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Why is it necessary to avoid disproportionate restraint on online gaming

State policy should focus on introducing meaningful regulation, which strikes a balance between promoting the online gaming industry and reasonably regulating online gaming, in the interests of the general public.

To satisfy the proportionality principle, less intrusive and more meaningful regulation of the online gaming industry is necessary.
To satisfy the proportionality principle, less intrusive and more meaningful regulation of the online gaming industry is necessary.
By Shahana Chatterji, Puneeth Nagaraj and Shaileja Verma

Lord Diplock’s aphorism – “you must not use a steam hammer to crack a nut if a nutcracker would do” captures the essence of the proportionality principle, which requires all State action to be commensurate with the objectives it intends to achieve. 

However, with the rapid rise in the popularity of online gaming, several states across India have begun enacting regulations that disproportionately regulate online games, including games of skill, by bringing them within the fold of ‘gambling’. This transgresses established jurisprudence which recognizes that games of skill are distinct from gambling activities, as well as impacts the fundamental right to freedom of trade of those engaged in the business of online gaming. Accordingly, State policy should instead focus on introducing meaningful regulation, which strikes a balance between promoting the online gaming industry and reasonably regulating online gaming, in the interests of the general public.

Recent Trends in Regulating Online Gaming

Under the Constitution of India, ‘betting and gambling’ fall under the purview of State regulation. Several States, such as Karnataka, have relied on this law-making power to place restrictions on online gaming. The Karnataka Police (Amendment) Act, 2021 (Karnataka Gaming Amendment), which amended the Karnataka Police Act, 1963, has widened the definition of ‘gaming’ to include online games involving all forms of wagering or betting. It imposes heightened criminal penalties on any person who owns or uses any electronic device or mobile application for gaming purposes, including the act of risking money or other stakes on the unknown result of any game, even a game of skill. 

The Karnataka Gaming Amendment is analogous to the erstwhile Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 (TN Gaming Amendment) which had prohibited wagering or betting on all games, including online games of skill. The TN Gaming Amendment was successfully challenged before the High Court of Madras for being unreasonable and disproportionate, and running afoul of Article 19(1)(g) of the Constitution. The Karnataka Gaming Amendment, whose constitutionality has now been challenged before the High Court of Karnataka, will likely meet the same fate as that of the TN Gaming Amendment since it places an undue embargo on the operation of online games of skill, if stakes are involved. This disproportionately affects the fundamental right to carry on business activities in relation to games of skill. Thus, one of the focal points to a challenge to the Karnataka Gaming Amendment may rest on the argument that it violates the proportionality principle. 

Testing the Limits of Proportionality

The proportionality principle, in the context of Article 19(1)(g) of the Constitution, has been consistently applied by courts of law to test the reasonableness of State action. According to this principle, a limitation of a fundamental or constitutional right is permissible if the State, among other things, demonstrates that the measures it intends to undertake are necessary for the objectives it seeks to achieve, and that there are no alternative and lesser intrusive measures available to achieve the same (the ‘least intrusive measure’ test). Recently, the proportionality principle was applied by the Supreme Court in holding that a circular issued by the Reserve Bank of India prohibiting regulated entities from dealing in or facilitating cryptocurrency transactions infringed upon Article 19(1)(g), as less intrusive or alternative measures were not considered prior to issuance of this circular. Similarly, the High Court of Madras, in its decision on the TN Gaming Amendment, applied the proportionality principle to hold that it violated Article 19(1)(g).

The proportionality principle envisages the balancing of conflicting interests – which in the case of gambling, lies between a State’s objective of regulating (online) gambling to protect societal interests against addiction, and a person’s right to carry on a legitimate business in the field of online gaming. On applying the proportionality principle to the Karnataka Gaming Amendment, it appears that the restrictions it places are not the least intrusive measures available to regulate the online gaming industry.

Paving the Way for Meaningful Regulation

To satisfy the proportionality principle, less intrusive and more meaningful regulation of the online gaming industry is necessary. This can be achieved, for example, by introducing licensing systems to regulate the conduct of online gaming, such as those implemented in the States of Nagaland, Sikkim and Meghalaya. Licensing is also a global standard, implemented in countries such as the United Kingdom and Singapore, where even the conduct of online gambling is permitted after obtaining a license or an exemption from the Government.

Licensing, as a form of regulation, will benefit the State exchequer as it will ensure a steady flow of revenue through licensing fees. States will also be able to monitor illegal operations of unlicensed entities, and introduce safeguards to deter excessive online gaming, such as by imposing time limits. Overall, a licensing system will improve the ease of doing business, enable greater accountability, and promote above-board online gaming activities.

Accordingly, States must look towards implementing such viable models of regulation to support the growth of a sunrise sector. States have much to gain if they follow the wisdom of Lord Diplock – that one must not use a steam hammer to crack a nut, if a nutcracker serves the purposesince regulating the online gaming industry only really requires a nutcracker.

This article is authored by Shahana Chatterji, partner, Puneeth Nagaraj, principal associate and Shaileja Verma, associate at Shardul Amarchand Mangaldas and Co.  The views expressed in this article are those of the authors and does not necessarily reflect the views of the firm.

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