Skip to main content

Legal Capsule by Veyrah Law


FANTASY SPORTS: AGE OF DIGITAL PLAYGROUNDS

Introduction

Earlier, only a handful of cricket and football fans understood and participated in fantasy sports in India. In the past decade, the subscriber base, number of fantasy gaming companies and the investor base have all increased multifold. Now, credit to Dream11 bagging the title sponsorship of renowned Indian Premier League and their funny television commercials, fantasy sports are well known and are played in almost each Indian household. More so, fantasy gaming is not limited to cricket and football anymore; there are fantasy leagues for almost all sports, be it a franchisee league or an international league/tournament. The statistics clearly indicate that fantasy leagues are here to stay. 

Fantasy Sport 

What is a fantasy sport? To put it simply, fantasy sport is a game which occurs over a predetermined number of rounds, in which participating users select, build and act as managers of their virtual teams prepared from a real team. The virtual team prepared by a user competes with the virtual team prepared by other users. The results are tabulated based on the statistics, score, achievements, and results of the real players. The winner of a fantasy game is a user who accumulates the maximum number of points amongst the entire set of competitors. A fantasy game may extend from a single sporting event to an entire league or series.

From a legal standpoint, fantasy sports linked with monetary benefits was always a grey area in India. It has always been mistakenly equated with betting and gambling. Unfortunately, the archaic Indian laws governing gambling have not helped; laws governing the modern business models are the need of the hour. Having said that, the judicial principles have set out certain clear patterns for fantasy sports. The legality of fantasy sports is determined based on it either being a game of chance or a game of skill. 

Dream11 Litigation

Dream11, India’s first fantasy sports unicorn led the way after being muddled in various litigations. Indian judicial authorities pronounced the difference between game of chance and game of skill and adjudged fantasy sports (in the case of Dream11) to be a game of skill. The judicial authorities evaluated the gaming model of Dream11. Upon evaluation, the judicial authorities determined that a user/player on fantasy gaming is required to exercise a considerable level of skill, knowledge and discretion while drafting a team. Further, a user is required to study the rules and regulations to draft a team. Therefore, the success of a player is an outcome of his/her superior knowledge and skill over the others. 

The legal fight led by Dream11 bore fruits and paved the way for various other fantasy sports companies. Based on certain publicly available statistics, in the last decade – the subscriber base has increased from 20 million to 250 million, the number of gaming (and allied) companies has increased 10 times. The industry revenue has increased multifold as well and is expected to skyrocket in the next 5 years. Of course, these statistics sound like music to investors’ ears. Therefore, the investments into these gaming companies have increased multifold as well, with marquee investors entering these companies with big-ticket size investments.

Investment potential

While investments have increased and time for further investments may be ripe, potential investors may need to assess and evaluate certain elements of the business before infusing funds into these companies. The investors need to ensure and take adequate representations from the company that the business model is clearly a game of skill. They should ensure that the model falls squarely within the criteria laid down by the judicial precedents and does not promote any aspects of gambling or betting. Another reason to ensure this is the foreign exchange laws. Under India’s foreign exchange laws, while fantasy gaming companies are considered as service companies and do not draw major foreign exchange conditionalities, the foreign exchange laws categorically prohibit any foreign investment into gambling and betting sectors. Hence, if the company is at fault, it will not only be looking at penal provisions under the legislations prohibiting gambling in India; but also at penal provisions under Indian foreign exchange laws. 

While central laws in India allow fantasy sports companies to operate as a game of skill, certain states (such as Telangana, Assam, Odisha) have enacted laws prohibiting any risking of money on an uncertain event, including games of skill. Further, certain states (such as Nagaland) have enacted a license regime for virtual team selection games and virtual fantasy league games. The division of central and local laws is something investors need to be mindful of. They should conduct a thorough due diligence to understand the risks associated with the business and their investment. While as such there are no legal regimes to be followed by fantasy gaming companies, a game changer in this sector is the establishment of self-regulating body FIFS, Federation of Indian Fantasy Sports. FIFS was established to protect consumer interest and create standardized best practices in the Fantasy Sports industry. The establishment of a self-regulating body reduces the governance hassles and ensures promotion of the sector. 

Way Ahead

While the absence of sector specific laws may be a concern, the current set of laws do not create any embargo on the continuity of business of these companies. To that extent, one could safely state that fantasy gaming business do not have an existential crisis that should be a red flag for investors. If the growth of fantasy gaming companies is anything to go by, this sector may be apt for investors looking to invest into gaming and technology companies.

Arun Mohanty | Principal Associate, Veyrah Law; Ajay Joseph | Partner, Veyrah Law

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry. Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back? Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms

Nasscom announces Short-listed Cos for EMERGE Product Showcase 2010

Software industry association Nasscom has released a shortlist of companies which will be showcased as part of the "EMERGE Product Showcase for 2010" at its Product Conclave 2010 event: Aikon Labs Pvt. Ltd. – A comprehensive idea and initiative management platform that utilizes Web 2.0 and social networking technologies integrated with process management, content management and analytics. The platform helps Enterprises & Academic/Research institutions in tapping ideas from stakeholders in their ecosystem and take them through a stage-gated process to execution. Elina Networks Pvt. Ltd. – Elina creates software based networking and IT management solutions that deliver business continuity and visibility, through robust network security, reliable connectivity, and effective remote IT management. Essentia Soft Solutions – Communities on the Cloud (community as a cloud service) Interviewstreet – Interviewstreet helps you to create your own customized programming tests

PE-VC Investments in 2021 hit all time high of $63 Billion

Press Release: Private Equity - Venture Capital (PE-VC) firms invested a record $63 Billion (across 1,202 deals) in Indian companies during 2021, registering  a 57% rise over the   $39.9 Billion (across 913 deals) invested in the previous year ,  reports  Venture Intelligence , a research service focused on private company financials, transactions, and their valuations. (Note: These figures include Venture Capital type investments, but exclude PE investments in Real Estate). India minted a total of 44 " Unicorn"  companies (VC-funded startups valued at $1 Billion or more)  in 2021, 15 of them during Q4'21. The $23.4 Billion invested into the Information Technology sector dominated list of  Unicorns  accounted for more than 37% of the overall value of PE-VC investments in 2021. The October-December 2021 quarter (Q4'21) saw over $5 Billion (across 25 deals) being invested in such companies.  2021 witnessed eight investments worth $1 Billion or more, led by Flipkart'

LSE Podcast with Apax Founder Ron Cohen

Click Here to download an interesting lecture and interaction (at the London School of Economics) with Ron Cohen , founder of global PE firm Apax Partners. Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

"Leveraged stock purchase led Arvind Rao to go astray": Forbes India

Forbes India has an article on the series of events leading to the recent controversial exit of Arvind Rao, Co-founder & CEO of listed Mobile VAS firm OnMobile. On November 23, 2010, Arvind Rao, the 53-year-old co-founder and CEO of OnMobile, bought approximately 6 lakh shares of his company from the open market, representing a little over 1 percent of the company’s total shares....At Rs 277 a share, he had to pony up nearly Rs 16.5 crore to acquire them....So he went ahead and borrowed money to buy the shares, thinking nothing of the interest it entailed or the fact that he’d need to put up nearly half his existing shareholding as collateral...OnMobile’s shares continued to fall from those levels, while Rao’s interest payments ballooned. ...Motivated by OnMobile’s growth all these years, he had never paid much attention to his salary, most of which went towards the monthly rental on his sea-facing apartment in Mumbai and his BMW 7-Series, both paid directly by the company. He r