With two new casinos set to open in India this year, what was once a no-go area for investors is attracting considerable interest

The fanfare that accompanied the opening of Casino Sikkim in March 2009 illustrates the high expectations that are riding on its success. The tourism minister of Sikkim, RB Subba, spun a roulette wheel and Casino Sikkim’s CEO, Naresh Subba, said he had been entrusted by the state to attract more tourists.

Much was made in the media about the revenue the casino would generate – although when it opened there were only two roulette wheels, 10 slot machines and a table each for flush, baccarat and blackjack.

Casino Sikkim, located on one floor of the Royal Plaza hotel in Gangtok, bears little resemblance to the mega-casinos of Macau or Singapore. But as India’s first land-based live casino (where dealing is done by people rather than machines), its opening was a giant step forward for the country’s nascent gambling industry.

Sikkim will be home to a second land-based live casino when a much larger operation opens later this year at the Mayfair-Gangtok hotel.

A popular taboo

Gambling is highly controversial in India. “Gaming, gambling, lottery … traditionally they have all been treated as taboo in Indian culture,” says Salman Waris, a Delhi-based partner at FoxMandal Little, who heads the firm’s intellectual property and technology practices.

Salman Waris Partner FoxMandal Little

And yet, in one of those contradictions typical of a country as large and diverse as India, gambling is big business and extremely popular. Reports suggest that illegal gambling in India is worth ₹50 billion (US$1.1 billion) per year and illegal lotteries account for another ₹150 billion (US$3.3 billion). Legal gambling operations and lotteries, meanwhile, generate more than ₹300 billion (US$6.6 billion).

With the exception of trackside betting on horseracing, betting on sports is prohibited. However, the ban is widely flouted by people who use betting websites based outside India or who place bets in India through the satta market – an underground market where millions of rupees change hands and where bets are placed on everything from the outcome of cricket matches and elections to whether the monsoon will arrive on time.

Rules of the game

The country’s laws distinguish between games of chance and games of skill, and specifically frown upon the former.

The Indian constitution lists “betting and gambling” as a state subject rather than a union one, and as such, it is governed by state laws. However, the Public Gambling Act, 1867, which came into force long before the country’s constitution, is a central law that sets the tone for much of the legislation adopted by individual states.

As Ameet Datta, a Delhi-based partner at Luthra & Luthra, explains, the Public Gambling Act remains in force “in those states which have not enacted a gambling law, but have by notification applied the act to their respective territories”.

The act bans all public gambling, but does not apply to “games of mere skill, wherever played”. It therefore leaves a space for gambling on games that are deemed to involve “skill”, such as the card game rummy, which has flourished as a result.

In recent years, online gambling based on rummy has also become popular. India has no specific laws to control online gambling. Instead, authorities turn to the Information Technology Act, 2000, as a means of regulating the practice. This act specifies a penalty for the online publication of materials that “deprave and corrupt”.

In addition, according to Waris, the recently published Information Technology (Intermediaries guidelines) Rules, 2011, compel internet service providers to inform users “not to host, display, upload, modify, publish, transmit, update or share any information” that is “encouraging money laundering or gambling”.

Love-hate relationship

Lotteries, which have long been cherished as a source of revenue for state governments, are treated differently. “Constitutionally, lotteries organized by the government of India or the government of a state fall in the union list,” explains Waris. As such, they are governed by central laws.

The Lottery Regulation Act, 1998, stipulates the conditions under which state governments can “organize, conduct or promote a lottery”.

Paper lotteries are run by several states and union territories, but only Sikkim has an online version. Despite the money that lotteries bring in, state governments have often had love-hate relationships with them. Goa, which set up a lottery in 1995, discontinued it in 2002 and is currently working towards re-introducing it. And Karnataka, after being the first state to introduce online lotteries in 2002, banned them three years later following vehement opposition from civil society groups.

Even Kerala, a state in which lotteries are big business and where they have existed since 1967, briefly suspended all lotteries in 2005, after its quarrels with the lotteries of other states resulted in a rebuke from the Supreme Court.

In April 2010, in an attempt to calm the competition between the states that operate lotteries, the central government notified the Lotteries (Regulation) Rules, 2010.

As Jyoti Sagar, the managing partner of J Sagar Associates, explains, the new rules also “seek to … delink online lotteries from gambling”. They do this, he says, by grouping online lotteries with paper lotteries in order to legitimize the former, which have long been mired in controversy.

However, the validity of the rules is currently being challenged before the Supreme Court.

Forbidden fruits

Foreign investment in both the gambling and betting sector and the lottery business is strictly prohibited in India. In addition, foreign technology collaborations in any form, including franchising, management contracts and the licensing of trademarks and brand names are forbidden. This position was clarified by the Department of Industrial Policy and Planning in July 2002 in press note 5 of 2002 and has been reiterated in every consolidated circular on foreign direct investment policy since then.

But with its restrictive gambling laws and prohibition on foreign investment, is India missing a trick that other countries are playing to their advantage?

Macau, for example, has long been building the largest gaming destination in the world. At its current growth rate, it expects its gambling industry to be worth US$45 billion per year by 2014.

Singapore and South Korea have also tapped into the region’s gambling market and Japan and Taiwan are reportedly considering similar moves.

“The gambling industry in Asia will continue to grow in the next three years … the market is not yet mature, so it is expected that more casinos will open across the region,” says Lantis Li, a gaming analyst at Capital Securities in Hong Kong.

Playing catchup

India is well behind the curve in developing its gambling industry. But some states have amended the provisions of the Public Gambling Act to legalize certain forms of gaming. Goa and Sikkim, for example, allow casinos to operate within their boundaries, as does the union territory of Daman. Until 1987, Daman had been administered jointly with the other former Portuguese enclaves of Goa and Diu. All three locations share a common gambling law: the Goa, Daman and Diu Public Gambling Act, 1976.

Goa was first off the mark, when, in 1992, it amended the Goa, Daman and Diu Public Gambling Act to allow slot machines in five-star hotels.

The act was amended again in 1996 to allow table games and gaming on offshore vessels. As a result, Goa now has six floating casinos with live gaming moored on the Mandovi River. It also has electronic gaming in 16 five-star hotels.

In 2002, the state of Haryana attempted to go down the same road when its state legislature passed a bill on the licensing and control of casinos. But neither the state’s governor, nor the president of India, who the bill had been referred to, gave it their approval, largely because it reportedly was to have paved the way for foreign investment to develop the casinos.

“There was a lot of political pressure,” says Waris at FoxMandal Little. Indeed, one of the arguments used by the sizeable anti-casino lobby in Haryana was that the ruinous battle described in the Mahabharata, a Sanskrit epic of ancient India, had its origins in a game of dice.

The state of Sikkim faced no such problems when it passed the Sikkim Casino Games (Control and Tax) Act, 2002, which gave the state government the power to grant licenses. Yet it was only when the act was notified in 2007 and licenses were actually issued that the ground was set for the opening of Casino Sikkim. “The excitement in the market has generally revolved around that,” says Waris.

He adds that at around the same time, “there was a lot of excitement about the setting up a special gaming zone along the lines of Las Vegas in Gujarat, but it fell afoul of the law and it never took off”.

Beginner’s luck

Now the union territory of Daman, north of Mumbai, is muscling in on the action.

In December 2008, Thunderbird Resorts, a British Virgin Islands-registered company headquartered in Panama, set up a joint venture with an Indian company, Daman Hospitality, to build a ₹3.7 billion (US$83 million) integrated resort in the territory.

The resort is expected to open later this year and will contain restaurants, shops and an electronic casino called Casino Jackpot. An Indian company, Daman Entertainment, will operate the casino using a gaming license issued under the Goa, Daman and Diu Public Gambling Act.

In mid-May, a Bombay Stock Exchange-listed company called Delta Corp acquired a 51% stake in Daman Hospitality and Daman Entertainment.

Delta Corp has its origins in the textile business, but diversified into real estate, hospitality and entertainment. It is currently the largest gaming company in India. Coincidentally, the company’s chairman, Jaydev Mody, is married to a prominent lawyer, Zia Mody, who is the managing partner of AZB & Partners.

Delta Corp owns three offshore casinos in Goa – Casino Royale, Casino Caravela and Horseshoe Casino, which is due to commence operations in January 2012. It also owns an in-principle license to set up an additional casino in Daman.

“India is just waking up,” says Jaydev Mody in a statement on Delta’s website. “Goa is preparing to be the Las Vegas of India. And in this endeavor, Delta Corp is leading the effort by having three of the six offshore live gaming casino licenses in Goa.”

Foreign players warned to tread carefully

The Thunderbird-Daman deal illustrates that while the lucrative gambling market remains out of bounds for foreign investors, they can still participate in related projects, such as the development of resorts that will house casinos. Indeed, despite being operated by an Indian company, Casino Jackpot will occupy a 5,700-square-meter space rented from a resort that has a foreign joint-venture partner.

Lawyers, however, urge investors to exercise extreme caution when embarking on such ventures.

“Any structure using real estate for making foreign investments [that relate to] gambling and betting has to be carefully considered,” says Vandana Shroff, a partner at Amarchand Mangaldas in Mumbai. “Specific legal advice should be sought.”

Vandana Shroff Partner Amarchand Mangaladas

She also warns that foreign investment in resort development is subject to the restrictions on foreign investment in the real estate sector, which she says is “a sensitive issue”.

Sagar believes that foreign participation of this nature “may not be advisable” at all. He says that while the government continues to keep a close watch on developments in the gaming sector, foreign investors “may want to abstain from adopting such indirect methods”.

Jyoti Sagar Managing Partner J Sagar Associates

Betting against the odds?

Concerns over foreign investment are not the only threat facing India’s nascent gambling industry. Indeed, even in Goa – long considered India’s most gambling-friendly state – dark clouds regularly descend over fledgling casinos as politicians pander to the anti-gambling lobby.

In 2008, there were moves by lawmakers to force the casinos to moor further upriver. Then, in March 2009, Goa’s captain of ports ordered all casinos be removed from the Mandovi River and taken to Aguada Bay. A court case followed, but in the end the casinos stayed put.

At around the same time, the state government announced plans to set up an independent gaming commission to regulate the casinos. The intention was reiterated in a speech by the chief minister earlier this year, but as of yet, nothing has happened.

Risky business: Gamblers and investors alike face considerable uncertainties in India’s gaming industry.
Risky business: Gamblers and investors alike face considerable uncertainties in India’s gaming industry.

Meanwhile, in February, Delta Corp’s share price fell sharply after the licences of two of its offshore casinos were briefly cancelled by the state government. The vessels that house the casinos were deemed not to have the requisite trading licences.

A month later, the leader of the opposition in the state legislature, Manohar Parikkar, introduced the Goa Public Gambling (Amendment) Bill, 2011, with the aim of “preventing locals, specially youth, from getting involved in gambling activities”. Parikkar is a former chief minister of the state and a member of the Bharatiya Janata Party. If his bill is passed, residents of Goa will no longer be allowed into the state’s casinos for the purpose of gambling. Furthermore, all casino advertisements in Goa will be banned.

Cashing in

Despite fears that politicians are trying to suffocate the industry, casino operators enjoy a broadly favourably operating environment. Licensing fees are just over ₹1 million (US$22,200) and taxes are as low as 10% of gross gaming revenues. In Macau, by contrast, gaming revenues are taxed at almost 40%.

Lawyers too are cashing in on the opportunity and gaming has become a surprisingly big practice area for some of them. Waris, for example, says that gambling forms a “considerable part” of his practice. “Going forward is going to be the same, if not immediately, in the medium to long term,” he adds.

For despite the opposition to gambling, the industry is growing stronger. Not only will the country have two new casinos – in Daman and Sikkim – in the course of this year, but as Waris says, “there has been quite a bit of movement in the past couple of years [in the debate surrounding gambling].

“It is probably a matter of time and a matter of people accepting the reality,” he adds.

A recent article in Mint proposed that sport betting be legalized. “With gambling already so widespread, it is better for it to be in the open,” the article argues.

Commentators suggest that this shift in the debate is the result of the large sums of money that change hands in the satta market during cricket matches – especially Indian Premier League matches.

“Maybe in a couple of years we could see legislation that allows gambling in general,” says Waris.

Will this lead to the ban on foreign direct investment being lifted? No doubt the satta markets have already calculated the odds of such an outcome.