“Industry is blowing hot and cold”: Govt slams Gaming firms in SC over PROGA challenge

The Centre has told the Supreme Court that the unregulated online money-gaming ecosystem poses significant risks to public order, national security and financial integrity, arguing that Parliament is fully empowered to enact the Prohibition of Online Gambling and Regulation of Online Games Act (PROGA). The submission comes in response to a writ petition filed by Head Digital Works challenging the constitutional validity of the legislation.

In a detailed affidavit (a copy of which is with Storyboard18), the government said the sector has expanded without any coherent or enabling legal framework, which has “hindered structured development” and prevented the emergence of responsible gaming norms. According to the affidavit, the vacuum in regulation has enabled widespread access to online money games through mobile phones and the internet, exposing young and economically vulnerable groups to “serious social, psychological and public health harms.”

The Centre has accused online money-gaming companies of “blowing hot and cold” on the question of regulatory oversight, telling the court that the same platforms which earlier insisted only the Union could legislate on the sector are now challenging Parliament’s competence after the enactment of PROGA.

In its affidavit, the government also detailed how several foreign-controlled gaming operators have been incorporating entities in India using dummy local directors, who serve merely as a façade before foreign nationals assume control of operations — a pattern the Enforcement Directorate says has enabled illicit fund flows, weak compliance structures and evasion of regulatory scrutiny.

The Centre said many online money-gaming platforms use “manipulative design features, addictive algorithms, bots and undisclosed agents,” creating systems that undermine fairness and transparency while encouraging compulsive use and financial losses. It added that this ecosystem has been aggressively marketed through large-scale advertising and celebrity and influencer endorsements, further amplifying risks for minors and other vulnerable categories.

Links to Terror Financing and Money Laundering

The affidavit states that data analysed by investigative agencies establishes clear links between parts of the online gaming sector and money laundering, terror financing and fraud. The government cited suspicious transaction reports (STRs) and cross-border wire transfer reports (CBWTRs) to argue that illicit funds are being routed through gaming platforms.

According to the affidavit, gaming companies incorporated in small island jurisdictions have facilitated the movement of funds out of India using proxy bank accounts opened in the names of “front persons” — individuals such as students, homemakers and retired persons whose accounts are used to mask the identity of the real beneficiaries. Banks have also identified “money mule” accounts where customer IDs were linked to online gaming websites and used to route illicit proceeds.

The government said Enforcement Directorate investigations have found that dummy Indian directors are routinely appointed to incorporate gaming firms, after which foreign nationals travel to India and take charge of operations. Local recruits are then used to open mule accounts and create merchant and trade accounts with payment intermediaries. Weak due-diligence practices and non-reporting of suspicious transactions by intermediaries have enabled such firms to move funds without detection, the affidavit said.

The government also detailed methods used for layering illegal transactions, including “refer-and-earn” schemes and MLM-style incentives that push users’ bank accounts into the flow of funds. It highlighted fraud patterns such as fake gaming websites promoted on WhatsApp and Telegram that vanish after collecting deposits; apps that trigger unauthorised recurring withdrawals after the first OTP-verified payment; and platforms that offer high initial rewards to attract deposits before disabling withdrawals and wiping out server data.

These features, along with cross-border structures and digital anonymity, have made investigations extremely challenging, the government said.

Regulatory Turf and Constitutional Competence

The Centre argued that online money gaming falls squarely within Parliament’s legislative competence under Entry 31 (communications) and Entry 97 (residuary powers) of the Union List. The affidavit said the technological nature, cross-border operations and absence of any explicit entry in the State List place the subject within the Union’s domain. Even if some aspects could theoretically be regulated by states, Parliament may legislate under Entry 52 to protect public interest, the Centre said.

According to the government, allowing states to independently regulate online gaming would create “regulatory chaos” and duplicative compliance burdens. Varying state approaches, it said, have already led to raids, FIRs, arrests and legal uncertainty, including unconstitutional prohibitions of skill-based games played for stakes. Conflicting regimes could exert a chilling effect on operators, employees and the broader tech ecosystem, potentially jeopardising jobs of over a lakh skilled workers, the affidavit warned.

The government said the IT Gaming Rules of 2023 were framed precisely to avoid such fragmentation and to establish a uniform federal framework suitable for a digital-first, borderless industry.

Online Gaming Firms “Blowing Hot and Cold”

The affidavit accuses online gaming platforms of adopting contradictory positions depending on convenience. It said that when states enacted laws to regulate the sector, platforms argued that only the Union had the constitutional authority. Yet, after Parliament legislated, the same companies — including the petitioner — now claim that the Union lacks competence.

The Centre told the court that this pattern shows the industry “does not want any kind of regulation or oversight,” and that Parliament took this into account while framing PROGA, which introduces prohibitions aimed at “preventing the erosion of youth, protecting public health, curbing money laundering and blocking terror financing.”

Prohibitions Are Justified and Proportionate, Centre Says

The government defended the reasonableness of the law, stating that every provision is backed by “rationality” and aimed at containing documented risks. It argued that activities classified as res extra commercium — that is, outside the scope of legitimate commerce — can be absolutely prohibited by Parliament, and that the petitioner cannot invoke proportionality or least-restrictive-means tests when no fundamental rights are implicated.

Overall, the Centre maintained that the “pith and substance” of the Act firmly place it within Parliament’s exclusive legislative field and that the law was neither capricious nor excessive but a necessary response to a clear national-level threat.