[ad_1]
[Rishi A. Kumar and Zainab Bhanpurawala are fifth-year B.A., LL.B. (Hons.) students at Tamil Nadu National Law University and ILS Law College, Pune, respectively]
On April 29, 2025, the Securities and Exchange Board of India (“SEBI”) published a cautionary press release to investors operating on opinion trading platforms. SEBI stated no investor protection mechanisms will apply, as opinion trading fall outside their purview since (i) the instruments traded are not ‘securities’, as defined under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”) and, (ii) even if they do qualify as securities, such trading is illegal as these platforms are not ‘recognized stock exchanges’ (defined under section 4 of the SCRA).
Opinion trading platforms, or prediction markets, allow users to trade on the outcome of “yes/no” events (e.g., “Will the S&P 500 reach 5500?”) through an event contract (a type of futures contract). These platforms use a trade-matching engine where users take opposing positions, and prices are defined by a probability based on demand and market sentiments. For example, user A believes the S&P 500 will hit 5500 points by the end of the month and buys a “Yes” contract for ₹60. Meanwhile, user B believes it won’t and buys a “No” contract for ₹40. The platform matches their trades, locking in a ₹100 pot. If the event occurs, A receives ₹100; if it doesn’t, B does. Midway, new data causes the market to doubt whether the S&P 500 will rise. The price of the “Yes” contract falls to ₹30. User A triggers a stop-loss and exits by selling at ₹30, losing ₹30 (A can only exit if there is liquidity in the market and someone else is willing to accept the trade). Now, if user C buys A’s contract, hoping for a rebound, B’s “No” contract remains active, and B still stands to win ₹100 if the index doesn’t reach 5500.
These opinion trading platforms gained popularity in the U.S., with platforms like Kalshi, which exclusively trade in event contracts. In India, too, platforms like Probo and others have attracted five crore users and over 50,000 trades in market volume. However, they operate in a regulatory vacuum or a grey area. To assess the legality of event contracts and opinion trading platforms in India, one needs to examine the structural design and underlying legal character from three laws: (i) the Indian Contract Act, 1872, (ii) the Public Gambling Act, 1867, and state-specific laws, and (iii) the SCRA.
Event Contracts under the Contracts Act
The first question is whether these event contracts qualify as valid contracts. Two important provisions here are section 23, which voids agreements with unlawful objects and consideration (e.g., illegal acts, contrary to public policy, etc.), and section 30, which voids wagers.
Wagers are not illegal acts per se (see Gherulal Parakh v. Mahadeodas Maiya), but they are unenforceable, i.e., parties cannot go to court if the other party refuses to pay. Wagers resemble contingent contracts, as both depend on the occurrence of an uncertain future event, but unlike wagers, contingent contracts are legal and valid under section 31 (e.g., insurance contracts). The key difference lies in the presence of an ‘economic interest’. When a person has a genuine, pre-existing interest in the outcome of the event, beyond simply winning or losing money, it would be a valid contingent contract; if not, it would be a wager. For example, an insurer’s interest in insured property reflects a valid economic interest.
The challenge is determining whether event contracts are wagers or contingent contracts. As ‘wager’ is not a statutorily defined term, the courts have derived three elements of wagers: (i) two persons holding opposite views referencing a future uncertain event; (b) one party must either win or lose on the happening of this event and; (c) parties have no genuine interest in the event other than the stake involved. (see Rajshree Sugars & Chemicals v. Axis Bank)
However, this raises questions about the validity of over-the-counter (OTC) derivatives products, as they also lack a specific economic interest. This is where the concept of hedging becomes relevant. Hedging involves using derivatives to offset potential losses in an existing position, thereby creating an economic interest in the underlying asset or exposure. While event contracts are structured like wagers, there are important differences. Unlike wagers, which are purely speculative and involve no underlying interest, a variety of event contracts reflect a genuine attempt to manage real-world uncertainty by referencing financial, geo-political, or environmental events, as such events can have a tangible impact on people’s lives, affecting everything from food prices to employment. For example, a poor monsoon can disrupt agriculture and raise inflation; sudden political decisions, like tax reforms or trade bans, can materially influence markets, supply chains, and even household finances.
Institutional investors use derivatives, like futures, options, or swaps, to hedge against such risks. However, creating customized derivative products to cover highly specific risks (e.g., a rainfall threshold or the outcome of a central bank meeting or credit events) is practically impossible for retail investors due to entry barriers, complexity of products, and the regulatory constraints which limit market access. In this context, event contracts could represent the next best alternative. It democratizes such hedging products and offers a way for common individuals to manage exposure, or offset potential losses arising from real-life uncertainties, and calls for a more nuanced regulatory treatment, rather than direct dismissal as mere wagers.
On the other hand, retail investors rarely use such event contracts for genuine hedging purposes. Instead, these instruments may become speculative tools, bordering on gambling, driven by the hope of making quick profits. A recent SEBI report found that nearly 90% of retail investors trading in exchange-related derivatives incurred losses, which indicates a lack of informed analysis or any risk management, leading to restrictions on the trading of derivates. Moreover, when such contracts are traded on public platforms, it is unrealistic to assume that all users are engaging in them to hedge real-world risks. Without a risk-mitigation object, such contracts become pure speculation, and are void and unenforceable.
Event Contracts under Gambling Laws
When there is extreme speculation, it becomes a matter of public policy, triggering the application of gambling laws. However, the question is whether there can be a classification of these contracts as ‘gaming/gambling’ under the Public Gambling Act, 1867. It depends on whether the activity involved is a game of chance or a game of skill. Indian courts, including the Supreme Court, have held that games of skill are not gambling and are protected under Article 19(1)(g) of the Constitution (see RMD Chamarbaugwala v. Union of India).
The key argument in favour of opinion trading platforms is that, in traditional gambling, individuals typically play against the ‘house’, where the house has a vested interest in the outcome and profits from players’ losses. This is exactly where such opinion trading platforms differ, as they only function as marketplaces, merely matching opposing predictions between users. The platform itself remains agnostic to the outcome and does not take a position; instead, it obtains profits from a minor fixed fee on all the trades. In opinion trading, some argue that users apply skill, analysis, and judgment to predict events, becoming a game of skill (e.g., poker), unlike pure games of chance where outcomes cannot be predicted (e.g., dice). An additional argument in favor is that they function as prediction markets, aggregating diverse information about future events, often producing forecasts that are more accurate than individual expert opinions, serving a genuine economic purpose. Therefore, outright bans may be unconstitutional under Article 19(1)(g) of the Constitution since similar platforms exist which operate for research purposes.
However, given the SEBI’s report on derivative trades, assuming widespread use of skill/analysis is doubtful, and raises public policy concerns. If primarily speculative transactions are taking place, they may warrant regulation or even prohibition under gambling laws. In line with this, several States under Entry 34 of the State List have enacted broader and more modern gambling laws. For instance, the Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022, which recently withstood constitutional scrutiny in Play Games 24×7 v. State of TN, completely prohibits ‘online wagers’ under section 7 of the Act. Following this, Probo has voluntarily geo-blockedaccess in Tamil Nadu. This shows that even industry players may view these activities as games of chance/wager, and the legal presumption tilts toward treating such contracts as falling under section 23 (contrary to public policy) and section 30 (wagers) of the Indian Contract Act, rather than contingent contracts with genuine economic purposes.
Event Contracts under SEBI’s Jurisdiction
The key question is whether the SEBI can regulate trading of event contracts. Looking at the U.S. position gives some useful insight. In 2020, Kalshi (the prominent player in the opinion trading industry) received approval from the Commodity Futures Trading Commission (CFTC) as an authorized Designated Contract Market (DCM), becoming the first financial exchange dedicated for event contracts. However, controversy arose when Kalshi listed event contracts on the outcome of the U.S. presidential election. The CFTC objected, claiming it was against public interest, and filed a case to block it (see KalsiEx v. CFTC), however, the D.C. Circuit Court ruled in Kalshi’s favour, as the CFTC failed to prove any harm to public interest from such contracts.
Kalshi’s growth has encouraged others; however, the legal requirements and market conditions in India are very different. In India, the SCRA defines derivatives to include: (i) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences, or any other form of security; (ii) a contract which derives its value from the prices, or index of prices, of underlying securities; (iii) commodity derivatives; and (iv) such other instruments declared by the central government to be derivatives.
The key issue with event contracts under the SCRA is that the underlying asset or reference event must be a financial instrument, commodity, or some indices. The mere occurrence or non-occurrence of events like environmental changes or political outcomes cannot be referenced and thereby fall outside the definition of ‘derivatives’. Unless the central government specifically declares such event contracts as derivatives under clause (iv), they remain outside the SEBI’s regulatory scope. If the scope of event contracts remains restricted, retail investors will continue to rely on already prevalent exchange-traded derivatives for market exposure.
Section 18A states that, notwithstanding other laws, derivatives that (i) are traded on recognised stock exchanges; (ii) are settled on the clearing house of a recognised stock exchange; or (iii) are between parties and terms set by the central government, shall be legal and valid. It could be argued that this prohibits event contracts traded on opinion trading platforms. However, such an interpretation of section 18A would be invalid. The Bombay High Court, in Edelweiss Financial Services v. Percept Finserve, stated that “… Section 18A of the SCRA does not purport to invalidate any contract… what it does is making contracts referred to in clauses (a) to (c) thereof as legal and valid. It does not, by its own force, make any particular contract illegal or invalid. For such illegality or invalidity one has to look outside Section 18A.”
Alternatively, if such opinion trading platforms obtain recognition from the central government under section 3 of the SCRA as stock exchanges and establish a clearing house, all event contracts traded on these platforms would be deemed valid ‘derivatives’ removing the necessity of validating them under other laws, as section 18A contains a non-obstante clause that overrides all other laws. However, as of now, there are only five recognized stock exchanges that trade in derivatives, indicating that regulatory barriers are too heavy, especially for start-ups like Probo.
Conclusion
While opinion trading platforms have found success in the U.S., their potential in India remains stunted. These platforms operate in legal grey areas and are perpetually at risk of prohibition, either by being classified as wagers (and losing public legitimacy) or under gambling laws. Although the Gujarat High Court dismissed an initial public interest litigation, the recent decision of the Supreme Court to reinstate a petition seeking a ban on opinion trading apps further shows the regulatory uncertainty and the urgent need for legal clarity. The only viable path forward for such platforms in India would be to seek regulatory legitimacy, and obtain recognition as a stock exchange, and get approval from the central government for such contracts. Despite the heavy initial costs, this would validate all such event contracts, removing future legal burdens.
– Rishi A. Kumar & Zainab Bhanpurawala
[ad_2]
Source link