A Tricky Game: The Legality of Fantasy Trading in India

[In
this post, Sumit Agrawal, Partner
and Surbhi Purohit, Associate from
Suvan Law Advisors write about the increasing trend of stock market virtual
games, apps and websites and how regulators may look at it. They can be reached
at
[email protected].]
Background
In recent times, the online stock
trading apps and games have stirred up some controversy in the otherwise
efficiently regulated realm of securities across the whole wide world. In
India, there seems to be an increasing trend of free-to-play games as well as
competitions based on stock market predictions. As highlighted by
Zee Business, Medianama
and
Times of India reports,
Stock Race
is one such new gaming website (promoted
by Satyug Gold Private Ltd.)
that is in news these days. The game allows
players to compete for prizes, which include Mercedes Benz cars, Harley
Davidson motorbikes, Apple products and gold coins based on the one-day returns
of a virtual stock portfolio. Players have to pick a stock, currency or
commodity and then predict whether in a stipulated time the price of that
stock, currency or commodity will rise or fall. Another such example highlighted
is
Indian Trading League,
a website endorsed by famous cricketer Kapil Dev, which allows the players/
contestants to trade in shares at flat Rs. 20 transaction and offers prizes of
over Rs. 1.5 crores. These types of services are set up to allow individuals to
compete for prizes based on the performance of a virtual stock portfolio.
At the outset, people are
interested in virtual stock trading games as it gives both the excitement to
deal in the stock markets and the lack of serious risks attached to the stock
markets, as the trading is done using virtual money and the amount charged by
these gaming websites is a lot less in comparison to trading in the actual
stock market. Many of them operate by margining the difference between the
entry fees charged and the prizes awarded. Some promoters of these games would
argue that they are generating revenues through their creativity and
innovation, without creating a systemic risk. Rather, they allow contestants to
play on an ‘imaginary’ stock exchange, participate in skill-based contests
within their control and winning outcomes on their games or apps, thereby reflecting
the relative knowledge and skill of the participants.
On the other hand, some trading
websites or the game at CNBC-moneycontrol or BSE Training Institute websites, are
simulated trading processes often used for educational purposes to teach
potential investors and future stock brokers / sub-brokers how to trade stocks
and may not involve either consideration or monetary benefits.
International
Practices
United States
When
a similar situation arose in United States to decide on legality of trading in
stocks in real time using a virtual portfolio, it was widely reported that the
popular website named “Stock Battle”, one of the first sites to allow real
money stock picking games modeled after daily fantasy sports, had received a
cease-and-desist letter from the Securities and Exchange Commission (SEC).
 In this “game,” participants paid a small entry fee to build a model
stock portfolio and the winner got a prize based on the entry fee of the other
participants. The whole process was carried out in mock format (the trades were
not real) because the players could not afford the real cost of trading and
high commission fees.  The SEC, upon becoming aware of the same, sent the
company a cease-and-desist letter claiming that they were dealing in
“unregulated security based swaps.” The company announced later that it lacked
the funds to become registered and shut down. 
In
2015, the SEC’s Office of Investor Education and Advocacy issued an
Investor Alert
to warn about fantasy stock trading websites and clarified by way of Press
Release that these websites in fact violate the federal securities laws:
Even
when the site presents the transaction as a “fantasy” trading game or
competition, and even when it involves only small amounts of money (sometimes
called an “entry fee”), you should understand these sites may be violating laws
designed to protect investors.’
The
SEC has taken the position that these fantasy stock trading programs could
potentially involve security-based swaps and implicate both the federal
securities and commodities laws.  
Australia
In Australia, there is a clear demarcation
done between trading games which are licensed by Australian Securities and
Investments Commission (ASIC) and the ones operating without any such license
provided by ASIC, and might ‘be offering
a form of derivatives trading, such as binary options trading’
as
warned by
the ASIC. According to it, online companies for fantasy stock trading could be
breaking the law if they offer financial rewards for real trades, and firms
offering such derivatives trading must obtain an Australian Financial Services
license. 
Indian
Context
On August 30, 2016, even the Indian
capital and commodities regulator, the Securities and Exchange Board of India (SEBI),
issued a
press release
warning investors about such schemes and fund-raising on unauthorized
electronic platforms. SEBI has clarified that such schemes are neither approved
nor endorsed by SEBI or SEBI-recognized exchange. SEBI’s view is that in any
kind of disputes relating to such schemes or enforcement of any agreement /
MoU, benefits of investor protection under the jurisdiction of SEBI or the
exchanges, the exchange dispute resolution mechanism and investor grievance
redressal mechanism administered by exchanges would not be available to the
investors. SEBI also seems to have nudged stock exchanges to issue warnings
about such games to investors. BSE has
issued
an advisory regarding such leagues/schemes/competitions etc. offered by third
party or group company / associate of stock broker, which may involve
distribution of prize monies, and has clarified that the dispute resolution
mechanism under the exchange laws will not be available to the concerned
investors who have invested in such schemes.
Trading in ‘securities’ is governed
under Securities Contracts (Regulation) Act, 1956 (“SCRA”). As per the section 2(ac) of the SCRA, the definition of
derivatives includes ‘a contract which
derives its value from the prices, or index of prices, of underlying
securities’
, and as per section
18A of SCRA such contracts in derivatives can only be ‘traded on a recognized stock exchange.’ Since these trading games /
apps / websites are not traded on any SEBI-registered Stock Exchange, this kind
of transaction could be considered under the illegal derivatives specially where a virtual game’s market feed is
derived from the respective exchanges’ live feed.
While the investors and operators
of these sites may have made an analysis of general laws to claim that they are
not assisting betting or wagering contracts, it needs to be appreciated that securities
laws are special laws, which override the applicability of general laws. The Supreme
Court of India has recently held that SCRA is a special law to regulate the
sale and purchase of shares and securities and hence it prevails over the
provisions of the Indian Contract Act, 1872 and Sale of Goods Act, 1930,
insofar as the matters which are specifically dealt with by the SCRA.[1] Therefore,
a game, app or website may be operating in compliance with the general laws and
still be violating Indian securities laws.
There may also be a policy concern
here. Such internet based games have the potential to sideline the regulated
market and offer some alternatives to investors and market analysts. Regulated
trading and investing serves an underlying economic purpose in capital and
commodities markets, but that may not be the case with these virtual trading
games. If they become a widespread phenomenon, it can even create a parallel, unregulated
securities market. An element of trust and prudence that is available in the
regulated market may be lacking in operation of gaming websites and
applications. Therefore, SEBI may consider these games, apps or websites as
engaging in “any act, practice, course of
business which operates or would operate as fraud or deceit upon any person, in
connection with the issue, dealing in securities which are listed or proposed
to be listed on a recognized stock exchange”
under Section 12A of SEBI Act,
1992. Consideration in any form such as bitcoins, lite coins, as a signing fee
or entry fee, or anything of value such as gifts, prizes, may invoke the
securities laws to the exact same extent as payment in currency would.
Conclusion
Regulators globally are known to view
every innovation with a suspicious eye. It is said that the purpose of
legitimate government regulation is to encourage the private business activity
that is subject to the regulation. From that view, it could be argued that SEBI
needs to encourage such websites by clarifying the framework of their
registration, cap on number of players, specifying disclosures under which they
can work – while considering that operators of such websites, games and apps do
not have the capital, time, or resources to be ‘regulated’ to the likes of
financial institutions or intermediaries. Until that happens, SEBI has the
option of using its Cease and Desist Powers under Section 11D of SEBI Act,
1992.
Each gaming site and fact scenario
therefore, would require a review and analysis as to whether it has invoked the
SEBI Act, 1992 and Securities Contracts (Regulation) Act, 1956, and has
complied with such laws. No doubt, in the coming times, fantasy trading games,
app or websites and their promoters will face increasing scrutiny.
– Sumit Agrawal & Surbhi
Purohit



[1] SEBI v. Opee Stock-link Ltd. [2016] 197 Comp. Cas. 435 (SC).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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