Thursday, September 1, 2016

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]


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.  


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.


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).

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