Banned Games, Trapped Funds: PROGA’s Refund Gap and Missing Refund Route

[Prabhas and Atharv are students at Gujarat National Law University.]

On 1 May 2026, the Promotion and Regulation of Online Gaming Act 2025 (PROGA) and the Promotion and Regulation of Online Gaming Rules 2026 (Rules) came into force and prohibited online money games, whether based on skill or chance. While the prohibition and the validity challenge before a three-judge bench of the Supreme Court have attracted attention, the treatment of user funds held by platforms has received far less scrutiny. A substantial part of those funds remains with the platforms. 

Following searches between 18 and 22 November 2025, the Enforcement Directorate (ED) froze deposits of approximately INR 523 crores across WinZO and Gameskraft under Section 17(1A) of the Prevention of Money-Laundering Act 2002 (PMLA). The ED recorded that WinZO held around INR 43 crores in customer wallet balances, while Gameskraft held over INR 30 crores in escrow. Neither amount had been refunded to users. Ownership of these balances is not disputed; what is missing is a lawful route for their return. 

This post argues that PROGA classified the game but not the money held through it. By deleting draft Rule 24, the Rules left users with a restitutionary right but no clear means of receiving payment. It first traces the exemption that allowed platforms to hold user funds without segregation. It then examines the deleted refund provision, the payment restrictions that remained, and the restitutionary obligation created by PROGA. Finally, it explains why company law, insolvency law and consumer law do not fill the gap, before proposing an immediate regulatory remedy and a broader client-money framework applicable across sectors.

The Money Nobody Classified

User money was still held by platforms in three ways: entry fees, platform-only wallet balances, and pooled prize money waiting to be distributed. None of them were considered to be client money within Indian law. This lacuna arose particularly from the RBI’s Master Directions on Prepaid Payment Instruments, which did not require authorisation for closed-system instruments usable only with the issuing entity. Simply put, wallets that could be used only on the same platform and did not permit cash withdrawals were outside RBI regulation. Gaming wallets that met these conditions fell within that exemption. Platforms may therefore be able to keep user funds without a licence, escrow arrangement or requirement to keep the funds separate. A wallet balance only showed up as a liability in the platform's books, making the user an unsecured creditor. PROGA prohibited the activity, but left the status of existing balances untouched.

Rule 24, and Its Deletion

The draft Rules published on 2 October 2025 included Rule 24. It gave platforms 180 days from commencement to refund outstanding balances, deposits and winnings, and clarified that doing so would not amount to facilitating a prohibited game. The Internet and Mobile Association of India argued that the period was too short and that the provision did not address balances left unclaimed after it expired. These concerns were not addressed, rather the notified Rules removed Rule 24 entirely. That's important since the payment limitations still existed.

Under PROGA, banks and financial intermediaries are prohibited from conducting transactions associated with online money games in Section 7. This prohibition is implemented by Rule 19 which mandates that they suspend, restrict or terminate facilitation when OGAI determines that a game is an online money game. The only rule that explicitly distinguished between refunds of existing balances and prohibited transactions was Rule 24. Without that exception, platforms cannot be certain that refunding existing balances will not be treated as facilitating a prohibited transaction.

The Restitutionary Right PROGA Creates and Obstructs 

By prohibiting online money games, PROGA rendered subsisting gaming contracts void for supervening illegality under Section 56 of the Indian Contract Act 1872. In Boothalinga Agencies v VTC Poriaswami Nadar, the Supreme Court treated Section 56 as a rule of positive law, so that the contract fails irrespective of the parties' intentions. Section 65 requires restoration of any advantage received under a void contract, and Kuju Collieries v. Jharkhand Mines confirms its application where a contract becomes void through subsequent events. 

The in pari delicto objection doesn't help the platforms. In the case of Loop Telecom v. Union of India, the Supreme Court held that restitution would only be available if the claimant was also responsible for the illegality. Users placed on platforms that courts had already ruled were games of skill, and had nothing to do with the voidance. The right is clear and payment transaction is required for its discharge. Rule 19 directions contain no refund exception. PROGA generates the obligation and disables the means of performing it. 

Why Existing Law Does Not Close the Gap 

Sections 248 and 271 of the Companies Act 2013 require liabilities to be discharged before dissolution, and wallet balances are liabilities. Money attached under the PMLA is not part of the winding up estate until the confiscation proceedings are completed. Where attachment is resolved, a bank holding an OGAI direction (which was given under a more recent and specific statute) cannot release the money without the liquidator's permission. 

The Insolvency and Bankruptcy Code 2016 divides creditors into financial and operational, a binary the Supreme Court treated as deliberate in Swiss Ribbons v. Union of India. A gaming user advances no financial debt. The route of operation seemed to be open following Consolidated Construction Consortium v. Hitro Energy Solutions, where an operational debt was accepted in advance for services, but this requires a contract to exist. That which remains after PROGA is a statutory restitution right, which is a residual right under Section 53(1)(f). Users therefore rank last in respect of funds that were always theirs. 

Consumer forums can acknowledge the claim, but cannot provide the remedy. An order against a platform does not bind the bank, which is neither before the forum nor free to disregard an OGAI direction addressed to it. 

The Eight-Month Window

One objection should be addressed directly. Major operators phased out cash formats from late August 2025, banks continued to accept cash withdrawals and prevent new deposits. Many users recovered their balances then. This is why the residue is important. What is left is in two categories: those whose accounts were frozen prior to refunds (which is the ED's claim) and dormant balances of users who never returned to claim them. These are not accessible via a mechanism that relies on the user to make a request, and the platform to be solvent and unfrozen. 

The Way Forward

The immediate remedy requires no legislation. The power to make an amendment to a direction given under a Central law is contained in Section 21 of the General Clauses Act 1897. OGAI can accordingly incorporate into its Rule 19 directions the carve-out that rule 24 would have supplied, permitting verified refunds of pre-existing balances. IAMAI's related submission, which proposes that instructions for any payment system should go through or be communicated to the RBI, would eliminate the possibility of the intermediaries getting conflicting instructions from two regulators. For funds already frozen, identifiable user balances subject to a section 65 obligation are difficult to characterise as proceeds of crime within Section 2(1)(u) of the PMLA, and the Adjudicating Authority may release them under Section 8. 

The structural response should not be sector-specific, and each component already exists in Indian regulation. The platforms with a user balance exceeding a prescribed limit should keep a separate account for user balances, known as user fund account, with a scheduled commercial bank, similar to the investor protection fund that SEBI mandates for stock exchanges and the escrow discipline that RBI has imposed on payment aggregators in 2025. This account should never be overdrawn, and should be quarterly certified to the regulator, and annually certified by the account bank that only authorized debits were made. The RBI can extend that discipline upstream under Section 18 of the Payment and Settlement Systems Act 2007, the same power under which its prepaid instrument directions are issued. The balances held should be held under a statutory trust from the date of opening the account, and therefore should not form part of the insolvent estate and should not be attached. 

Prohibition orders should also carry an express refund trigger. Intermediaries will not act on an implied exception, and the drafting cost of stating one is negligible. 

The timing of the draft prepaid instrument direction illustrates the limits of a sectoral fix. Published on 22 April 2026, the same day the Rules were notified, it withdraws the closed-system exemption from marketplaces, defined as e-commerce entities whose platforms facilitate transactions between buyers and sellers. A first party gaming wallet does not sound like that, as the operator acts as principal instead of intermediary. The reform that identifies the problem may not extend to the wallets that produced it. Client-money protection should attach to the function being performed, which is the holding of money for another, rather than to the sector in which the holder happens to operate.