Game, set, match: Free pass likely for foreign investors in online gaming

A proposal for 100% FDI in online real money gaming without requiring official approval is being discussed at various government levels, two officials familiar with the mater said. The proposal from the commerce ministry's Department for Promotion of Industry and Internal Trade (DPIIT) will exclude games involving betting and gambling.

“The idea is to make it simpler and easier for Indian startups to raise foreign capital in a sector, which is seeing high growth. There is some ambiguity with respect to FDI under automatic route, which will also be clarified. Allowing up to 100% through the automatic route will help this industry raise capital," said one of the two officials, both of whom spoke on the condition of anonymity.

To be sure, 100% FDI was not banned for online gaming; however, regulatory ambiguity made it difficult for companies to get banking and government-level clearances, making investors wary. A clear green light on FDI may breathe life into the industry, whose revenue has been largely driven by real-money games such as fantasy sports and rummy. However, the sector has struggled with questions over whether they qualify as games of skill or chance.

Queries emailed to Meity and DPIIT on Tuesday remained unanswered till press time.

The gaming industry welcomed the move, saying it will open opportunities for companies in this space.

“We have received many queries from investors, both for the real-money skill gaming space, and the free-to-play space. it will also reassure global investors about the robust and supportive regulatory environment in India. The online gaming industry, poised for exponential growth, can now confidently attract more investment—fostering innovation, job creation and economic development in the sector," said Roland Landers, chief executive of All India Gaming Federation, which represents gaming companies such as Nazara Technologies, Gameskraft and Mobile Premier League.

Regulatory clarity vital

Regulatory clarity on all formats of gaming ventures will enable foreign investments in the sector, said Salone Sehgal, founding general partner of gaming-focused venture capital firm Lumikai, one of India’s biggest gaming investors. "As such, this policy can help existing investors by drawing in more foreign funds, and act as a relief in the face of all the taxation and classification conflicts that startups in the gaming industry have faced," Sehgal added.

A senior executive at one of India’s top gaming firms said on the condition of anonymity that the move could “largely benefit the biggest companies seeking high-quantum funding rounds, rather than small ones."

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The move is part of the government’s plan to liberalize FDI rules in a range of sectors. The Union budget on 23 July announced that the government will simplify rules and regulations for FDI and overseas investments to facilitate foreign investments, and promote opportunities for using the rupee as a currency for overseas investments.

However, industry stakeholders said the government also needs to clarify the "permissibility" of games.

Self regulation plan stalls

The Ministry of Electronics and Information Technology (Meity) last year proposed that gaming companies form their own self-regulatory bodies (SRBs), which would identify which games would be deemed permissible, and which wouldn’t. However, the SRB plan has not made progress over concerns that some large startups might dominate such bodies, Mint reported in April.

Jay Sayta, a technology and gaming lawyer who represents multiple top companies, said the Centre needs to resolve the permissibility issue.

“If the FDI implementation is linked with permissibility and the IT Rules, 2021—which are yet to be operationalized, then ambiguity will still persist, and that will not really be beneficial for smaller companies in this industry. Alongside enabling investments, the IT ministry also needs to decide what it wants to do with the proposed SRB mechanism—which hasn’t made any headway," Sayta said.

A debate around retrospective taxation has further hurt the sector, leading to its consolidation under a handful of firms and dampening investor interest. Industry stakeholders said it remains to be seen if the FDI policy may help small firms survive.

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India's online gaming industry has faced considerable scrutiny over the past two years. After facing initial bans in Karnataka and Tamil Nadu, the industry succeeded in the Supreme Court which segregated fantasy sports and rummy as games of skill, from lotteries and gambling based on chance. Before they could celebrate, tax authorities demanded up to ₹1.2 trillion ($14.3 billion) from these startups, largely based on tax claims from FY17.

Startups have said in court hearings that the taxes claimed are greater than their net revenue. Tax authorities say the startups misreported their taxations to begin with.

Hit to industry

All of this has considerably hit the online gaming industry. A November 2023 report by gaming venture capital firm Lumikai, in association with Google, said that between FY23 and FY28, the overall online gaming industry—which included e-sports and casual games—would grow at a compounded annual rate of 19.3% to reach net revenue of $7.5 billion by FY28. However, real-money games, which included the bulk of the industry’s monetization potential so far, was pegged to grow only at 3.7% until FY28.

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While real-money games, represented by startups such as Sporta Technologies (Dream11), Games24x7 (RummyCircle, My11Circle) and Gameskraft (RummyCulture), contributed 65% of the overall online gaming industry’s revenue as of FY23, this could go down to as low as 32% by FY28 due to being hit by regulatory and taxation conflict.

It is this conflict that is expected to hamper the ability of smaller startups to attract funding, and thus, survive independently without being acquired by larger entities in the industry. With a clarified FDI policy and streamlined regulations for the sector, smaller firms could benefit at a time when retrospective taxation remains sub-judice at the Supreme Court.