Call of Duty for Gaming Investors

The introduction of gaming by Nintendo Entertainment System in India in the early 1990s was an exciting period. The memory of Contra and the timeless Super Mario Bros game definitely created and left all young adults with core memories. This was just the beginning of an ever-booming and ever-expanding gaming era. With better technologies in the early 2000s, personal computer games such as Virtua Cop, Road Rash, etc. started gaining popularity.

The entry of Play Station by Sony Interactive Entertainment and Microsoft Corporation’s Xbox 360 with enhanced graphics, missions and challenges made the gaming industry competitive, addictive and popular.

While gaming is primarily for the entertainment of young adults and game geeks, the demand for games with superior graphics, complex story lines and immersive characters has made the gaming industry more profitable and competitive. Cities like Hyderabad and Bangalore have also contributed to the gaming industry by creating popular games like Hanuman: Boy Warrior and Don 2.

It is quintessential to understand why some games are extremely popular in comparison to others. It is primarily due to the conscious efforts of the gaming start-ups hiring quality gaming professionals, such as gaming designers (who provide digital art, storylines, game levels, technical design, etc.), gaming programmer (who creates and protects the codes for the game), animator, sound designer, composer, producer, quality assurance tester, marketing manager and user designer, business analyst, etc.

While any start-up gaming company or existing gaming company may have the credibility to attract investment; it is imperative for prospective investors to conduct legal, financial, tax, technical due diligence. Also, with the rising demand for Environmental, Social and Governance (ESG) compliances, it is prudent that the investors examine the ESG ratings of such companies.

Gaming companies globally are required to follow a code of gaming ethics, especially when the game is violent or abusive in nature, such as Call of Duty, Battlefield, Grand Theft Auto, Watchdogs, etc., as these games can psychologically push a player into a state of rage and aggression. These codes ensure the prevention of cyber bullying, abuse or harassment that may occur while playing with unknown online players.

For instance, the popular Player Unknown's Battle Grounds (PUBG) game, was banned from India on account of reasons discussed below. The users of PUBG were young adults and kids who reported committing acts of violence due to the psychological impact the game had on them.

An investor desirous of investing in Indian gaming companies shall require the gaming companies to comply with laws as such the Companies Act, 2013, Trade Marks Act, 1999, Copyright Act, 1957, Designs Act, 2000, Information Technology Act, 2000 (IT Act), Digital Personal Data Protection Act, 2023 and ancillary cyber Laws. Professionals conducting legal due diligence shall be required to look into the registration status of the brand name, the logo, names of characters, words, pictures that are created while developing the games and their registrations under the Trade Marks Act, 1999.

One cannot imagine a game without storylines, voice overs, artistic works of the animators, graphic designs, digital arts, dialogues or background music. Such works of art are essential to a game and unique in the gaming universe. Therefore, registration of these is essential under Copyright Act, 1957. 

Another important legislation is the Patents Act, 1970. When games are in the creation stage, video programmers play a big role in creating software and the codes (which by itself cannot be patented). Patents can be granted under the Patents Act, 1970 to a gaming company only if the gaming company has created code that is original and innovative in its space and has the potential to bring technical applications including hardware. The perfect examples are Play Station, Xbox or stimulators that have taken the gaming universe by storm.

Further, getting a patent registration would help the gaming company have dominance in the gaming industry by preventing other gaming companies from embodying similar features. Protection is also accorded to computer programmes and source codes under the Section 2 (o) of Copyrights Act, 1957. Gaming companies are also required to protect the visual aesthetics, interface such as designs of the remotes, buttons, etc. under Designs Act, 2000. In arcade games, the design of the simulating cars, bikes or the simulators used are protected under Designs Act, 2000.

Investors need to ensure that there is strict adherence with the provisions of the IT Act and that there have been no litigations initiated or pending against the gaming company for tampering with the source codes or creating any games that are promoting any act of terrorism or verbal bullying or harassment.

The Digital Personal Data Protection Act, 2023 obligates online gaming companies and developers to protect the personal data of various users such as their age, gender, network connection, personality traits, sexual orientation or any kind of biometric details that are collected by the companies.  It further provides that companies can transfer such data to cloud companies, only in such jurisdictions where data protection laws are uncompromising. Online gaming networks are required to provide for parental consent if the players are below the age of 18 years since the personal information of minors may be used for predictive analytics for future versions of the games. Therefore, it becomes a moral obligation of gaming companies to use the personal information of minors only for legitimate purposes.

On September 2, 2020, the Central government suspended Chinese gaming apps such as PUBG which breached the privacy data of game users and were prejudicial to sovereignty and integrity, defence, security of state and public order in the opinion of the Central government.

As part of the compliance with the data protection laws, gaming companies must also formulate their privacy policies which protect the game users against any kind of cyber bully, harassment, verbal abuse etc. It is imperative that the users are aware of the purpose of their data being collected, know whether it shall be further used by a third party or not, and understand the security measures in place to protect such information. 

A gaming company is also required to strictly adhere to Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2011.Gaming companies are required to appoint a grievance officer to provide legal assistance to the aggrieved in case of any kind of cyber harassment or bullying or breach of privacy policy, infringement of any patent, trademark, copyright or other proprietary rights, impersonation of another person or reporting of virus that potentially interrupts, destroys or limits the functionality of any computer resource.

The company is also expected to have obtained valid registration such as GST registration, permanent account number, certification of incorporation, etc. under the applicable Laws.

The investor must also pay specific attention to the provisions of material contracts that the gaming company must have entered into with employees or freelancers, including any software and hardware suppliers, leave and license agreement for office space or other software licenses used by graphic designers and animators. The material contracts need exclusivity clauses that ensure that even if the work is created and innovated by animators, programmers, and graphic designers, the ownership remains under the name of the gaming company. Similarly, the gaming companies to need to enter into robust non-disclosure, confidentiality and non-compete and solicitation agreements with them ensuring that the data, client information or gamer information is protected at all times. 

If an investor has to invest in an online gaming firm, the investors need to identify if the online gaming firms promote games which are based on 'games of skill' or 'games of chance.' If the online gaming firm is involved in a 'game of chance', then the investor must identify if the online gaming firm does not have any pending tax litigations before the relevant tax authority under Section 115BBJ of Income Act, 1961. Last year, Gameskraft Technology Private Limited, an online gaming company based in Bengaluru, was reported to have faced tax evasion allegations.

If an investor is a person resident outside India, then the legal advisor shall be required to analyse the restrictions provided under Foreign Exchange and Management Act, 1999 and the sectoral caps under Foreign Direct Investment Policy since foreign investment is permitted in games of skill and is subject to restriction if it is a 'games of chance.'

Any investor, whether Indian or foreign, must conduct the diligence of the proposed investee gaming company and based on the risk assessment, invest in the right gaming company. A know-how of the risks enables the investor to negotiate with the company in terms of getting additional governance rights, get shares at a discount and at the same time, it helps the investee company to be compliant with the applicable laws.

About the authors: Pearl Boga is an Associate Partner and Rashi Rajani is a Senior Associate at Rajani Associates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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