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The recent ban on online real-money gaming (RMG) in India has sent shockwaves through the venture capital (VC) community, casting a shadow over the millions of dollars invested in gaming startups. The sweeping nature of the ban, solidified by Parliament's clearance of the Online Gaming Bill, has triggered legal challenges and prompted a frantic reassessment of investment portfolios. The future of numerous RMG companies hangs in the balance, with potential write-offs and valuation markdowns looming large. According to Aaron Kamath, leader of the tech and digital media practice at Nishith Desai Associates, the RMG segment faces “complete elimination,” forcing investors to rethink their strategies and brace for potential losses. This drastic regulatory shift raises serious concerns about the stability and predictability of the Indian market for technology investors, particularly those focusing on emerging sectors. The initial response from investors appears to be one of cautious optimism, with a willingness to give companies some leeway to adapt to the new regulatory landscape. However, Pearl Agarwal, founder and managing partner at Eximius Ventures, cautions that if adaptation proves unviable, write-downs and exits will become inevitable. This underscores the high stakes involved and the potential for significant financial repercussions for both investors and the startups they have backed. The impact of the ban is particularly acute given the substantial investments made in the RMG sector in recent years. Data from Tracxn reveals that between 2020 and 2024, investors collectively poured $696 million into RMG startups. This influx of capital fueled the growth of numerous gaming companies, creating jobs and contributing to the burgeoning digital economy. Now, with the rug pulled out from under their feet, these companies face an uncertain future and the prospect of having to completely overhaul their business models or even shut down operations altogether. Several prominent VC firms, including Peak XV Partners (formerly Sequoia India and Southeast Asia), Kalaari Capital, RTP Global, and Alpha Wave Global, have significant exposure to the RMG sector, having invested in various RMG firms. Even established gaming companies like Nazara Technologies have placed bets on RMG startups, further amplifying the potential fallout from the ban. The immediate aftermath of the announcement saw Nazara's stock price plummet, highlighting the market's anxiety and the perceived risk associated with the company's RMG investments. Nitish Mittersain, CEO of Nazara, acknowledged the uncertainty surrounding the situation, stating that while it was too early to definitively call for a write-off of their investment in PokerBaazi, the company would adhere to all applicable accounting standards. The legal battle against the ban is already underway, with industry bodies representing major gaming platforms preparing coordinated constitutional challenges before the judiciary. Their argument centers on the claim that the “blanket ban is arbitrary and disproportionate,” as stated by Kamath. These legal challenges represent a crucial effort to protect the interests of the RMG industry and to ensure that the ban is subjected to rigorous judicial scrutiny. However, the legal path ahead is fraught with challenges, particularly given the government's justification for the ban. The Online Gaming Bill explicitly flags online gaming services as being linked to serious unlawful activities, including the financing of terrorism and posing a threat to national security. This assertion raises the stakes significantly and could influence the Supreme Court's perspective on the matter, as noted by Surbhi Kejriwal, partner at law firm Khaitan & Co. The ban's impact extends beyond the immediate financial consequences for investors and startups. It also has broader implications for the investment climate in India and the government's stated commitment to fostering a favorable environment for businesses to thrive. Some experts argue that the move is inconsistent with the government's push for ease of doing business, potentially deterring global technology investors who are otherwise bullish on the Indian market. Nitin Sharma, partner at Singapore-based VC firm Antler India, expressed concern that “sudden blanket bans don't inspire a lot of confidence amongst global technology investors who are otherwise bullish on India but struggle to factor in regulatory risk in their investments.” He also pointed out the irony of the situation, given the existence of a $30 billion lottery market in India, which is regulated at the state level. The unpredictability of the policy changes, according to Ranjeet Shetye, venture partner at YourNest, unsettles both domestic and international investors. The abruptness of the ban signals to investors that the government can arbitrarily dismantle a thriving sector, creating significant regulatory risk, as argued by Probir Roy Chowdhury, partner at JSA Advocates & Solicitors. In the face of this challenging situation, RMG startups are exploring alternative strategies to survive and adapt. Experts suggest that pivoting to e-sports and social gaming, which are subject to different regulatory frameworks, could be a viable option. Another strategy involves relocating operations to jurisdictions with clearer and more stable regulatory environments. Kejriwal also mentioned that “some large-scale gaming companies are considering diversifying and exploring alternative revenue channels such as offline or casino businesses in permitted territories.” These diversification efforts highlight the resilience and adaptability of the RMG industry in the face of adversity. However, the long-term impact of the ban on the Indian gaming ecosystem remains to be seen. The regulatory uncertainty could dampen investor enthusiasm, stifle innovation, and potentially lead to a decline in the overall growth of the sector. The government's justification for the ban, citing concerns about national security and the financing of terrorism, underscores the complex interplay between regulatory oversight and the promotion of economic growth. Finding the right balance between these competing priorities will be crucial for ensuring the sustainable development of the Indian technology sector. The future of RMG in India hinges on the outcome of the ongoing legal challenges, the ability of startups to adapt to the new regulatory landscape, and the government's willingness to engage in constructive dialogue with the industry to find a way forward that addresses both regulatory concerns and the economic potential of online gaming. The next few months will be critical in determining whether the RMG sector can survive and thrive in the face of this unprecedented regulatory storm.
Source: VC stakes at risk, startups look at rejigging biz models