Online Gaming Act 2025: Can this trigger Material Adverse Effect(MAE) Clause?

Introduction

This article analyzes Material Adverse Effect (“MAE”) clauses in the transaction documents with specific focus on regulatory changes.

What is Material Adverse Effect?

A Material Adverse Effect means occurrence of events or circumstances that affect:

(a) substantially and adversely the business, operations, assets, liabilities, or financial condition of the target company;

(b)   the status and validity of any material consents or approvals required for the company to carry on its business;

(c)    the validity or enforceability of any of the documents or of the rights or remedies of the investors;

(d)   the ability of the company and/or the founders to consummate the transactions or to perform their obligations, etc.

Can enforcement of Online Gaming Act, 2025 be treated as an MAE Event?

How can a change in law trigger MAE?

One of the recent examples of events or circumstances that can substantially and adversely affect the business is the introduction of the Online Gaming Act, 2025 (“Act”) in the online gaming sector. This Act represents a significant change in law that could possibly trigger MAE clauses for companies in the online real money gaming sector.

Impact of regulatory change on business

For companies primarily engaged in online money gaming, this prohibition directly eliminates their core business model therefore affecting their operations, financial condition, validity of consents and approvals, also in some cases, consummation of transaction. This categorical prohibition would fundamentally undermine the business premise upon which investors may have valued the company, potentially reducing its value to near zero if no alternative business model exists.

What does the Act explicitly prohibit?

1. Offering online money gaming services Revenue elimination: Companies can no longer offer their core service, immediately cutting off revenue streams.
2. Advertising or promoting online money games Marketing prohibition: Even if a company wanted to pivot to offshore operations, they cannot advertise to the Indian market
3. Facilitating financial transactions for online money games Payment blockade: The prohibition on financial institutions from processing related payments creates a complete operational blockade.

This three-pronged approach means that companies cannot operate, market, or monetize online money games in any capacity within India, fundamentally altering the business case that investors relied upon. The Act specifically targets business operations “from outside the territory of India” as well, closing potential loopholes.

Penalties and Enforcement Mechanisms

The other provisions of the Act that could potentially trigger MAE are penalties and enforcement mechanisms which include imprisonment up to three years and fines up to one crore rupees for offering online money gaming services. These penalties create material risks for key employees of the target companies in several ways:

1. Operational disruption: The Act makes related offenses cognizable and non-bailable, meaning executives could be detained during legal proceedings
2. Criminal liability for leadership: Directors and officers face personal criminal liability, potentially triggering key person provisions (if applicable) in MAE clause
3. Significant financial penalties: Fines of up to one crore rupees (with enhanced penalties for repeat offenders) represent material financial exposure
4. Reputational Damage: Any company engaging in such activities can be seen as engaging in activities that can cause serious social, financial and psychological harm to public health. Further, the Act states that the unchecked expansion of online money gaming services has been linked to unlawful activities including financial fraud, money-laundering, tax evasion, and in some cases, the financing of terrorism, thereby posing threats to national security, public order and the integrity of the State. The companies engaged in such activities can be exposed to reputational damage for such reasons.

The collective impact of these enforcement provisions creates both immediate financial liability and operational continuity risks that would likely meet materiality thresholds in the MAE clauses.

How to safeguard the Company in such situations?

Building exceptions and carve outs:

• Industry-Wide Effects: Many MAE clauses exclude industry-wide changes that affect all market participants equally. Since the Online Gaming Act 2025 impacts the entire online money gaming sector uniformly, companies could argue this falls within standard carve-outs for industry-wide effects.
  
  Counter-argument for MAE trigger: However, the Act creates a bifurcated impact on the gaming industry, explicitly promoting e-sports and social gaming while prohibiting money gaming. Companies exclusively focused on money gaming would be disproportionately affected compared to diversified gaming companies, potentially overcoming industry-wide effect exceptions if the MAE clause contains “disproportionate impact” language.
  
• Changes in Law Exception: Building a carve out that provides exclusion of general changes in law or government policy from triggering an MAE. If the agreement contains such an exception without qualification, the target company could argue that the Act is merely a change in law that falls within this standard carve-out.
  
  Counter-argument for MAE trigger: The Act is not a general regulatory change but specifically targets and prohibits a narrowly defined business activity. The Act explicitly states it aims to “prohibit the offering, operation, facilitation, advertisement, promotion and participation in online money games.” This targeted prohibition, rather than general regulation, may overcome typical changes-in-law exceptions, especially if the MAE clause contains language addressing laws that specifically target the company’s industry or core business.
  
• Foreseeability: If regulatory changes were foreseeable at the time of entering the agreement, it could be argued that such changes cannot trigger an MAE. The Act’s preamble acknowledges longstanding concerns about “deleterious and negative impact of online money games” and their association with “financial fraud, money-laundering, tax evasion.” If these concerns were public knowledge, target companies could argue investors assumed this regulatory risk.
  
  Counter-argument for MAE trigger: While some regulation might have been foreseeable, the Act’s approach of complete prohibition rather than regulation represents a more extreme position that might not have been reasonably anticipated. The Act explicitly states it is “expedient…to completely prohibit the activity of online money gaming, rather than attempts to regulate.” This total prohibition approach, rather than a regulatory framework, may exceed what was reasonably foreseeable.

Drafting Considerations for MAE Clauses

When drafting or negotiating MAE clauses in the online gaming sector, parties should consider:

1. Specificity regarding regulatory changes: Explicitly address whether prohibition of core business activities constitutes an MAE, with clear thresholds for the percentage of revenue that must be affected
2. Definition alignment: Precisely reference the Act’s definitions of “online game,” “online money game,” and “online social game” to avoid interpretation disputes.
3. Transition provisions: Include specific language about the company’s ability and timeline to transition to permitted activities like e-sports and social gaming.
4. Materiality threshold: Define quantitative thresholds (e.g., percentage of revenue, EBITDA impact) for what constitutes “material”.
5. Look-back periods: Address liability for past activities that may be subject to penalties under the new law.

Conclusion

The Promotion and Regulation of Online Gaming Act, 2025 represents a paradigm shift in India’s approach to online gaming, with significant implications for MAE clauses in the transaction documents. The Act’s clear prohibition of online money games while promoting other segments of the online gaming sector creates a complex regulatory landscape with material business impacts.

Companies and investors should carefully review existing MAE clauses and thoughtfully draft new ones to address the specific risks posed by this legislation. The binary approach of the Act-prohibiting online money games while promoting e-sports and social gaming-creates both challenges and opportunities that should be reflected in transaction documents.