ECB INDIA & ONLINE RUMMY GAMING SECTOR

ECB INDIA & ONLINE RUMMY GAMING SECTOR

Foreign Investment in the form of FDI & ECB in the Online Rummy Gaming Sector

Date: Sept. 15, 2020

External Commercial Borrowing (“ECB”) is regulated by Reserve Bank of India’s (“RBI”) FED Master Direction No. 5/2018-19 (Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations) dated 26 March 2019 (“Master Direction”), as updated from time to time.

ECB Master Direction stipulates that, among other things, the eligible borrower shall be an Indian entity which is eligible to receive Foreign Direct Investment (“FDI”).

FDI is governed by Foreign Direct Investment Policy of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“FDI Policy”). FDI policy stipulates that FDI is prohibited in the following gaming related sectors:

a) Lottery Business including Government /private lottery, online lotteries, etc.

b) Gambling and Betting including casinos etc.

The terms “lottery, gambling and betting” are not defined in the FDI policy. Thus, reliance will need to be placed on other enactments, related judicial precedents, dictionary meanings, etc.

ENACTMENTS 

The Central government of India has framed Public Gambling Act, 1867 (“Public Gambling Act”). The Constitution of India has empowered the states to frame their own laws on gambling. Thus, in few cases, states have adopted the Public Gambling Act and in other cases they have framed their own state enactments.

These enactments refer to “Gaming” as wagering or betting on any figures or numbers or dates which are to be subsequently ascertained or disclosed and will be a prohibited activity if the game played is not a game of skill.

In the case of State of Andhra Pradesh v. K. Satyanarayana & Ors. AIR 1968 SC 825, the Hon’ble Supreme Court held that the game of rummy (thirteen card game) is a “game of skill”

and not a “game of chance”. The apex court held that “Rummy, on the other hand, 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.” Thus, if game of rummy passes the test laid down in Satyanarayana case, then, it will be considered as a game of skill and would thus not be a prohibited activity.

 STATES VIEWS ON ONLINE RUMMY

Telangana: The Telangana state by way of The Telangana Gaming (Amendment) Act, 2017 amended The Telangana Gaming Act, 1974 by deleting the exception for games of skill, thereby, prohibiting the online rummy gaming activity for the players from the state of Telangana.

Assam & Odisha: Online rummy game is also prohibited in the states of Assam & Odisha. The Assam Game and Betting Act, 1970 & The Odisha Prevention of Gambling Act, 1955 do not create any exception for the game of skill and thus for these two states online rummy would be in the nature of prohibited activities.

Kerala: The Kerala High Court in its judgement dated 24 January 2019, in the case of Play Games 24×7 Private Limited vs. Ramachandran K., held that “playing rummy for stakes” within the club premises is an offense under the Kerala Gaming Act, 1960 (“Kerala Act”). A review petition was filed which was dismissed by the court. It ruled that though playing rummy is predominantly a game of skill and in case there is no side betting then it is essentially excluded from the provisions of the Kerala Act. But if rummy is played for stakes, then the court suggested that the issue has to be dealt on case-to-case basis.

Nagaland & Sikkim: The states of Nagaland and Sikkim have a regulated framework and issue Licenses for entities intending to operate in these states.

The enactments, further, define common gaming house as house, walled enclosures, room or place in which cards are played for the purpose of earning profit or gain. As the enactments were made prior to the advent of online gaming, it primarily prohibited gaming activities which were played in physical premises only and do not have any mention of online gaming.

ECB FRAMEWORK IN BRIEF

In case of an Indian entity, which is eligible to receive FDI, the ECB framework for raising ECB from its non-resident foreign equity holder is as below:

S.no

Parameters

FCY denominated ECB

INR denominated ECB

 

i.

Foreign equity holder

Foreign equity holder means:

(a) Direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity;

(b) Indirect equity holder with minimum indirect equity holding of 51%; or

(c) Group company with common overseas parent.

 

 

 

 

 

The equity holding of the foreign investor is considered on a fully diluted basis; like if the foreign equity holder has investment in the Indian entity through Compulsorily Convertible Debentures (“CCD”), then the equity shareholding percentage will be considered on a fully diluted basis.

 

 

 

 

 

 

 

 

 

 

 

 

Eligibility: Foreign equity holder should be a resident of Financial Action Task Force (“FATF”) or International Organization of Securities Commission's (“IOSCO”) complaint country.

 

ii.

Minimum Average Maturity Period (“MAMP”)

 

a.

General MAMP

3 years

b.

ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year

1 year

c.

ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of rupee loans

5 years

d.

ECB raised for

10 years

(i) working capital purposes or general corporate purposes

(ii) on-lending by NBFCs for working capital purposes or general corporate purposes

e.

ECB raised for

7 years

(i) repayment of Rupee loans availed domestically for capital expenditure

(ii) on-lending by NBFCs for the same purpose

f.

ECB raised for

10 years

(i) repayment of Rupee loans availed domestically for purposes other than capital expenditure

(ii) on-lending by NBFCs for the same purpose

Call and put options, if any, shall not be exercisable prior to completion of MAMP.

iii.

All-in-cost ceiling per annum, which includes rate of interest, other fees, expenses, charges, guarantee fees etc.

Benchmark rate + 450 bps 

Benchmark rate + 450 bps

 

 

(Benchmark rate: 6-months LIBOR rate or any other 6-month interbank interest rate applicable to the FCY) 

(Benchmark Rate: Prevailing yield of the Government of India securities of corresponding maturity)

iv.

Prohibited End-uses

Funds of ECB raised from foreign equity holder cannot be utilized for:

(Negative list)

a) Real estate activities;

 

b) Investment in capital market;

 

c) Equity investment;

 

d) Working capital purposes, except in case of ECB mentioned at ii(c) and ii(d) above;

 

e) General corporate purposes, except in case of ECB mentioned at ii(c) and ii(d) above;

 

f) Repayment of Rupee loans, except in case of ECB mentioned at ii(e) and ii(f) above;

 

g) On-lending to entities for the above activities, except in case of ECB raised by NBFCs as given at ii(d), ii(e) and ii(f) above

v.

Hedging

Indian entity shall conform to hedging guidelines of respective sectoral regulator, if any.

Foreign equity holder can hedge his position through Authorized Dealer Category - I bank (“AD bank”) in India or foreign branch/subsidiary of Indian bank or foreign banks with Indian presence.

vi.

Automatic vs. Approval route

Automatic route (where no approval from RBI is required):

·     ECB up to USD 750 million or equivalent (per financial year) can be raised by Indian entity

·     in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1 (applicable only if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent)

 

Approval route – Other than above, RBI shall examine the case on its own and shall grant approval having regard to the facts of the case.

 

CONCLUSION

Thus, online rummy, which passes the test laid down in Satyanarayana case will be considered to be a game of skill and unless it is operating in a banned or a regulated state, it would always be allowed to be operated in India.

By virtue of above, rummy game will not fall under the four corners of prohibited activity as mentioned in the FDI policy. Thus, foreign direct investment in the rummy gaming sector will be allowed in India. Foreign investment shall be governed under the automatic process of the FDI

policy. There are already sufficient precedents in the online rummy sector where investments have happened under the automatic route of RBI and are duly acknowledged by the authorities.

As the online rummy gaming is eligible to receive FDI as per the FDI policy, the Indian entity automatically becomes the eligible borrower for raising ECB under the provisions of the Master Direction, subject to its complying with the requisite guidelines as mentioned therein.

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