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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.

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