The stock market/fantasy stock prediction gaming platforms use exchange data and allow users to earn rewards such as distribution of money, gifts, by predicting the stock market movements. Though, no stocks and actual money (apart from the entry fee) are involved the actual stock market data is used by these fantasy stock trading platforms.
“GAME OF SKILL” – A BLANKET OF DEFENCE
Significant Judicial Precedents laid the foundation for future legal interpretations regarding the distinction between “games of skill” and “games of chance.” The concept of a game of skill has since been employed as a comprehensive defense to escape tedious & restrictive regulations.
The Public Gambling Act, 1867 is the only central legislation in India governing gambling. § 12 of The Public Gambling Act, 1867 states that no provision of the relevant act shall apply to any game of mere skill wherever played.[1]
In the landmark judgment of the Supreme Court in the two Chamarbaugwala cases [2] , clearly lay down that:-
(i) the competitions where success depends on a substantial degree of skill are not “gambling.”
(ii) despite there being an element of chance if a game is preponderantly a game of skill it would nevertheless be a game of “mere skill.”
In K.R. Lakshmanan v. State of T.N.[3], the SC 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. It deciphered the expression “mere skill” as substantial degree or preponderance of skill.
In State of A.P. v. K. Satyanarayana[4] the game of Rummy was examined on the principles of skill versus chance and it was held that rummy is not a game entirely of chance. SC provided a reasoning that rummy requires certain amount of skill because the fall of the cards has to be memorized and building up of rummy requires considerable skill in holding and discarding cards.
In M.J. Sivani & Ors vs State Of Karnataka[5] it was stated that No game can be a game of skill alone. In any game in which even great skill is required, chance must play a certain part. Even a skilled player in a game of mere skill may be lucky or unlucky, so that even in a game of mere skill chance must play its part. But it is not necessary to decide in terms of mathematical precision the relative proportion of chance or skill when deciding whether a game is a game of mere skill. When in a game the element of chance strongly preponderates, it cannot be a game of mere skill.
In M. M. Mandram v. State of T.N.[6] it was laid down that whether a game is of chance or skills is a question of fact to be decided on the facts and circumstances of each case. In Hari Singh v. Emperor[7] it had been laid down that If it is a game of skill, it is not an offence under the Bengal Public Gambling Act, but if it is a game of mere chance, it is, and that if a game involves a certain amount of skill, as well as a certain amount of chance, if the chief element of the game is skill, it is not an offence.
The Indian courts, while deciding the question of “skill v. chance”, have adopted the test followed by the US Courts, known as the DOMINANT FACTOR TEST. – based on Bayer v. Johnson[8]
A fantasy stock game based on actual market data is primarily a game of skill due to several key factors. Participants must process extensive market information, make informed decisions, conduct thorough Research & Analysis, develop effective strategies, adapt to changing market conditions, demonstrate consistent performance, and undergo a learning curve. Success in such games hinges on the application of knowledge, expertise, and strategic thinking rather than relying on random chance or luck, highlighting the dominant role of skill in driving outcomes.
Bullspree’s Positioning: Learning Contests of Skill
Bullspree claims to be an informational platform which aims to bring awareness among people about financial markets through stock market events and learning modules, and mock stock Learning contests. It positions itself as “Learning contests of skill” under T&Cs.[9] By virtue of the same, they claim to be outside the purview of Public Gambling Act, 1867.
It claims to “boosts financial literacy through gamification whereby, involving considerable skill, judgement and discretion. “The Element of Skill” has a predominant influence on the outcome of the event selected by the User. Success arises out of Users’ exercise of superior knowledge, judgement and attention.”
Stockgro’s Defence: Value of Platform Rewards ≠ Value of Actual stocks
The legality of online stock fantasy gaming under the SCRA hinges on whether it falls under the definition of a ‘contract for sale or purchase of a derivative.’ While such gaming platforms involve derivative-like contracts between users and operators, these contracts are not traded further, distinguishing them from typical securities transactions. Thus, the legality of these contracts may not be affected by § 16 & § 18A of the SCRA.[10]
Similar to Bullspree, it poses as an experiential learning platform. It furthermore justifies as per its T&Cs that the value of the rewards awarded to best performing participants does not correlate to the value of the actual stocks in the stock market, and neither the virtual stocks nor virtual portfolios amount to ‘securities’ or ‘derivatives’ under Indian law.
- 18A of the SCRA[11] provides a ‘safe harbour’ for derivative contracts traded on recognized stock exchanges, settled on clearinghouses of recognized stock exchanges, or specified by the Central Government. This § does not invalidate any contract but rather establishes the legality of certain types of derivative contracts as ruled in Edelweiss Financial Services Ltd. v. Percept Finserve Pvt Ltd.[12]
Frontpage’s Securities Disclaimer
It sheds of liability through user disclaimer stating “Frontpage is not a tax advisor, broker, financial advisor or investment advisor. The service is not intended to provide tax, legal, financial or investment advice, and nothing on the service should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.”[13]
It is to be duly noted, that such applications provide direct incentives, prize money, gifts, reward pools on the fantasy transactions made, though based on actual stock market fluctuations & activity.
As per the NSE Circular (2023)[14], several market participants use the exchange data for gaming and virtual trading purposes which goes against the principles of fair and transparent trading. It further opines that NSE data is only for legitimate trading purposes by their clients & not for the purpose of gaming & virtual trading. Additionally, BSE’s Advisory[15] clarified that the dispute resolution mechanism under the exchange laws will not be available to the concerned investors who have invested in such schemes. The SEBI Press Release (2016)[16] warned the investors about such schemes and fund-raising on unauthorized electronic platforms. SEBI has clarified that such schemes are neither approved nor endorsed by SEBI or SEBI-recognized exchange. Disputes relating to such schemes or enforcement of any agreement / MoU, benefits of investor protection under the jurisdiction of SEBI or the exchanges, the exchange dispute resolution mechanism and investor grievance redressal mechanism administered by exchanges would not be available to the investors.
SEBI (Investment Advisers) Regulations, 2013[17] slated certain amendments which would’ve led to restriction on any person from organizing schemes, games, leagues or any competitions related to the securities market but this was not enforced further.
In USA, SEC’s Office of Investor Education and Advocacy issued Investor Alerts to warn investors about fantasy stock trading stating
“Transactions on these websites can implicate both the federal securities and commodities laws. Even when the site presents the transaction as a “fantasy” trading game or competition, and even when it involves only small amounts of money (sometimes called an “entry fee”), you should understand these sites may be violating laws designed to protect investors. “[18]
In SAMCO Securities Ltd. v. SEBI[19] weighed in on the legality of 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 those who had built portfolios that attracted the highest returns among the participants, were rewarded.
The particular case necessarily does not align with the present subject matter as the nature of the league was based on trading on actual securities which is of different nature than an online stock fantasy league which does not involve any actual trading in shares and is also not operated by stock-brokers or their affiliates to maximise their customer base.
The applications may be prone to § 12A of SEBI Act, 1992 which states that “any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange.”[20] Such Consideration in any form such as a signing fee or entry fee, or anything of value such as gifts, prizes, may invoke the securities laws to the exact same extent as payment in currency would. This power shall vest exclusively on SEBI & its consideration.
Usage of NSE Data for Gaming & Virtual Trading
In NSE Circular[21] dated 20th April, 2023 denounced the market participants which were using its Exchange data for gaming and virtual trading purposes & deemed it against the principles of fair and transparent trading. Though, it promotes the dissemination of such data for education purposes, free of cost. Additionally, SEBI Regulatory Sandbox Application by Shiv Ram Jindal Industries Ltd. titled “Development of Stock Market Fantasy Game” which was rejected.[22] Though, the grounds of such rejection are not publicly disclosed.
NOMINAL FEES by GAMING HOUSES
- The Supreme Court in State of Andhra Pradesh Vs. K. Satyanarayana and Ors., (AIR 1968 SC 825) addressed this point, in context of physical clubs and held:
- An extra charge for playing cards (unless it is extravagant) would not show that the club was making a profit or gain so as to render the club into a common gambling house.
- The court also noted that, any nominal fee charged per person for playing in the card room, as sitting fees, is not such a heavy charge in a members’ club as to be described as an attempt to make a profit or gain for the club. The court also noted that, if there is evidence of gambling in some other way or that the owner of the house or the club is making a profit or gain from the game of Rummy or any other game played for stakes, the offence may be brought home.
ADDITIONAL CASES
The High Court of Punjab and Haryana in 2017 had held that a fantasy sports game was predominantly a game based on skills.[23] In this particular case, the plaintiff moved to the court against fantasy sports game company “Dream11” (defendants) alleging that the game was not based on skill and that Dream 11 was conducting business that was covered within the definition of gambling in the State of Punjab. The High Court relied upon the Lakshmanan Case and opined that “petitioner himself created a virtual team of a cricket match between two countries by choosing players, who were to play for two countries collectively and after forming a virtual team as per his own selection, knowledge and judgment, which is thoughtful will, he joined various leagues and after registration which was declared before participating, was not about possibility of winning or losing like horse riding not every bettor is winner.”
In Chandresh Sankhla v. The State of Rajasthan[24], a PIL was fled before the Rajasthan High Court alleging that Dream 11 constitute betting and gambling, and is illegal. The respondent company (Dream11) pleaded that Section 12 of the Rajasthan Public Gaming Ordinance, 1949 grants immunity of game involving “mere skill” and Dream 11 has been held to be a game involving skills (majorly). The court after considering the view adopted by the Punjab & Haryana High Court and the Bombay High Court dismissed the PIL while ruling that skill games are legal as exempted by Section 12 and out of the purview of Gambling laws.
Significantly, the Bombay High Court in Gurdeep Singh Sachar v. Union of India[25] dismissed a Criminal Public Interest Litigation by placing its reliance on previous judicial pronouncements of the Supreme Court and other High Courts. The court upheld the legality of online fantasy sports gaming in India and asserted that such games preponderantly involve skills. The court further opined that unlike betting, the outcome of any team winning or losing in fantasy sports was not dependent on any team losing or winning in the actual world.
References
[1] The Public Gambling Act, 1867, §12.
[2] State of Bombay v. R.M.D.C, AIR 1957 SC 699 & R.M.D. C. v. Union of India, AIR 1957 SC 628.
[3] K.R. Lakshmanan vs. State of Tamil Nadu and Ors., (1968) 2 SCR 387.
[4] State Of Andhra Pradesh vs K. Satyanarayana ,1968 AIR 825.
[5] M.J. Sivani & Ors vs State Of Karnataka, 1995 (2) SCC(SUPP) 680.
[6] Manoranjithan Manamyil Mandram v. State of Tamil Nadu, AIR 2005 Mad 261.
[7] Hari Singh v. Emperor, (1907) 6 Cr LJ 421 (Cal).
[8] Bayer v. Johnson, 349 N.W.2d 447, 449 (S.D. 1984).
[9] Bullspree (M/s Krazzy Fin Private Limited), Terms & Conditions. https://www.bullspree.com/terms-and-conditions.
[10] Securities Contracts (Regulation) Act, 1956, § 16, § 18A.
[11] Securities Contracts (Regulation) Act, 1956, § 18A.
[12] Percept Finserve Pvt. Ltd. v. Edelweiss Financial Services Ltd., 2023 SCC OnLine Bom 319.
[13] Frontpage, Terms of Use [Last Revised: 25th September, 2023]. https://front.page/s/terms.
[14] Usage of NSE Data only for Trading Purpose, Cir. Ref. no. 35/2023. https://archives.nseindia.com/content/circulars/COMP56426.pdf.
[15] BSE Advisory, Leagues/Schemes/Competitions Offered by Third Party or Group Company/Associate of Stock Broker.
https://www.bseindia.com/attention_investors.htm
[16] SEBI Press Release, PR No.: 137/2016, August 30, 2016.
https://www.sebi.gov.in/media/press-releases/aug-2016/sebi-cautions-investors_33094.html.
[17] Consultation paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013, October 07,2016.
https://www.sebi.gov.in/reports-and-statistics/reports/oct-2016/consultation-paper-on-amendments-clarifications-to-the-sebi-investment-advisers-regulations-2013_33435.html
[18] U.S. Securities Exchange & Commission, Investor Alert: Beware of Fantasy Stock Trading Websites Offering Real Returns, June 17, 2015.
https://www.sec.gov/oiea/investor-alerts-bulletins/ia-fantasy-trading.
[19] SAMCO Securities Ltd & Ors. v. SEBI & Ors., 2018 SCC OnLine Bom 2784.
https://www.sebi.gov.in/enforcement/orders/aug-2018/order-dated-29-08-2018-of-the-hon-ble-bombay-high-court-in-the-matter-of-samco-securities-ltd-and-ors-v-sebi-and-ors-_40299.html
[20] Securities and Exchange Board of India Act, 1992, § 12A.
[21]National Stock Exchange of India, Circular, 20th April, 2023. [35/2023].
https://archives.nseindia.com/content/circulars/COMP56426.pdf
[22] Status of application received under Regulatory Sandbox, (February 07, 2024). https://www.sebi.gov.in/sebiweb/other/RegulatorySandbox.jsp
[23] Varun Gumber v. Union Territory of Chandigarh, 2017 Cri LJ 3827.
[24] Chandresh Sankhla v. The State of Rajasthan, Civil Writ Petition No. 6653/2019 (High Court of Rajasthan, 14/02/2020).
[25] Gurdeep Singh Sachar v. Union of India, (2019) 75 GST 258 (Bombay).
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