In India, there are multiple online stock gaming platforms that allow users to play fantasy stock games and leagues. Most of them involve users creating fictional portfolios of stocks and competing with other users in a contest. Users pay an entry fee to enter these contests and the creators of the best-performing portfolios win cash prizes. The point system that ranks the performance of the fictional portfolios created by users is tied to the performance of the actual stocks on the stock exchange. There can be tournaments that have varying criteria for identifying the winners. Typically, these games or leagues do not involve trading in any actual shares or the right to sell or purchase any actual shares but the performance of the portfolio tracks the price movements of shares actually traded on the floor of the stock exchange.
Gambling, Betting and Wagering Contracts
Under the Indian Constitution, States have the power to legislate on betting and gambling. Certain States and Union Territories have modelled their gambling laws on the archaic Public Gambling Act, 1867 (1867 Act) and others have enacted laws on gambling that are independent of the 1867 Act. In most States and Union Territories, the determination of whether a game is legal or not depends on the level of skill required by such game. In the landmark judgment of the Supreme Court in R. M. D. Chamarbaugwalla vs Union of India , a distinction was made between competitions whose character is akin to gambling and competitions in which success depends “to a substantial extent on skill”. Further, in the case of K.R. Lakshmanan vs. State of Tamil Nadu and Ors , the Supreme Court of India went on to hold that horse-racing is a game where the winning depends substantially and preponderantly on skill and distinguished it from a game of chance that is similar to gambling. These seminal judgments became the bedrock for subsequent jurisprudence on what constitutes a game of skill and what constitutes a game of chance. In the last few years, decisions of the Bombay High Court and the Punjab and Haryana High Court have held that online fantasy sports gaming in relation to cricket, football, kabaddi and others, involve skill. It is, therefore, possible to argue that online stock fantasy gaming would also involve skill and knowledge and is not akin to ‘gambling’. This argument should also withstand a challenge from Section 30 of the Indian Contract Act which renders wagering agreements void for similar reasons.
While the parallel between online fantasy sports gaming and online fantasy stock gaming is easy to draw, given that the latter is connected to price movements of actual shares traded on the stock exchanges, it is useful to analyse the securities law framework that may be applicable to it. The Securities Contracts (Regulation) Act, 1956 (SCRA) defines ‘securities’ to include shares, scrips, bonds, debenture, debenture stock, or other marketable securities of like nature of any incorporated company, investment vehicle or other body corporate, and derivatives among other things. Further, derivatives include: (i) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (ii) a contract which derives its value from the prices, or index of prices, of underlying securities; (iii) commodity derivatives; and (iv) such other instruments as may be declared by the Central Government to be derivatives. It is possible to argue that, since the contracts between the users of an online stock fantasy gaming platform and its operator bind the operator to pay out prize money to users with the best-performing portfolios, determined based on the performance of actual corresponding shares listed on the stock exchanges, these are derivative contracts.
Under Section 16 of the SCRA, the Securities and Exchange Board of India (SEBI) has the power to prohibit ‘contracts for the sale or purchase of any security’ to prevent undesirable speculation in securities. SEBI had issued a notification on March 1, 2000 (2000 Notification) , which stated that no person, except with the permission of SEBI, shall enter into any ‘contract for the sale or purchase of securities’ other than, inter alia, such spot delivery contracts, contract for cash or hand delivery or special delivery, or contract in derivatives as permissible under the SCRA or the SEBI Act, 1992 and the rules and regulations made thereunder. On October 3, 2013, SEBI issued another notification (2013 Notification) that rescinded the 2000 Notification (with effect from the date of rescission). The 2013 Notification too stated that “no person … shall, save with the permission of the SEBI, enter into any ‘contract for sale or purchase of securities’ other than a contract falling under any one or more of the following…” and set out an expanded list of contracts that may be entered into without the permission of the SEBI, which included, contracts in derivatives that are specifically permitted under the SCRA or the SEBI Act, 1992 or rules under it. The embargo, therefore, under Section 16 of the SCRA as well as the 2000 Notification and the 2013 Notification has been on entering into ‘contracts for sale or purchase of securities’ (except in the case of permitted categories of contracts) and not on entering into ‘securities contracts’ or ‘derivative contracts’.
The SCRA also contains Section 18A, which, notwithstanding what other laws may say, provides a ‘safe harbour’ to contracts in derivatives that (i) can be traded on recognised stock exchanges; (ii) settled on the clearing house of a recognised stock exchange; or (iii) are between such parties and on such terms as the Central Government may specify (Permitted Derivative Contracts). There has been a misconception that Section 18A of the SCRA imposes a prohibition on all contracts in derivatives other than the Permitted Derivative Contracts. This is, of course, a misinterpretation of the section as has been clarified by the Bombay High Court in the case of Edelweiss Financial Services Ltd. v. Percept Finserve Pvt Ltd. and Anr : The relevant part of the judgement states that “… Section 18A of the SCRA does not purport to invalidate any contract. It is a non-obstante clause having overriding effect over any other law for the time being in force and what it does is making contracts referred to in clauses (a) to (c) thereof as legal and valid. … It does not, by its own force, make any particular contract illegal or invalid. For such illegality or invalidity one has to look outside Section 18-A.”
The effect of the above Sections of the SCRA and the 2013 Notification is that the legality of ‘online stock fantasy gaming’ under the SCRA should depend on whether it is construed as a ‘contract for sale or purchase of a derivative’. In stock fantasy gaming, although the contract that a user enters with the operator of the platform may be treated as a ‘derivative contract’, since that contract is not traded further, there is no ‘contract for sale or purchase of any security or derivative’. Hence, it is possible to argue that the legality of the contracts between the users of an online stock fantasy gaming platform and its operator is not affected by Sections 16 and 18A of the SCRA or the 2013 Notification.
Online Stock Fantasy Gaming in the United States
In the United States, the federal legislation regulating internet gambling contains an exception that permits fantasy sports contests. Yet another federal legislation prohibits the use of wire communications for conveying information related to betting or wagering unless the State laws at the places where such communication is sent and received have legalised sports betting. Several States in the United States have legislations that prescribe various tests that factor the elements of skill and chance to varying degrees in determining what is legal and what is not. Therefore, fantasy sports in the United States should ensure that they meet the test for legality by ensuring that there is an appropriate element of skill in the relevant State where the users and operator of the platform are located.
But the U.S. Securities and Exchange Commission (SEC) considers fantasy stock games, ‘security-based swaps’, and has taken exception to certain platforms that allow players to engage in fantasy stock-based contests.
SEBI and Online Stock Fantasy Gaming
In India, SEBI had issued a press release on August 30, 2016 warning investors about leagues and competitions related to the securities market and had clarified that these are neither approved nor endorsed by SEBI or any other SEBI recognized exchange. The press release also clarified that investors will not have recourse to investor protection, exchange dispute resolution or investor grievance redressal mechanisms. Consequently, even the Bombay Stock Exchange and the National Stock Exchange have issued advisories along the same lines as the SEBI press release. Further, the Code of Advertisement for Stock Brokers also contains a requirement that, “The Stock Broker shall not involve/engage in games/leagues/schemes//competitions etc. which may involve distribution of prize monies/medals/gifts, etc.”
In October 2016, the SEBI sought public comments through a consultation paper on certain amendments proposed to the SEBI (Investment Advisers) Regulations, 2013, which contemplated, among others, a restriction on any person from organizing schemes, games, leagues or competitions related to the securities market. However, a subsequent SEBI memorandum released in March 2020 specified that, based on the recommendations of a Working Group and public feedback received, the above proposal may not be taken up further.
In the case SAMCO Securities Ltd & Ors. V. SEBI & Ors., the Bombay High Court weighed in on the legality of and SEBI’s powers to restrict the petitioners from operating, a trading league called the Indian Trading League, pursuant to which, participants who traded in actual securities were ranked and the those who had built daily, weekly, monthly or quarterly portfolios that attracted the highest returns among the participants, were rewarded. The Bombay High Court had no trouble in deciding that the SEBI was well within its powers to prohibit stock-brokers from being associated, directly or indirectly, with any schemes, leagues or competitions which may involve distribution of money, gifts or prizes based on trading of actual, listed securities. However, the nature of the league that was the subject matter of this case is different from the nature of an online stock fantasy league in that the latter does not involve any actual trading in shares and is also not operated by stock-brokers or their affiliates to maximise their customer base.
Even as various States in India are contemplating new legislation on online gaming and online fantasy sports, the status of online stock fantasy gaming remains clouded in uncertainty. The SEBI does not appear to have any interest in imposing a complete ban on online stock fantasy gaming but does not want stock-brokers to get involved in it. For the time being, participants and investors in stock fantasy gaming may not have any access to SEBI’s investor protection or grievance redressal mechanisms.
As with new-age, internet-based business models, online fantasy stock gaming comes with its share of risks for investors and users. Ideally, these risks should be identified, and regulation should be enacted to protect investors and players from unscrupulous and fraudulent operators. Given that platforms offering online stock fantasy gaming options to users in India are mushrooming across the internet, one can only hope that the securities market regulator steps in soon to enable a safe and equitable eco-system for investors and participants in online stock fantasy gaming rather than distancing itself from it.