HSA | Corporate & Commercial Monthly Newsletter | February 2025

REGULATORY UPDATES REGARDING DOWNSTREAM INVESTMENT FOR 'FOREIGN OWNED OR CONTROLLED COMPANIES'

Background

On January 20, 2025¹ , the Reserve Bank of India (RBI) updated its master direction on foreign investments in India (Master Direction), including downstream investments (DI) by foreignowned or controlled companies (FOCCs). This Master Direction clarified that certain arrangements which are available for direct investments under the Foreign Exchange Management (NonDebt Instruments) Rules, 2019 (NDI Rules) are also now available for FOCCs, thereby addressing the ambiguity surrounding FOCCs since the issue of NDI Rules in 2019. The intention behind treating the FOCCs on the same level as individuals residing outside India was to deter foreign investors from circumventing Indian exchange control regulations by channelling their investments through Indian entities that they own and control.

The guiding principle introduced for DI guidelines proves the aforesaid inference that "what cannot be done directly, shall not be done indirectly". Accordingly, DIs which are treated as indirect foreign investment are subject to the entry routes, sectoral caps or the investment limits, as the case may be, pricing guidelines, and the attendant conditionalities for such investment as laid down in the NDI Rules.² This includes investment by way of swap of equity instruments/equity capital, payment arrangements/mechanism as per Rule 9(6) of the NDI Rules etc, provided that the transaction does not circumvent the provisions contained in Rule 23 of the NDI Rules (relating to downstream investment), including the restrictions on use of borrowed funds for downstream investment.³ While the Master Direction provides various clarifications, this article focuses on the following key clarifications in respect of DIs, which have been summarized and analysed below.

Key Takeaways

• Definition of Indirect Foreign Investment:
  The RBI stipulated the following clarifications in the definition of 'Indirect Foreign Investment':
  1. That if an investment in an investee entity was initially made by a resident investor, but such investor entity subsequently becomes a FOCC entity, the said investment will be reckoned as a DI from the date of this change in ownership or control. Such DIs must comply with the relevant entry route and sectoral caps, and the investor entity is required to report this reclassification within 30 (thirty) days using Form DI.⁴
  2. It is further clarified that investments made by NonResident Indians (NRIs) and Overseas Citizens of India (OCIs) on non-repatriation basis are treated as deemed domestic investment. Accordingly, an investment made by an Indian entity which is owned and controlled by a NRI or an OCI including a company, a trust and a partnership firm incorporated outside India and owned and controlled by a NRI or an OCI, on a non-repatriation basis in compliance with the NDI Rules, will not be considered for calculation of indirect foreign investment.⁵
• Purchase consideration:
  Pursuant to Rule 9(6) of the NDI Rules, in event of transfer of equity instruments between a person resident in India and a person resident outside India, an amount not exceeding 25% (twenty five percent) of the total consideration: -
  
  1. may be paid by the buyer on a deferred basis within a period not exceeding 18 (eighteen) months from the date of the transfer agreement; or
  2. may be settled through an escrow arrangement between the buyer and the seller for a period not exceeding 18 (eighteen) months from the date of the transfer agreement; or
  3. may be indemnified by the seller for a period not exceeding 18 (eighteen) months from the date of the payment of the full consideration, if the total consideration has been paid by the buyer to the seller:

• Transfer by way of swap of equity instruments and equity capital:
  The RBI also included that the transfer of equity instruments of an Indian company between a person resident in India and a person resident outside India may be by way of–
  1. swap of equity instruments, in compliance with the rules prescribed by the Central Government and the regulations specified by RBI from time to time;
  2. swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including the Foreign Exchange Management, (Overseas Investment) Rules, 2022, and the regulations specified by RBI from time to time:
  3. Provided that prior Government approval shall be obtained for transfer in all cases wherever Government approval is applicable.

• RBI's recent updates to the Master Direction clarify certain key aspects, including an updated definition of indirect foreign investment, and reporting obligations on the investor entity when it becomes an FOCC. These reporting requirements will increase the compliance burden for investors. If an investor fails to meet these reporting obligations, they may be subject to a late submission fee.⁸ The guidelines regarding purchase considerations and the transfer of equity instruments through swaps have also been expanded to apply to FOCCs, as long as all transactions adhere to the relevant regulations and pricing guidelines. Following the recent clarification issued on foreign investments and FOCC various ambiguities and interpretational issues previously encountered have been resolved, providing the much needed clarity to FOCCs and foreign investors. The issuance of clear and coherent guidelines by RBI has significantly streamlined the framework for FOCCs, facilitating more effective strategic planning, structuring, and execution of transactions.

Understanding The Regulatory Landscape of Real Money Gaming Applications in The Light of The CCI Order in Winzo Games Private Limited V. Google LLC

The Competition Commission of India vide its order dated November 28, 2024 (Order), directed an investigation against the tech-giant Google LLC, Alphabet Inc., Google India Private Limited, and Google India Digital Services Private Limited (collectively, Google), following a complaint filed by an online gaming platform Winzo Games Private Limited (Winzo).

In its complaint, Winzo inter alia alleged that Google, by way of its arbitrary and one-sided policies, does not permit listing of third-party gaming applications, which offer users the facility to place real money for stake in 'games of skill' on its Google Play Store application (Playstore). Winzo claimed that online real money games fall within the scope of 'games of skill', and notwithstanding that such games have been declared legal by the Hon'ble Supreme Court and various High Courts of India and hosting of such games on the Playstore is a general market practise, the same is not followed by Google without any justification.¹ In the light of this allegation, we will examine, in this article, the concerns associated with listing of real money gaming applications on Playstore and the current Indian jurisprudence in this subject-area.

Pursuant to the segregation of powers enumerated under Schedule VII of the Indian Constitution, 'gambling and betting' form a part of the state list² , thereby each state legislature is empowered to implement its own laws in this subject-area. While certain states have adopted the Public Gambling Act, 1867 (PGA), or provisions similar to it, others have enacted their own legislations; accordingly, the legislation so adopted, or promulgated by a state in respect of betting and gambling is the law applicable to that particular state. Under various state legislations, while games of chance are prohibited, games of skill are typically exempt from the ambit of such legislations. While states such as Nagaland³ , Sikkim⁴ , and Tamil Nadu⁵ have adopted a licensing regime to regulate gaming, other states such as Orissa⁶ and Telangana⁷ have attempted to ban any game, including 'game of skill' when played for monetary stakes. Most of these legislations were enacted prior to the advent of online real money games in the gaming industry and only few states such as Sikkim, Nagaland, Telangana, and Tamil Nadu have amended their legislations to make provisions for online gaming Given that the online gaming industry has witnessed tremendous growth, which is projected to hit INR 66,000 Crore by 2028⁸ , it becomes imperative, in today's time, to distinguish a 'game of skill' from a 'game of chance' in order to determine the applicable regulatory provisions.

While the PGA excludes 'games of mere skill' from its ambit, it does not define or explain anywhere as to what constitutes 'games of mere skill'. In the absence of a clear statutory regime, the issue of whether real money games provided on online gaming platforms involve a predominant element of skill, or are they are solely activities in the nature of gambling/betting based on chance, has been litigated before various Indian courts, whereby, the courts have adopted the test of 'preponderance' or 'predominance' to decide whether a game constitutes 'game of skill' or 'game of chance'. In this test, the court determines whether skill or chance is the dominating factor in determining result of the game in question. However, it is relevant to note that this test is to be applied, and the game is required to be evaluated on a case-to-case basis, as the courts have held that determining whether a game is of chance or skill is to be decided on the facts and circumstances of each case.⁹ The Supreme Court has applied the above-said test in the following cases.

In State of Andhra Pradesh v. K. Satyanarayana and Ors. ¹⁰, the Supreme Court tested the game of 'Rummy' on the principle of 'game of skill' v. 'game of chance' and held that "the game of Rummy is not a game entirely of chance.... Rummy requires certain amount of skill because the fall of the cards has to be memorised and the building up of Rummy requires considerable skill in holding and discarding cards. We cannot, therefore, say that the game of Rummy is a game of entire chance. It is mainly and preponderantly a game of skill. The chance in Rummy is of the same character as the chance in a deal at a game of bridge. In fact, in all games in which cards are shuffled and dealt out, there is an element of chance, because the distribution of the cards is not according to any set pattern but is dependent upon how the cards find their place in the shuffled pack. From this alone it cannot be said that Rummy is a game of chance and there is no skill involved in it." ¹¹

Similarly, the Supreme Court held that betting on horse racing is a game of skill since winning is dependent on factors such as speed and stamina of the horse and the training and art of riding by the jockey,¹² and the predominant factor would be the player's (better) ability to assess the jockey and the horse. In view of the foregoing 'predominance test' as laid by the Supreme Court, this article examines the legality around 'Rummy' and 'Daily Fantasy Sports' (game of chance vis-à-vis game of skill), as Winzo, in its complaint, alleges that Google has selectively permitted only these two types of real money game applications on its Playstore for its pilot program launched on September 28, 2022.

Rummy as a 'game of skill'

Through 'Rummy' and 'Poker', the constitutional validity of Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 (TNGPLA), and its prohibition of gaming in cyberspace if played for wager, bet, money or other stakes was challenged in Junglee Games India Private Limited and Ors. v. State of Tamil Nadu. The Madras High Court held that the amendments made to TNGPLA which imposed a blanket ban on all forms of gaming, irrespective of whether the game is based on skill or chance are ultra vires the Indian Constitution, and observed that "both rummy and poker are games of skill as they involve considerable memory, working out of percentages, the ability to follow the cards on the table and constantly adjust to the changing possibilities of the unseen cards....and the betting that the State can legislate on has to be the betting pertaining to gambling; ergo, betting only on games of chance," and the term 'betting' cannot be standalone, and cannot cover games of skill.

Likewise, in All India Gaming Federation v. State of Tamil Nadu & Ors, the Madras High Court while determining the constitutional validity of Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022 (TN Online Games Act) and clarified its application to such games which predominantly involve an element of chance. The TN Online Games Act defines online gambling as online wagering or betting and includes playing online game of chance for money or other stakes, in any manner ¹³, and prohibited any online game specified in the Schedule to the Act, with money or other stakes involved, by presuming such games to be online games of chance; and this list included 'Rummy' and 'Poker'. The Court observed that the TN Online Games Act did not impose any prohibition on physical games of 'Rummy' and 'Poker', and dismissed State's submission that in an online game, the software or the dealer has knowledge of the cards to be dealt and the cards in hands of each player,¹⁴ as it lacked merit. The Madras High Court, placing reliance on precedents, held that online 'Rummy' and 'Poker' is a game of skill akin to its physical version¹⁵. The Court directed the State to regulate games of chance played for stakes and excluded games of skill, including rummy and poker, from outside the purview of the TN Online Games Act, and held that the State may choose to introduce separate reasonable regulations to monitor and regulate the games of skill, including, its time limit, monetary threshold, and age restrictions.¹⁶

Daily Fantasy Sports as a 'game of skill'

The Punjab & Haryana High Court in Varun Gumber v. U.T., Chandigarh, held that playing of fantasy game by any participant user involves creation of a virtual team by him/her which certainly requires a considerable skill, judgment and discretion. The participant has to assess the relative worth of each athlete/sportsperson as against all athletes/sportspersons available for selection, based on their strengths and weaknesses at the time of drafting players. It is this assessment which finally determines the success or failure of fantasy sports games. Hence, the element of skill predominantly affects the outcome of matches.¹⁷ A challenge filed against this order was dismissed by the Supreme Court on September 15, 2017.¹⁸ The Bombay High Court in Gurdeep Singh Sachar v. Union of India took a similar view as taken by the Punjab & Haryana High Court and held that games played on the Dream 11 platform (being, online fantasy gaming platform) were games of skill and not games of chance.¹⁹

Moreover, on April 6, 2023, the Ministry of Electronics and Information Technology (MeitY) amended the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021²⁰ (Gaming Amendment Rules) and sought to introduce a co-regulatory framework between MeitY and designated self-regulatory industry bodies (SRB). The Gaming Amendment Rules lay down compliances on the online gaming intermediaries. It defines 'online gaming intermediaries' as entities which enable users of its computer resource to access online games (OGI),²¹ and lays down due-diligence and obligations of OGIs for operation of online real money games, which inter alia includes appointment of a chief compliance officer, implement a grievance redressal mechanism, register themselves with the SRB, and display visible mark of registration.²² Correspondingly, MeitY vide its press release dated April 20, 2023,²³ explained that "the rules cast an obligation on intermediaries, including social media platforms and app stores, to make reasonable efforts to not host, publish or share any online game that causes user harm or which has not been verified as a permissible online game by an online gaming self-regulatory body (SRB) designated by the Central Government." However, the Gaming Amendment Rules are yet to be implemented, pending designation of the self-regulatory industry bodies.

In light of above discussion, it can be seen that there are significant differences in the gaming legislations of different Indian states, and there may be potential conflict between the recent Central regulation on online gaming – the Gaming Amendment Rules, and the state-level legislations. The CCI has also noted that the distinction of 'games of skill' vis-à-vis 'games of chance' requires a case-to-case examination.²⁴ Moreover, the special leave petitions filed by the respective State Governments in the matters of The State of Karnataka v. All India Gaming Federation²⁵ , The State of Tamil Nadu v. Junglee Games India Private Limited, ²⁶ Varun Gumber v. Federation of Indian Fantasy Sports, ²⁷ and The State of Tamil Nadu v. All India Gaming Federation, ²⁸ seeking permission to appeal their corresponding judgements, have been combined and are currently pending before the Supreme Court. The outcome of these cases as well as the observations made by the Director General of CCI in its investigation report submitted pursuant to the Order will play a critical role in providing further clarity on the legal framework in relation to of 'games of skill' in India.

Footnotes

1. Master Direction - Foreign Investment in India (Updated up to January 20, 2025), available at, https://website.rbi.org.in/web/rbi/-/notifications/masterdirection-foreign-investment-in-india-updated-up-to-march-17- 2022-11200

2. 2 Id. Paragraph 9

3. Supra, note 1. Paragraph 9

4. Supra, note 1. Paragraph 9.1.15 (a)

5. Supra, note 1. Paragraph 9.1.15 (b)

6. Rule 21(2)(b) of the NDI Rules and Paragraph 8.2 (c) of the Master Direction.

7. Supra, note 1. Paragraph 7.9

8. Regulation 5, Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Amended up to January 15, 2025), available at, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11723 &Mode=0

1. Winzo Games Private Limited v. Google LLC and Ors, Case No. 42 of 2022, ¶18.

2. Constitution of India, Schedule VII, List II, Entry 34.

3. The Nagaland Prohibition Of Gambling And Promotion and Regulation Of Online Games Of Skill Act, 2015, §7.

4. Sikkim Online Gaming (Regulation) Act, 2008, §4.

5. Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022, §10.

6. The Odisha Prevention of Gambling Act, 1955, §3.

7. Telangana Gaming Act, 1974, §2(2) read with §3.

8. The contribution of online gaming to the Viksit Bharat journey and India's cultural power, available at https://www.pwc.in/assets/pdfs/online-gaming-to-theviksit-bharat-journey-old.pdf, last accessed February 6, 2025.

9. Manoranjithan Manamyil Mandram v. State of Tamil Nadu, AIR 2005 Mad 261, ¶5.

10. Andhra Pradesh v. K. Satyanarayana and Ors, AIR 1968 SC 825, ¶12.

11. Ibid, ¶15.

12. Dr. K. R. Lakshmanan v. State of T.N. and Another, (1996) 2 SCC 226, ¶¶ 30,31.

13. The Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022, §2(i).

14. All India Gaming Federation v. State of Tamil Nadu & Ors, 2023 SCC OnLine Mad 6973, ¶25.

15. Ibid, ¶ 38.1.

16. Supra note 14, ¶ 38.3.

17. Varun Gumber v. U.T., Chandigarh, (2017) 4 RCR (Cri) 1047, ¶8.

18. SLP Diary No. 27511 of 2017.

19. Gurdeep Singh Sachar v. Union of India, 2019 SCC OnLine Bom 13059, ¶18.

20 The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, available at https://www.meity.gov.in/writereaddata/files/Information %20Technology%20%28Intermediary%20Guidelines%2 0and%20Digital%20Media%20Ethics%20Code%29%20 Rules%2C%202021%20%28updated%2006.04.2023%29 -.pdf, last accessed on February 6,

2025.

21. Ibid, Rule 2(qb).

22. Ibid, Rule 4.

23. Ministry of Electronics and Information Technology, Government ushers in new era of responsible online gaming through strict guidelines for ensuring safety of Digital Nagriks and accountability of online gaming industry, available at https://pib.gov.in/PressReleasePage.aspx?PRID=1918383 , last accessed on February 6, 2025.

24. Supra note 1, ¶21.

25. Dairy No. 9648/2022.

26. Case No. 27706/2021.

27. Case No. 8885/2022.

28. Case No. 54028/2023.

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