Indian law very straight forwardly bans Foreign Direct Investment in the gambling sector in India.
There has been a clear and consistent policy decision no foreign investment is allowed in Indian gambling businesses.
No foreign company or subsidiary of such a company can directly or in joint venture with Indian companies participate in legal gambling businesses in India. Even foreign holding of securities is not allowed in an Indian venture, even if such shareholding is minority or marginal.
Taking capital in form of debt from foreign investors is also not an option as Indian entities must toe the lines drawn by External Commercial Borrowings (ECB) Guidelines. Automatic route under current ECB rules does not allow borrowing for gambling sector and it is anybodys guess whether the approval route will work for this. I have no idea if anyone ever tried seeking approval for a foreign loan to run a gambling business, if policy with respect to foreign capital in the gambling sector is any indication, chances are nil.
So what law exactly guards the way of direct foreign investment into Indian gambling sector?
Excerpt from Consolidated FDI Policy, accessible over here:
5.1 PROHIBITION ON INVESTMENT IN INDIA.
FDI is prohibited in the following activities/sectors:
(a) Retail Trading (except single brand product retailing)
(b) Atomic Energy
(c) Lottery Business including Government /private lottery, online lotteries,etc.
(d) Gambling and Betting including casinos etc.
(e) Business of chit fund
(f) Nidhi company
(g) Trading in Transferable Development Rights (TDRs)
(h) Real Estate Business or Construction of Farm Houses
(i) Activities / sectors not opened to private sector investment.
Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.
If not direct investment, what about other kind of profitable collaborations?
As will be evident from the above provision on technology collaborations, most of the usual ways of licensing the brandname or technology or operations expertise and earning royalty from the same or sharing profit is also not allowed. However this leaves open the possibility of providing services or products and charging upfront sale price, which can be very profitable given that India definitely does not have a pool of technology or expertise with respect to gambling operations.
Is any kind of profit sharing arrangement possible in India?
Well, while the government has done quite well in preventing foreign companies from venturing into gambling business in India and formulated law and policy in quite a watertight way as far as Foreign Direct Investment into gambling sector is concerned, it has not completely succeeded in preventing foreign participation.
The most obvious example is perhaps the resort and casino coming up in Union Territory of Daman which is located at North of Mumbai, in which a British Virgin Islands based company has been known to have invested. In December of 2008, Thunderbird Resorts which is registered as a company in British Virgin Islands and headquartered in another tax heaven Panama, set up a joint venture with an Indian company called Daman Hospitality to build a 3.7 billion integrated resort.
The resort boasts of an electronic casino called Casino Jackpot apart from restaurants and other sources of tourist entertainment. The casino will be operated by an Indian company Daman Entertainment using a gaming licence issued under the Goa, Daman and Diu Public Gambling Act which gives permission to run a casino.
The model through which the investors have isolated the regulatory problem of foreigners not being able to invest in gambling business is definitely very interesting. This is a model in which the foreign entity is participating in profits of a gambling operation, albeit indirectly probably by charging a premium for the real estate it owns.
This is going to be a recurring income, which could increase in future and will definitely have a commercial link to the economic success of the casino. Anyone could tell that the existence of the casino will contribute to the business of the resort, restaurants and other sources of revenue. Similarly, the casino will benefit from the existence of all the other tourist attractions and amenities within the same compound. The key concept behind this structure is that there is a core gambling business which is separate from all the paraphernalia and hospitality that goes together.
It excites me because I have at times suggested similar models (there are some subtle differences, which I consider make the transaction safer and definitely legal under laws as they stand) to those keen on participating in the apparently $ 55 Billion gambling market in India, which happens to be mostly underground at the moment.
One may find it interesting to know that the biggest Indian investor in gaming business, Delta Corp has acquired a 51% controlling stake in Daman Hospitality and Daman Entertainment. The companys chairman Jaydev Modi happens to be the husband of Zia Modi, legendary founder of AZB and Partners and daughter of Soli Sorabjee, a legal luminary and former Attorney General of India. We can trust that Delta Corp has gotten the best legal advice out there to protect its investments into Daman Entertainment!
Apart from setting up operations in India, some foreign operators are also targeting the Indian market through online gambling, and they are likely to continue to do so especially in absence of laws prohibiting internet gambling. These kind of operations when completely based out of India will are unlikely to attract FDI regulations though they may be subject to other laws including Public Gambling Act applicable to various Indian states.
While considering the question of foreign investment in gambling, we have to remember that the rules with respect to foreign investment in India are policy based and can be changed at any point of time; also, interpretation of these rules cannot be strict. While it is natural to see a loophole in the existing law and jump up in joy, it is also important to understand that government can be very quick in blocking those loopholes and will not be very pleased with apparent exploitations of such loopholes.
This post has been written by Ramanuj Mukherjee, founder of iPleaders and
Intelligent Legal Risk Management Solutions LLP.