Newly Regulated Digital Platforms and Self-regulation: Exploring the Mechanism’s Feasibility

[By Vanshika Agarwal]

The author is a student of the West Bengal University of Juridical Sciences.

 

Abstract

The burgeoning growth of the gaming industry has necessitated its need for regulation. The Central Government by proposing amendments to the already contentious IT Rules, 2021, has sought to bring online gaming platforms within its ambit of regulation through a template for self-regulation. Self-regulation of industries are steps taken to supplement the rules and regulations provided by government that oversee their activities. Self-regulation of any industry can pose various challenges relating to accountability, fair competition, market integrity and privacy which may render such schemes unfeasible. The paper analyses the ambiguities and complexities in the proposed amendment for the self-regulation of gaming platforms. It examines the regulatory-proportionality theories to demonstrate the issues associated with the powers and discretion provided to self-regulatory bodies in classification of online games and online gaming intermediaries. Finally, the paper shows that by an application of these regulatory theories, the present mechanism for self-regulation is not feasible.

I.          Introduction

The Ministry of Electronics and Information Technology [‘MeitY’] introduced further amendments to the IT Rules, 2021 on 2nd January, 2023,[1] post its appointment as the nodal ministry for online gaming.[2] These draft amendments introduce provisions for the regulation of online gaming platforms by expanding the purview of Part II of the IT Rules, 2021.[3] These rules provide for the establishment of self-regulatory bodies (‘SRB’), which would be responsible for registering and approving games as well as providing a grievance redressal mechanism.[4]

The proposed laws mandate, among other things, that gaming companies adhere to SRBs,[5] only publish games recognised by such bodies, adhere to know-your-customer (KYC) standards,[6] establish a grievance resolution system,[7] and define online gaming platforms as intermediaries.[8] The ambiguities and wide discretionary powers afforded to SRBs under this regulation must be assessed to determine the feasibility of the proposed mechanism.

Part II of the paper explores the shortcomings in the proposed regulation for online gaming, specifically in relation to self-regulatory bodies. It discusses how the membership of the SRBs as envisioned in the regulation can lead to regulatory capture, allowing for competitive distortions by larger gaming firms. Part III examines the ambiguity surrounding the classification of online games by SRBs. By briefly explaining the theories of regulatory-proportionality to assess fintech regulations, the paper analyses how this ambiguity is not in conformity with regulatory principles and its potential effects on innovation and growth. Part IV concludes the discussion on this topic by holding the present self-regulation mechanism to be not feasible.

II.          The risk of regulatory capture

There are several concerns with the proposed mechanism relating to definitional ambiguity for ‘online game,’ the role of SRBs and the excessive powers conferred to the government for the governing of online gaming platforms.[9] In this section, the risk of regulatory capture is explored in light of the roles of the SRBs.

According to the guidelines, membership in multiple SRBs is possible for online gaming intermediaries.[10] SRBs must ensure due diligence,[11] in addition to making sure that the game does not prejudice national security and public order.[12] These wide reasons of public order can be interpreted differently by each SRB.  Liberal or biased interpretation can result from conflict in interest which would be detriment to the consumers. It affords online gaming intermediaries the opportunity to forum-shop for an SRB that interprets these provisions in a manner favourable to their interests, or to construct a separate SRB in a race to the bottom.[13] Evidently, this would be deleterious, by permitting discriminatory conduct and enlarging the scope for regulatory arbitrage.[14]

When a self-regulatory body is “closely” connected with the business that it oversees there exists a risk of regulatory capture.[15] Regulatory capture is the consequence or process whereby regulation, in statute or application, is steered continuously or repeatedly away from the public interest and towards the interest of the regulated industry, by the intent and activity of the industry itself.[16] Dominance by industry specialists and insiders can result in regulatory capture by well-organized groups with specialised but powerful interests.[17] SRBs with diverse stakeholders, as is likely in the gaming industry, have an even higher probability of regulatory capture. This is because the differential size and influence of gaming firms can concomitantly affect their influence in the SRB, precluding the SRB’s ability to be unbiased.[18] Due to the regulatory bodies being highly specialized and compartmentalized there can be absence of transparency in the rules followed.[19]

The online gaming platform is a nascent market whereby having online gaming intermediaries approach membership in SRBs can potentially harm the common standards of the industry. As the governing body of the SRBs are constituted by comprising of individuals that are specialists,[20] lack of transparency as to their decisions poses a high risk of regulatory capture. Further, as the online gaming intermediaries themselves can become part of these SRBs, there is an extreme “close” connection. Online gaming intermediaries that are dominant can submit to SRBs whose interpretations are beneficial to them,[21] leading to questionable abilities of such bodies to ensure equal treatment for all intermediaries.

SRBs have charged exponentially large registration fees offering large corporations an unfair competitive edge because startups and small businesses cannot pay such exorbitant costs.[22] Furthermore, the decision of the SRB in case of a grievance redressal is final and there is no appellate body to safeguard game publishers if SRB chooses not to register a game.[23] Without measures for transparency,[24] to show the reasons for the assessment of online gaming intermediaries for membership, not only conflict but regulatory capture can also exist.

III.          AMBIGUITY IN DEFINING ‘ONLINE GAME’

Under the proposed amendments, SRBs can register an online game following conformity to certain rules which includes ensuring that an online game complies with Indian laws, including state laws on betting and gambling.[25] This can be seen as a step towards getting SRBs to certify whether the online game is one of skill or chance and what constitutes as an ‘online game. [26] In this part, the ambiguity surrounding the definition of ‘online game’ is explained. This power of SRBs to arrive at a definition is analysed according to regulatory-proportionality theories to show how the present mechanism is not feasible.

A.     The complexities in defining an “online game”

Online games are categorized as ‘games of chance’ or ‘games of skill.’[27] In a ‘game of chance’ the outcome can be strongly influenced by a random device.[28] In a ‘game of skill’ the outcome is determined based on the cognitive abilities, physical skill, experience and attention by the player.[29] If the outcome is materially dependent on chance, even involvement of skill would deem the game to be one of chance.[30]

According to Indian laws, it is illegal to bet on games of chance but legal to bet on those of skill.[31] The unclear distinction between ‘game of chance’ and ‘game of skill’ leads to confusion in gambling laws and gaming laws.[32] The Supreme Court had held rummy to be a ‘game of skill’ as it required players to have levels of skill particularly in relation to memorisation.[33] Poker has been classified as a ‘game of skill’ by the majority of courts but the Gujarat High Court classified it as a game of ‘chance.’[34] However, Tamil Nadu prohibits games like rummy and poker under state gambling laws.[35] States like Andhra Pradesh, Telangana and Karnataka have banned online gambling, and there is no Act regulating online gaming in these states.[36] This has resulted in ambiguity regarding the legality of online games.

E-sports and other fantasy sports have gained popularity over time and are now considered a part of online gaming.[37] With a compound annual growth rate of 212%, from 2 million users in June of 2016 to 90 million users in December of 2019, fantasy sports in India have been one of the fastest-growing sectors, expanding from 2 million users in June of 2016 to 90 million members in December of 2019.[38]

Recently, the Rajasthan High Court while going into the jurisprudence on ‘game of skill’ and ‘game of chance’ held Myteam11 Fantasy Sports, an online gaming platform to be one of skill.[39] Similarly, Punjab and Haryana High Court held Dream 11 to be a ‘game of skill’ due to the exercise of judgement, knowledge and attention on users’ part.[40] The outcome of fantasy games, which are technology-based sports, is unclear and based on probability, although there is an element of talent involved. According to the Indian Contracts Act, involvement of a wager in an agreement would result in the nullity and voidness and of the same.[41] Thus, there is complexity surrounding their legality as well.

Hence, there exists conflicting opinions between Centre and States in the classification of online gaming platforms and their adherence to gambling rules. SRBs have to ensure that an ‘online game’ is in conformity with the existing laws on gambling or betting along with contract laws.[42] As betting and gambling are subjects under the state list, the decision by the SRBs regarding classification could not be binding and the purpose of the rules to have uniform legislation remains unresolved due to the unsettled debate. Judicial remedy would be the only recourse for online games in such situations which can lead to disincentivising small and medium gaming platforms whose investment opportunities decrease due to the ambiguity.[43] Moreover, the lack of clear definition of games of skill and chance also exacerbates the problem of regulatory capture. This is because, as discussed earlier, the SRB model makes it easier for larger firms to influence regulatory decisions. This becomes acute when the regulatory body has greater leeway and flexibility in deciding. For instance, if there are clear regulations on what a game of skill, and what a game of chance is, the scope of regulatory bias reduces. However, in the absence of any such delineation in the Rules, the SRBs can roughshod with their discretion in deciding to certify a game or not, exacerbating the effects of regulatory capture. This confusion can hamper the growth in the fast-evolving gaming platform sector.

B.     Classification by srb vis-à-vis regulatory proportionalIty theories

Fintech is a crucial component of online gaming, assisting players with purchasing and payment. Additionally, as it can assist developers in earning money through multiple channels, including the sale of virtual currency and advertising, the regulations governing fintech can be extended to monitor online gaming. According to the conventional model in assessing proportionality in fintech regulations, the necessity for the regulation is gauged in relation to the stringency,[44] regarding the three core objectives of regulation being – fair competition, market integrity and financial stability.[45] In this part it is argued how the discretion of SRBs to classify online games is not in proportion to the fundamental objectives of regulation relegating the present mechanism to be not feasible.

The stringency of a regulation should be in corelation to the threats to the integrity of market of the domain under regulation.[46] If there is a greater risk to the consumers then that would permit a proportionately closer scrutiny by the regulators. Regulation functions for public interest require an elimination of information asymmetries as they can lead to market inefficiencies causing consumer detriment based on the fundamental understanding of a regulatory theory.[47] There exists potential to spur financial innovation, efficiency and inclusion by new technologies while creating risks to market integrity requiring protection in interest of an innovative industry by regulators and supervisors.[48] Privacy issues are heightened with increased importance to data requiring vigilance to the emerging risks.[49]

The certification by SRBs as to what constitutes an ‘online game’ would require the SRB deciding whether the game is one of skill or chance. An independent entity without any legislative authority should not be permitted to make such a classification as it could lead to potential sharing of data with competitors, heightening the privacy issues.[50] As the SRBs also consist of industry players there remains possibility of inherent biases, conflict of interests between members and shareholders.[51] This could result in violation of Intellectual Property rights of the inventors as a an online intermediary presenting its game could be rejected by the SRB on various grounds and such innovation of the inventors would then have no protection. This could lead to situations of information asymmetries which could be detrimental to the various stakeholders involved.

OTT players, for instance, are overseen by a self-regulatory organisation.[52] Nevertheless, this organisation just gives registration for a price and requires compliance with specific terms and conditions. It does not certify what content may or may not be displayed on these sites.[53] However, according to the draft amendments, the self-regulatory body is the certifying agency. This certification of ‘game of chance’ or ‘game of skill’ should ideally arrive from the online intermediary itself and in case of dispute could then be overseen by regulatory bodies and courts.

Hence, a certification by the SRB as to what would constitute as an ‘online game’ would mean that they would get an excess right of certifying the content. The finality of such a certification would also be questionable given the contrasting views prevailing in different states on the constitution of a ‘game of chance.’ When perceived costs are large – when changes suggest a weakening of network effects – enterprises and new industries prefer not to pursue self-regulation.[54] SRBs under the proposed regulatory mechanism have overarching powers that could lead to over-regulation. Vagueness and discretion in this classification of ‘online game’ can negatively hamper innovation and hinder growth which would be in direct contradiction to the objectives of MeitY to enable the growth of online gaming industry.[55] Self-classification of whether the online game amounts to one of skill or chance would be more proportional and in consonance with principles of privacy and fair competition. Alternatively, the MeitY can provide such clarity on this definitional ambiguity so that SRBs cannot exploit such a provision. MeitY can further elaborate on rules to provide for more neutrality and to ensure that the interests of all stake-holders are protected.

IV.          CONCLUSION

It was anticipated that the rules for online gaming would lay a framework for clear and uniform laws across the country. However, the rules are far from achieving it. The gaming industry’s revenue climbed from $2 billion in FY21 to $2.6 billion in FY22, and is anticipated to expand at a compound annual growth rate of 27% to $8.6 billion in FY27.[56] This necessitates rules for the regulation of the digital gaming platform. However, the proposed model of self-regulation has numerous pitfalls that need to be addressed for better regulation and to ensure compliance with general principles of proportionality. The constitution of SRBs with industry experts and their role in the present framework run a risk of regulatory capture which is against the fundamental principles of regulation. The power given to SRBs to classify ‘online games’ with no clarity on the debate on ‘game of chance’ or ‘game of skill’ can open the entire classification by the SRBs to judicial review and render it ineffective. Further, such a power would be disproportional to principles of market integrity and fair competition. Hence, the proposed model while perhaps needed, has several falls that make the SRBs unfeasible.

 

[1] The Information Technology, Intermediary Guidelines and Digital Media Ethics Code (Draft Amendment) Rules, 2021 (‘Draft Amendments’).

[2] Shishir Sinha, Game changing, Government amends rules to place online gaming under MeitY, December 27, 2022, available at https://www.thehindubusinessline.com/economy/policy/government-amends-allocation-of-business-rules-to-place-online-gaming-under-meity/article66310041.ece (Last visited on March 1, 2023).

[3] Tejasi Panjiar et al., Centre’s Recent Move to Regulate Online Gaming Will Further the ‘Illegalities’ of IT Rules, January 4, 2023, available at https://thewire.in/rights/online-gaming-regulation-it-rules (Last visited on March 1, 2023).

[4] Draft Amendments, supra note 1, Rule 4B.

[5] Draft Amendments, supra note 1, Rule 4B.

[6] Draft Amendments, supra note 1, Rule 4A, sub-rule (b)(iii).

[7] Draft Amendments, supra note 1, Rule 4A, sub-rule (j).

[8] Draft Amendments, supra note 1, Rule 3.

[9] Mihir Nigam, Concerns over draft amendment to IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 related to online games, January 16, 2023, available at https://theleaflet.in/concerns-over-draft-amendment-to-it-intermediary-guidelines-and-digital-media-ethics-code-rules-2021-related-to-online-games/ (Last visited on March 1, 2023).

[10] Draft Amendments, supra note 1, Rule 4B, sub-rule (4).

[11] Draft Amendments, supra note 1, Rule 4B, sub-rule (4)(b).

[12] Draft Amendments, supra note 1, Rule 4B, sub-rule (5)(b).

[13] Varun Ramdas and Priyesh Mishra, Guidelines on online gaming a self-regulation template. But iron out 5 complexities, January 12, 2023, available at https://theprint.in/opinion/guidelines-on-online-gaming-a-self-regulation-template-but-iron-out-5-complexities/1310228/ (Last visited on March 2, 2023).

[14] Marjosola Heikki, The problem of regulatory arbitrage: A transaction cost economics perspective, 15(2) Regulation & Governance (2021).

[15] OECD, Industry Self Regulation: Role and Use in Supporting Consumer Interests, oecd digital economy papers, No. 247, (2015).

[16] Lodge, Martin, Regulatory Capture Recaptured, 74(4) Public Administration Review, 539-42 (2014).

[17] Elizabeth Magill, Courts and Regulatory Capture in Preventing Regulatory Capture: special Interest Influence and How to Limit it (Cambridge University Press, 2013).

[18] Richard B Stewart, Remedying Disregard in Global Regulatory Governance: Accountability, Participation, and Responsiveness, 108 American Journal of International Law 211, (2014).

[19] Mataija Mislav, Private Regulation and EU Economic Law in Private Regulation and the Internal Market: Sports, Legal Services, and Standard Setting in EU Economic Law (Oxford, 2016)

[20] Draft Amendments, supra note 1, Rule 4B, sub-rule (3)(d).

[21] See supra text accompanying note 13.

[22] Aarathi Ganesan, “How Will A Caged Parrot Hold Its Masters Accountable?”: Self-Regulation In India’s Gaming Industry, January 20, 2023, available at https://www.medianama.com/2023/01/223-self-regulating-indias-gaming-industry-nama/ (Last visited on March 2, 2023).

[23] Abhishek Gupta, “Unpacking the Pitfalls: A Critical Analysis of Draft IT Rules for Online Gaming,” available at https://lawschoolpolicyreview.com/2023/02/17/lspr-monthly-newsletter-volume-8/ (Last visited on May 17, 2023).

[24] Panagiotis Delimatsis, “Thou Shall Not … (Dis) Trust”: Codes of Conduct and Harmonization of Professional Standards in the EU, 47 Common Market Law Review 1049 (2010).

[25] Draft Amendments, supra note 1, Rule 4B, sub-rule (5).

[26] Varsha Meghani, Playing by the rules: Can the self-regulation model work for the online gaming industry?, January 9, 2023, available at https://www.forbesindia.com/article/take-one-big-story-of-the-day/playing-by-the-rules-can-the-selfregulation-model-work-for-the-online-gaming-industry/82397/1 (Last visited on March 2, 2023).

[27] Mehra Devika, Ludo: A game of chance or skill—Bombay High Court, August 06,2021, available at https://ssrana.in/articles/ludo-game-chance-skill-bombay-high-court/ (Last visited on March 2, 2023).

[28] Aneja J & Singh J. Pregabalin Use/Misuse: A Source of Consternation in Western Punjab, 45(2) Indian J Psychol Med (2023).

[29] Dr. K.R. Lakshmanan v. State of Tamil Nadu and Anr (1996) AIR 1153, 1996 SCC (2) 226.

[30] John Chung, The Legality of Online Daily Fantasy Sports Versus the Illegality of Online Poker, 27(1) Roger Williams University Law Review (2022).

[31] Mehab Qureshi, Online Gambling Apps in India: How Does It Work? Is It Legal, May 12, 2021, available at   https://www.thequint.com/tech-and-auto/online-gambling-apps-in-india-is-it-legal-to-play-details-here (Last visited on March 2, 2023).

[32] Id.

[33] State of A.P. v. K. Satyanarayana, AIR 1968 SC 825.

[34] Vidushpat Singhania, Games of ‘skill’ vs games of ‘chance’, January 19, 2023 available at https://www.thehindubusinessline.com/opinion/games-of-skill-vs-games-of-chance/article66410172.ece (Last visited on March 2, 2023).

[35] Tamil Nadu bans online ‘games of chance’ and gambling, October 9, 2022, available at https://www.thehindu.com/news/national/tamil-nadu/online-gambling-virtual-games-of-chance-banned-in-tamil-nadu/article65981510.ece (Last visited on March 2, 2023).

[36] Anupriya Chatterjee, Govt to formulate online gaming law after consensus with states, Vaishnaw tells Lok Sabha, February 8, 2023, available at https://theprint.in/india/governance/govt-to-formulate-online-gaming-law-after-consensus-with-states-vaishnaw-tells-lok-sabha/1362255/ (Last visited on March 2, 2023).

[37] Fantasy sports in India: A game of skill v. Chance, February 7, 2023, available at https://www.maheshwariandco.com/2023/02/07/fantasy-sports-in-india-a-game-of-skill-v-chance/ (Last visited on March 2, 2023).

[38] NITI AAYOG, Guiding Principles for the uniform national-level regulation of online fantasy sports platforms in India; Draft for Discussion, December 2020, available at https://www.niti.gov.in/sites/default/files/2020-12/FantasySports_DraftForComments.pdf (Last visited on March 2, 2023).

[39] Businessworld, Should Game Of Skill And Game Of Chance Be Taxed The Same? Rajasthan High Court Verdict Reignites Debate, March 02, 2023, available at https://www.businessworld.in/article/Should-Game-Of-Skill-and-Game-Of-Chance-Be-Taxed-the-Same-Rajasthan-High-Court-Verdict-Reignites-Debate/31-01-2023-463796/ (Last visited on March 2, 2023).

[40] Varun Gumber v. Union Territory of Chandigarh and Ors. CWP No. 7559.

[41] The Contracts Act, 1872, §30.

[42] Draft Amendments, supra note 1, Rule 4B, sub-rule (5)(c).

[43] Kriti Singh & Kazim Rizvi, Online Gaming in India: Decoding the ‘Game’ in Draft IT Rules, January 21, 2023, available at https://www.thequint.com/voices/opinion/online-gaming-in-india-decoding-the-game-in-draft-it-rules#read-more (Last visited on March 2, 2023).

[44] Fernando Restoy, Proportionality in Financial Regulation: Where Do We Go from Here? Bank of International Settlement 7 (2019).

[45] Marlene Amstad, Regulating Fintech: Objectives, Principles and Practice (ADBI Working Paper Series, No. 1016, 2019).

[46] Johannes Ehrentraud et al., ‘Regulating Fintech Financing: Digital Banks and Fintech Platforms: FSI Insights on Policy Implementation, Bank of International Settlement 32 (2020).

[47] Mathias Lehmann, The Goals and Strategies of Financial Regulation in Principles of Financial Regulation (1st edn, OUP 2016).

[48] Amstad, supra note 44.

[49] Id.

[50] Varsha Meghani, Playing by the rules: Can the self-regulation model work for the online gaming industry?, January 9, 2023, available at https://www.forbesindia.com/article/take-one-big-story-of-the-day/playing-by-the-rules-can-the-selfregulation-model-work-for-the-online-gaming-industry/82397/1 (Last visited on March 2, 2023).

[51] Online Gaming Companies write to MeitY against IAMAIS statement on draft rules, February 6, 2023, available at  https://g2g.news/online-gaming-laws/online-gaming-companies-write-to-meity-against-iamais-statement-on-draft-rules/ (Last visited on March 2, 2023).

[52] Chaitral Kishor Kotwal, Censorship of OTT Platforms in India: A Bliss or A Bane?, Multi-Disciplinary Journal (2022).

[53] Meghani, supra note 49.

[54] Cusumano et al., Can self-regulation save digital platforms?, 30(5) Industrial and Corporate Change 1259-1285 (2021).

[55] The Ministry of Electronics and Information Technology, Feedback on the draft amendments to the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 in relation to online gaming (Notified on January 2023).

[56] Lumikai, India’s gaming market hit $2.6 billion in FY22 and is projected to reach $8.6 billion in FY27, November 04, 2022, available at https://www.lumikai.com/post/india-s-gaming-market-hit-2-6-billion-in-fy22-and-is-projected-to-reach-8-6-billion-in-fy27 (Last visited on March 2, 2023).

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