Nazara Technologies share price dropped after Tamil Nadu govt bans online games

Gaming sites and online games have come in for a lot of flak in recent times. There have been constant calls to regulate games, tax them more stringently or subject them to higher levels of compliance. While the central government has been silent about the issue, the impact has been felt on the stock of Nazara Technologies. Now, Nazara is a gaming company which had been supported by the late Rakesh Jhunjhunwala and focuses more on online gaming and entertainment. The sentiments have been negative over the last few months and that is evident from the 41% fall in the stock price over last year and 15% in a month.

The latest salvo against online gaming has been fired by the Tamil Nadu government. Chief Minister, MK Stalin, had taken the lead in piloting an ordinance to ban all sorts of stakes based online games in the state of Tamil Nadu. Of course, this needs the assent of the governor before it can be promulgated. If Tamil Nadu manages to successfully pass a law against gaming apps and gaming sites, then more states are likely to follow suit. This could put this nascent industry in a lot of trouble and could thwart the huge promise that this sector had originally shown.

This ban on online games is nothing new and this is the second attempt by the Tamil Nadu state government to ban online games. In November 2020, the AIADMK led government had imposed a ban on all such online games that involved transfer of money, calling it akin to online gambling. However, the Madras High Court had struck down the rule as being unconstitutional. Subsequently, the Tamil Nadu government had approached the Supreme Court against the High Court order and that hearing is currently in progress.

Interestingly, it was MK Stalin, who in May 2021 had set up a 4-member committee led by retired Justice K Chandru. The mandate for the committee was to analyse the negative effects of these games and recommend a new law prohibiting "online gambling games". The apprehension was that such online games were addictive and many of the  young people were getting  latched on to it. Moreover, most of these gaming sites were using celebrities to endorse such games, which gave a lot of legitimacy to such online games, despite its deleterious effects on the  young people.

The Chandru Committee had submitted its report in June, recommending the prohibition of these games as well as a ban on advertisements encouraging people to play them. At that point, the government had also solicited feedback from key stakeholders as well and the general public via email prior to drafting the ordinance. Eventually, the draft ordinance was presented to the state cabinet for approval on 26th September. Now the only thing that is pending is the governor’s assent, post which it can be promulgated into law.

One thing is why such skill based games are being banned in South India. The answer is that the South accounts for a major chunk of skill based gambling. South India also accounts for a significant portion of the revenues of the Indian gaming industry. In the past, several state governments including Tamil Nadu, Andhra Pradesh, Telangana, Kerala, and Karnataka had either banned online gambling or tried to ban online gambling due to its deleterious effects and its immense popularity in the south. South India remains a very important market.

Real money gaming (RMG) has a total market value of Rs10,100 crore in India as of 2021 and this contributes nearly 70% of the country's gaming industry revenue. Popular skill based games like Rummy have seen frenetic growth in the last few years. However, the All India Gaming Federation (AIGF) is far from happy and they believe that participating in such games is a matter of choice. The AIGF has been trying to engage with the Indian government on multiple fronts and is open to checks and balances, but not in outright ban.

What companies like Nazara would really be worried about is that there is central legislation coming, to regulate the burgeoning online gaming industry. That is not great news for Nazara since it would have all-India applicability. The gaming industry wants self-regulation, but that is normally pointless. What is likely is that there may be a sub-regulatory body under the IT Ministry with blocking powers and a tougher stand against gambling websites. The dividing lines are too thin and regulation is perhaps the only answer. That is not really great news for listed gaming companies like Nazara.