This article is written by Esha Bura Chowdhury, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.
Table of Contents
Introduction
Indians have had a special affinity for sports, forever, be it legal or otherwise. They love the game whether it is off the field or the market and whenever money is associated with sport, people tend to book their seats first. In this article, we will be discussing fantasy sports. The fascination of chance is so thrilling that even epics like Mahabharat revolved around it. Since time immemorial we have come across various instances which mention these luck games. Coming to the scenario today, KPMG estimates that total revenue of more than INR 2,470 Cr in the financial year ending March 2020 has been generated. It was also estimated that the fantasy sports industry paid goods and services tax (GST) to the tune of INR 760 Cr in 2020 which is 4 times to that of what the industry made in 2019. This shows that there has been a drastic appreciation in the numbers.
This article concerns itself with the sustenance of such VC-funded fantasy sport in India which has gained sufficient traction recently. It looks into the legalities and whether or not such sport is regulated. This article provides an overall view to clear misconceptions about fantasy games and discusses if the game can hold its position of growth.
How is fantasy sports the talk of the town?
We all are accustomed to the proverb “all work and no play makes Jack a dull boy”. With the advent of work from home (WFH) culture solely resulting from the ongoing pandemic, workloads have indeed increased. The commute timings are substituted with work or meetings. Recreation in the physical form without subjecting oneself to the risk of the virus is far from imaginable. Sports in the form of entertainment come to the rescue of such ‘Jacks’. And what’s better when you can earn in the process.
That is precisely what Dream 11 and other fantasy sports operators have brought to the countrymen. So, did this Sport not exist before the pandemic? Sure it did! but the heights that it reached with rampant promotions this year are unprecedented.
Before delving into the legalities, let us first understand what Fantasy sport is and how it operates.
What is fantasy sports?
Online Fantasy Sports Gaming (OFSG) is a form of skill-based online sports gaming wherein sports fans/enthusiasts create their own team consisting of real-life players. The players are to be selected from both the teams between which a match is to take place. Once a team is created based on the expertise of the fantasy gamer the prize/income depends upon the live performance of the actual players. A fantasy team is created based on a real-life match to score maximum points. By building a good enough team one may win real cash. (just like the authentic owners of a premier league earn from having a real team). It is played across a variety of sports including cricket, football, kabaddi, basketball, hockey, etc. The points garnered from the statistical performances of actual players running parallel with the ongoing real-life game determine the winner of the fantasy game. These, however, do not exist for games like tennis or badminton.
Who are the fantasy sports operators in the country?
Fantasy sport as e-sport has come as a bonanza to the sports lovers in the forms of Dream11, My Team11, Halaplay, 11 Wickets, Starpick, and Fantain, and many more. These operators have partnered with the likes of the Indian Premier League (IPL), Kabaddi Premier League(KPL). The partnership has allowed these startups to flourish thereby providing credibility.
How is venture capital taking the chance of fantasy sport?
Venture capital and private funds are taking a plunge in this emerging market of Fantasy Sports. They are the bigger players who chip in allowing these fantasy sport concepts to grow. The Online Fantasy Sports sector was heavily funded by venture capitalists and foreign private equity in 2019 and there is scope for more owing to the trending ambassadorship of the sports celebrities. India’s passion for sport, especially cricket and soccer coupled with the rise in the use of smartphones/cheap internet have attracted the attention of investors, both foreign and native, to the prospects of the many monetization opportunities.
What is the funding status for these fantasy apps?
Billions and millions of dollars have been funded and financed by Tiger Global Management, TPG Tech Adjacencies (TTAD), ChrysCapital, Footpath Ventures, and Sequoia.
The Fantasy sports segment is flourishing and the investors are clamouring for stakes given the rising trend. Promotions of Dream 11 through title sponsorship of IPL were in rage the previous year. Dream 11 even surpassed the bets of conglomerates like Tata group and Jio, paying almost US$32 million for one-year title sponsorship. It is indeed likely that venture capitalists are anticipating a boom.
Origin of fantasy sports
Fantasy sport or rotisserie sport (roto) refers to a game where any player can play the virtual game of the virtual season of a game. Baseball was the first to be associated with fantasy sport and had come in the form of a board game developed by Dick Seitz called the APBA (American Professional Baseball Association). It was a baseball simulation table game using cards to represent each major league player, boards to represent different on-base scenarios, and dice to generate random numbers upon which the players were scored on.
However, the fantasy sport that we relate to today was developed in the 1980 s by Dan Okrent and a group of his baseball friends. The main difference between APB and Rotisserie baseball was that the latter used fantasy variants of the present season unlike the use of previous seasons’ data like their predecessors. The participants were allowed to choose 23-27 players from major league rosters and their points were added together based on their total season performance which was used to declare the winner.
A similar variant of this principle is found in present-day sports like Mobile Premier League (MPL), Dream 11, etc. Thus Rotisserie Baseball laid the foundation for the present generation of internet fantasy sports. Today, Dream 11 is India’s no 1 fantasy sports platform.
Nature of fantasy sports
Now that we know what fantasy sport is, let us look into what kind of a sport it is for further determination of legalities. Nature can be determined based on 2 questions: i) If fantasy sport is gambling or betting and ii) and if it is a game of chance or game of skill. The two questions are interrelated and the answer to the latter may answer the first.
Can fantasy sports be regarded as gambling?
In Indian jurisprudence, games that depend solely on chance without the presence of any element of skill have been treated as gambling and banned by various states. There needs to be a presence of a certain element of skill so as to remove it from the ambit of gambling. So, the question arises whether fantasy sports which are an amalgamation of both skill and chance fall under the definition of gambling.
In the past 5 years, Indian fantasy gaming has seen a spree of litigations challenging the use of real money by such gaming organizations and whether they can be classified under the definition of gambling is yet under scrutiny. Schedule 7 List II gives the state government the power to govern matters concerning betting and gambling. Gambling is a state subject also accounts for the lack of any central legislation regarding such online gaming departments. The presence of the superannuated, pre-independence Public Gambling Act, 1867 which does not address the issue of online gambling has led to the creation of multiplicity of opinions regarding whether fantasy sports are to be addressed under the same Gambling Act.
Is fantasy sport predominantly a game of skill?
Time and again various cases have been forwarded to different High Courts with a common misconception that online fantasy games are solely based on chance since the outcome of such games depends upon a team winning in an official match played offline. The Indian judiciary aimed at removing such controversies and contentions established that Fantasy Sports is a game based on skill and not entirely on chance.
Supreme court in 1957 in the case of R.M.D. Chamarbaugwala vs. Union Of India held that there is a two-fold method in distinguishing between a sport from betting or gambling. It was held that a sport is not betting when:
- The success of players depends significantly on their skill,
- And even if there is an element of chance, success in the competition dominantly relies upon the skill of the player.
The term ‘mere skill’ was first interpreted in the case of The State of Bombay vs. R.M.D Chamarbaugwala. Any game which does not employ a substantial amount of exercise of skill on the part of a player would be classified as gambling.
How is a game of skill different from a game of chance?
An analogy can be drawn from the game of ludo and snakes and ladders. In the game of ludo a player can obtain any number from 1-6 by rolling a dice which predominantly operates on chance, however, it requires a significant amount of skill upon the part of the player to strategically place such units to win the game. Thus Ludo is a game operating predominantly on the exercise of skill on the part of the player.
However, in Snakes and Ladders, the player has to move their pointer based on the number they get from 1-6 by rolling a dice. Nothing governs the movement of such pointers except the outcome of the throw of dice and does not involve any form of skill. Therefore, it has been classified as a game of chance.
Is fantasy sport a game of chance?
In Sri Varun Gumber vs. Union Territory of Chandigarh & Ors, the High Court stated that online fantasy games cannot be treated as a game of chance since a person participating was required to:
- Use considerable skill, judgment, and discretion while drafting his fantasy sports team;
- Assess the relative worth of all the players available for the draft and evaluate the worth of a player against other players;
- Abide by the rules while evaluating a player’s statistics as well as the strengths and weaknesses of such players;
- Ensure that the draft did not contain a significant number of players from a single real-world team, and;
- Evaluate and take into consideration other crucial factors concerning the game, pitch, and condition of players.
How does the game of skill eliminate the contention of betting?
The Bombay High Court in the case of Gurdeep Singh Sachar vs. Union of India & Ors determined that in a fantasy game, the skill of the participant determines the outcome. The court observed that, unlike betting, the winning or losing of a participant in a fantasy game has no connection to a team winning or losing in real life. This judgment was arrived at based on the observations made by the Punjab and Haryana Court in the Varun Gumber case.
Similarly, the High Court of Rajasthan (Jaipur Bench) in the case of Ravindra Singh Chaudhary v Union of India held that the skill of the participant predominantly determines the outcome of the fantasy game. The winning or losing of any team in an offline game is immaterial as a participant has to choose players from both the side which requires significant skill upon the participant which is based upon the previous performances of the players and other associated conditions thus cannot be classified under the ambit of gambling.
What inference can be drawn?
Virtual games played over the internet may or may not always satisfy the criteria of exercise of skill and is a matter of debate, open to scrutiny and interpretation of the courts. However, fantasy sports possess an element of skill that predominantly determines the outcome for the player and cannot be classified as gambling under Indian laws. The selection of players in the games does not influence the real game outcome but the real-life game influences winning outcomes thereby making fantasy sport a game of skill. When a game of skill involving money is not gambling, can fantasy sports be regulated by the states as under their gaming legislations?
Legality of gambling
Gambling is allowed in some states of India however Google has strict guidelines against gambling. Paytm was pulled down from the play store because it allegedly allowed redirecting to external websites which hosted paid tournaments for participants to win real-time money or cash prizes. Google made it clear that it was against any kind of online sports betting and won’t allow online casinos and unregulated apps that facilitate gambling.
Google also issued notice to Zomato and Swiggy for fantasy sports promotion in the form of Zomato Premier League wherein the winner could receive discounts on Zomato orders and gain in terms of food cashback. Google, citing violation of policy in the in-app gamification feature, contended that these kinds of promotions violated its Play Store policy since it is wary of activities linked directly or indirectly with gambling. The gamification feature was enabled as a part of the food delivery companies’ IPL campaign.
Bombay HC in recent judgment has answered in affirmative concerning the legality of such sport and held that it is purely a game of skill. The Supreme Court has refused to entertain an appeal from the Bombay HC judgment. The Bombay HC judgment, therefore, settles the legality revolving around such sport.
Now that the legality of fantasy gaming is determined, users can put across their sporting knowledge to test and compete with other users promoting healthy discussions of games.
Factors that assisted in the tremendous growth of the fantasy sports
The factors can be enumerated in brief points as under:
- COVID-19 and lockdown allowing free time,
- The settled legality surrounding fantasy sport,
- The surplus money with average Indians,
- Venture capital backed funding,
- Celebrity promotions,
- Access to low-cost internet and smartphones.
What are the regulations in India concerning online sports?
India as such does not have any statutory regulation solely for Fantasy Sport. Nevertheless, gambling is governed by the Public Gambling Act of 1867 and individually by states. For all sorts of reasons, Fantasy Sport has earned the ire of the archaic law. It is a promising industry that has found itself at constant odds with Indian regulatory bodies.
Kerala High Court had sent notices to many celebrities including skipper Virat Kohli for endorsing and promoting online Rummy and Fantasy Games.
Most of these regulations have to do with the Indian Government’s concerns with inadvertently exposing its public, especially minors, to gambling via gaming apps. The charter for online fantasy gaming prohibits the use of ‘gambling’ and ‘betting’ terms while promoting Online Fantasy Sports Platforms (OFSP).
How is fantasy sports regulated?
Thirteen states have legalized lottery, while the States of Goa and Sikkim have legalized and regulated other forms of gambling. States like Nagaland (Nagaland Prohibition of Gambling and Promotion and Regulation of Online game of Skill Act, 2015) and Sikkim regulate online fantasy games too. One needs a license from the state government to play the game. However, all the states do not allow fantasy sports. The pay-to-play format is not available for states like Assam, Telangana, Orissa, and any other state that is designated by the FIFS Board.
But if fantasy sport lies beyond the scope of gambling can the states continue to regulate the sport as it does now? The answer to this can be found in the Charter for Online Fantasy Sports Platform. The charter is constructed according to the FIFS( Federation of Indian Sports) by-laws. Adherence to the charter is required for all contest formats by the FIFS approved operators (fantasy sports operators).
Taxation of fantasy sports
Fantasy games are taxed under Section 115 BB which has been introduced in the Income Tax Act, 1961 amended by the Finance Act, 2020. According to Section 115BB, the income generated by way of winnings from lottery or crossword puzzle or race including horse race or card game and other game of any sort or for gambling or betting of any form or nature whatsoever shall be taxed at the rate of 30%. Fantasy sport can be believed to be taxed under the head of “other games of any sort” using ejusdem generis.
For any income beyond Rs. 10,000, the fantasy sports operator can deduct TDS as under Section 194B of the IT Act. The tax is upon the amount won in such games and the amount paid for participation in such games is not taken into regard. Cash bonuses are excluded while calculating TDS. Form 26AS reflects the Tax Deducted at Source (TDS) by the operator companies.
Should new laws be made for fantasy sport in order to distinguish it from gambling?
The government requires a two-thirds majority in Parliament to shift a subject from the State to the Concurrent List. According to Entry No. 34 of List II of the 7th Schedule of the Indian Constitution, the individual states have the power and legitimate authority to make laws with respect to gambling and betting. But variegation in the laws regarding Fantasy Sport in terms of individual states may not be beneficial in having a harmonious system since the game is not location-based but can be played online. Furthermore, entry No. 62 authorizes the states to tax gambling and other betting activities. Gambling is usually taxed higher, on the entire amount that is used in betting while fantasy sport’s winnings are taxed which are relatively lower. Since fantasy sport lies between gambling and real sport which requires skills and given the confusion in determining a lot of different factors regarding the online sport, it is necessary to have separate laws made out to govern the same.
Will the government take steps to promote growth?
The NITI Aayog’s recently released draft document titled Guiding Principles for the Uniform National-Level Regulation of Online Fantasy Sports Platforms in India which noted that the industry has the capacity to attract ₹10,000 crores in FDI over the next few years, thus, acknowledging the emergent need to recognize and support the sector. However, the biggest challenge faced by the fantasy sports industry revolves around the lack of proper legal regulations that mark the status of online fantasy sports. Unlike the USA, where fantasy sports have been declared as legal under the Unlawful Internet Gambling Enforcement Act, 2006, the lack of any form of centralized legislation mentioning fantasy sports in India has been a major backlash.
What are the limitations to the growth of fantasy gaming?
Even after repeated judgments by various High Courts where such has been classified as a game predominantly based on skill, there has always been a common misconception that the game solely depends on chance as a result of which the courts have seen various criminal as well as civil cases being filed under the Public Gambling Act,1857. This misinformation on part of the people limits the further growth of the industry and its prospects. The Public Gambling Act, 1857 was enacted during colonial times and has little to no significance in today’s date while addressing the issues of online gambling. The light around fantasy sports can only be cleared by clever legislation enacted addressing the issues and clarifying the doubts surrounding the legality of fantasy sports. This would help in providing a safe harbour to the people who deliver services on a game that is predominantly based on the skill of an individual.
What is the step moving forward?
Potential legislation and regulation of the industry will have to address whether fantasy sport should fall under the State List or the Union List. Entry 33 of the State List contains the term ‘sports’. However, this includes sports activity between states and does not include rules regarding cross country sport or sports outside national borders. Under such circumstances, the state lacks the jurisdiction to operate outside its boundaries. Owing to this issue the courts held that international sports and the regulation of National Sporting Federations and the Indian Olympic Association would fall within Entry 97 of the Union List, which pertains to all residual matters. This becomes critical in the context of fantasy sports as the individuals who play are often residing in different jurisdictions and borders. Under such cases, legislative acts need to define the way of regulation and put across uniformity in such laws which would address the issues of the fantasy sports industry and make it a subject matter of the Union List.
How will the fantasy game benefit India?
The sport might generate sufficient market value and significance in the upcoming years as it is doing today. The startups (operator companies) might attract foreign direct investment when the laws are in favour. The gamers can be taxed sufficiently which would add to the GDP of the country. The gaming companies are making substantial investments towards developing the e-sports ecosystem in India given the increase in demand for competitive games. E-sports can be a viable career option for people associated with the segment. E-sport may run parallelly with the field sport with adequate awareness and governance. With the world going online, the young population with increasing disposable incomes and access to digital infrastructure are expected to be early adopters of digital/online gaming in the country. We see that the horizon for its expansion is bright and might provide earning opportunities even to the unemployed having a knack for the game.
Conclusion
It cannot be ascertained whether fantasy sport is gambling until there are definitive laws in place. Even though we have detailed hereinabove that it has the characteristics of game-of-skill, one cannot truly vouch for the lack of the ‘chance’ factor in it. However controversial, the industry looks not only fascinating but also perspective to the youngsters. Undoubtedly, some statistics prove the emerging and rapid escalation but it is the unambiguous determination of law which can provide an end to this long-drawn debate. As a matter of fact, the general public is divided into two segments concerning fantasy sport. One segment is moralistic which fears the evils of gambling and the other is futuristic, which is inviting the prospects of this industry towards the economy and wholesome investments giving returns. If the subject of ‘gambling’ could be centralized, could it then provide laws regulating the newly evolving game? Should there be a new statutory provision for fantasy sport altogether? If fantasy sport is not well within the scope of gambling, then the scope of such online fantasy games should be determined firsthand. The ambiguity is nothing less than RBI regulating/not regulating cryptocurrency. With the evolution of sport and economy backed by lightning globalization, it becomes the duty of the State to provide a mechanism contributing to such growth. It is about time that out of the ark gambling laws are given a new shine.
References
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