the time of account registration, redressing grievances of the consumers, testing & verification protocols, suitable criteria determining the content of an online game to be registered with SRB, appropriate measures for safeguarding children, measures safeguarding users against the risk of gaming addiction and financial loss and measures to protect against the risk of financial frauds etc., thereby leaving the scope of obligations open-ended. Hence, there appears to be no legislative guidance for the SRB to come up with such a framework which would result in the adoption of different standards of the framework by the SRB, resulting in various online gaming intermediaries being subjected to different rules & regulations. Therefore, appropriate checks and balances are required to be plugged into the legislative basis which the SRB would design the responsible play framework.

Among other obligations, the online gaming intermediaries are subjected to significant compliance requirements such as the appointment of India based nodal contact person for 24*7 coordination with law enforcement agencies, India based chief compliance officer for ensuring compliance with the Intermediary Guidelines, no bot and random number generation certification etc., Surprisingly, such compliances are applicable to all online gaming intermediaries including online gaming start-ups. Currently, the online gaming industry is a sunrise sector that requires to be promoted through well-drafted legislation. However, the placement of all online gaming companies including start-ups under one umbrella would disincentivise the companies and hamper the investments and growth in the sector. There is a need to approach the legislation in a manner where the consumer interests are balanced with the interests of the gaming companies including the start-ups. Hence, a distinction between the large online gaming companies and the online gaming start-ups is required to be made basis the factors including but not limited to the registered user base, size of the companies, turnover of the companies etc.

It is important to note that the foreign gaming companies which were offering services in respect of betting were operating in the grey area. The Draft Amendment seems to have granted legitimacy to such companies and hence it is a step in the right direction. However, some of these compliances such as the appointment of India-based officers might prove to be onerous and deter the global gaming companies from offering services in India.

Further, the online gaming intermediaries are responsible for undertaking KYC similar to the one prescribed under the RBI norms, at the time of user registration. The KYC norms prescribed by the RBI range from simplified to enhanced KYC for different regulated entities. This requirement of undertaking KYC at the time of user registration itself raises questions on the applicability of KYC procedures on free-to-play gaming formats, given that a lot of users are engaged with free-to-play and not pay-to-play gaming formats. Hence, clarity is required on the aspect of whether the KYC procedure is only intended to be undertaken for all online games other than free-to-play games. The procedure for taking KYC should also be detailed in the legislation to avoid any confusion.

The Draft Amendment provides sweeping powers to the Central Government to bring even the free-to-play games within the ambit of the definition of ‘online games’ for the purposes of the application of the Draft Amendment. This would create uncertainty for the stakeholders; hence, free-to-play games must be kept outside the purview of the Draft Amendment.

The Draft Amendment provides an insufficient timeline for enforcement of the Draft Amendment as it states that it will be applicable upon expiry of a period of three months from the commencement of the Draft Amendment. The gaming platforms would require sufficient time to make necessary changes to their policies, infrastructure, and processes, and arrange for certifications etc., Hence, it would be difficult for smaller gaming companies or gaming start-ups to implement the Draft Amendment within the stipulated timeline. Therefore, the timeline for enforcement of the Draft Amendment by gaming start-ups must also be reconsidered.

It is pertinent to note that the Draft Amendment is issued by the Central Government by exercising the general rule-making powers conferred under the Information Technology Act, 2000 (“IT Act“). There may be arguments that it traverses beyond the scope of the IT Act, and hence there could be potential constitutional validity challenges. It remains to be seen how it plays out in the court of law.

WAY FORWARD

Definitely, the Draft Amendment is a step in the right direction as it would bring much-needed clarity and certainty to all the stakeholders involved in the gaming sector. Though the Draft Amendment is touted as a progressive regulation that would catalyse innovation and investments in the gaming industry, however, it leaves many issues such as fraud, consumer protection etc., which have not been adequately addressed. Reportedly, the Central Government is in the process of framing the Digital India Act which is expected to replace the IT Act. The Digital India Act would govern the digital ecosystem in India and is further expected to bring much more clarity in the online gaming space.

By: Avisha Gupta and Somya Yadav

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SOURCES: Luthra and Luthra Law Offices – Lexology