New Delhi: Lottery company Future Gaming and Hotel Services, the largest purchaser of electoral bonds in the country, first bought electoral bonds from the revenue it earned from the sale of lottery tickets, and only then registered the remaining meagre amount as profits, a deep analysis of the financials of the company by ThePrint has found.
This is of particular significance since the Enforcement Directorate has launched an investigation into the company and has seized its assets, alleging that the company and its management had illegally inflated its revenue by manipulating unsold lottery tickets and claiming prizes on them, among other things.
The purchases of Rs 1,368 crore worth of electoral bonds were recorded deep in the financial statements of the company, under layers of obfuscating sub-heads like ‘other expenses’ and ‘miscellaneous expenses’. It was only once these layers were peeled back that it became clearer how the company was paying for them — through its revenue and not profits.
Indeed, a larger look at the lottery business in India — encompassing financial statements, reports by central government agencies, and conversations with industry insiders and experts — shows that the industry as a whole has very slim profit margins, of less than 1 percent.
The profits are so small that they would not have been able to finance the purchase of the bonds.
While lottery companies earn large amounts as revenue, their profits remain small due to large expenses relating to the prize payouts, Goods and Services Tax (GST), commissions to vendors and, in the case of Future Gaming, purchases of electoral bonds.
This, however, is on the face of it. Several reports by the Comptroller and Auditor General of India (CAG) and investigations by the Enforcement Directorate (ED) show that several lottery systems in multiple states are plagued with financial malpractices that go against the rules and laws laid out for the industry by the Centre.
ThePrint has reached out to Future Gaming over email with a list of queries. This report will be updated as and when a response is received.
Also Read: Electoral bonds: Lottery firm charged by ED & infra company raided by IT dept emerge as top 2 donors
How lotteries are supposed to work in India
The rules regulating the lottery industry in India are laid out in the Lotteries (Regulation) Act, 1998. Under the Act, state governments are free to choose whether to allow lotteries with their jurisdiction or not. They are also free to either sell the lottery tickets themselves, or through individual agents, or private companies that act as marketing agents (MA). Further, states can sell their lottery tickets in other states that allow lotteries.
Both online and offline lottery systems fall under these rules.
At the moment, there are nine state governments that allow lotteries, according to an answer provided by Minister of State for Finance Pankaj Chaudhary in the Lok Sabha in March 2023. These states are Arunachal Pradesh, Goa, Kerala, Maharashtra, Mizoram, Nagaland, Punjab, Sikkim, and West Bengal.
The number of lotteries run by each state varies, with most running daily lotteries as well as periodic bumper lotteries — priced higher and with higher payouts — on special occasions like festivals and new year’s. Kerala, for example, currently runs seven daily lotteries in a week, apart from annual bumper lotteries for Christmas, Summer, Vishu, Monsoon, and Thiruvonam.
Mizoram, on the other hand, runs four lotteries a day, every day. Its legislature has mandated that it cannot run more than 24 lotteries a day.
It is the state governments that are tasked with fixing the time for claiming the prize money, and the periodicity of the lotteries. If a state government chooses to outsource its lottery distribution to a private company, it must choose that company through a transparent tendering process.
According to the Lotteries Act, the marketing agents are to transfer the entire proceeds of the sale of lottery tickets to the public account of the state, which is then supposed to distribute the prizes and the commission payable to the MA. States also include a provision wherein they are mandated to receive a Minimum Guaranteed Revenue (MGR) from the marketing agents. This MGR is typically supposed to be about 20 percent of the ticket sales.
What often happens
Over the last 10 years, the CAG has released several reports on the functioning of lotteries in states such as Sikkim, Mizoram, and Kerala. While all these reports found numerous smaller issues in the running of lotteries in these states, the main highlight —at least in the case of Sikkim and Mizoram — was that the marketing agents were transferring minuscule amounts to the state governments, and were instead keeping the overwhelming majority of the ticket sales with themselves.
A lottery and gambling industry insider told ThePrint on the condition of anonymity that under the agreement with state governments, the whole ticket sale value has to be transferred to the state government and the distributor would get a commission.
“But what’s happening, in many states and not just Mizoram and Sikkim, is that they are not even transferring this sale amount to the state in the first place,” this person added. “Many times, they transfer less than the MGR. So the state governments get only about 0.5 percent of the total ticket sales amount. The rest of the amount is cornered by the distributor.”
The CAG’s 2017 report on Sikkim’s state lotteries, for example, found that while the MAs sold a total of Rs 44,834.87 crore worth of tickets between 2010 and 2016, these distributors transferred just Rs 628.74 or 1.4 percent to the states. They were supposed to transfer 20 percent as per the agreement.
“Thus, the MAs were getting the major share of revenue from the State’s lotteries while the State received a meagre share of revenues,” the CAG noted. “Even the sale proceeds indicated above were based on figures submitted by the MAs whose authenticity was not verified by the Department. The Department had not established any mechanism to independently verify and obtain the correct sales figures from MAs. It relied on the sales figures submitted by the MAs.”
The CAG also found several discrepancies in the way the MAs were awarded the contracts for distribution, with cases emerging where the contract was awarded without a tendering process having taken place.
A previous CAG report in 2016 found the same issues in the lottery system in Mizoram — it found that the MAs transferred just Rs 25.45 crore to the state government in the period 2012-15, against a total sale of Rs 11,834.22 crore during this period. This works out to 0.22 percent going to the state and the rest retained by the MAs.
“The distributors neither deposited the balance amount of Rs 11,808.77 crore to the Consolidated Fund of the State nor was it demanded by the Government,” the CAG noted.
Do private companies make money?
A look at the financial statements of lottery marketing companies shows that their revenue can vary greatly — from a few hundred lakh in a year to several thousand crores. So, too, can their profit margins, from less than 1 percent for the larger companies to about 5 percent for the smaller ones.
The difference in profit margins lies in how large their scale of operations are, the size of the prizes that are paid out, and the commissions they agree to pay their vendors.
“Of the ticket sale value, more than 60 percent goes out as the prize money, and there is also a 28 percent GST (which has to be transferred to the state government and Centre)” Jay Sayta, a tech and gaming lawyer, told ThePrint. “Then the suppliers, retailers and stockists have to be paid their commissions as incentive. Overall, it is not a high margin business. The margins are in fact very low.”
The financials of Future Gaming and Hotel Services show that, as the company’s revenues have grown between 2017-18 and 2022-23 (the latest year for which data is available publicly), its profit margins have fallen substantially.
The company earned Rs 2,779.60 crore in 2017-18, of which just Rs 137.08 crore was its profit, a profit margin of 4.9 percent. By 2022-23, the company’s revenue had grown to Rs 22,965.52 crore but its profits fell to just Rs 48.3 crore, a profit margin of 0.2 percent.
Future Gaming was booked by the Central Bureau of Investigation (CBI) in 2011, based on which the ED registered a case of money laundering and found that Future Gaming owner Santiago Martin and his companies made “unlawful gain” amounting to Rs 910 crore by causing losses to the Sikkim government by inflating the price of prize-winning lottery tickets between 2009 and 2010.
The ED has so far attached more than Rs 500 crore worth of assets of the company.
Additionally, during the same time, the ED had also filed a prosecution complaint against the company and said that it had dishonoured the agreement it signed with states for selling lotteries across India and that it was not transferring the entire sale proceeds to the state governments.
“The modus operandi also includes illegally retaining unsold lottery, claiming prizes on unsold lotteries, manipulating data to show unsold prize-winning tickets as sold and claimed prizes on same, which are also in contravention of Lottery Regulation Act, 1998,” the ED had said after filing a prosecution complaint against the Future Gaming and Hotel Services PR and 14 other firms.
Electoral bonds within layers of sub-heads
A deeper look at Future Gaming’s profit and loss accounts, filed with the Ministry of Corporate Affairs and accessed by ThePrint, shows that the overwhelming majority of the company’s expense in 2022-23 were attributed to purchases of stock-in-trade worth Rs 22,357.8 crore.
Stock-in-trade refers to the goods necessary to carry on a business. This amount works out to 97.3 percent of the revenue the company earned that year (Rs 22,965.51 crore) and 97.9 percent of its total expenses.
The second largest item of expenses for the year 2022-23 was a category called ‘other expenses’, which worked out to Rs 489.3 crore. Within this, the largest category was something called ‘miscellaneous expenses’ of Rs 335.8 crore. Finally, this category is where the Rs 328 crore worth of electoral bonds purchased that year were recorded.
This is the pattern of recording electoral bonds in the previous financial years as well, the analysis found.
Kerala emerges as a different case
Kerala is one of the few states that does not allow private distribution of its lottery tickets, instead doing it itself.
“Kerala lottery is fundamentally different from how lottery is run in the rest of the country,” Abraham Renn, Director in the Directorate of State Lotteries in Kerala, told ThePrint. “Where the interest of the rest of the country in lottery may be to generate a profit, Kerala’s lottery is run for a wholly different motive. It is run as a means of employment and means of livelihood for the poorest of the poor, especially for people with special needs and differently-abled individuals.”
As such, he said, the way the lottery system is structured in Kerala differs from how it is in other states. At the outset, the state provides its agents a discount, Renn explained. That is, if a lottery ticket costs Rs 100, the state will charge the agent only Rs 75. The vendor can go ahead and sell the ticket for Rs 100.
The state also collects GST on that Rs 75, not on the total Rs 100. This discount, along with some additional prizes for the agents themselves, makes the lottery business in Kerala barely profitable.
“We give 60 percent of what we collect from ticket sales back as prizes,” Renn said. “In addition, there’s the 28 percent GST. That’s 88 percent right there. Then, we also give 12 percent of the winning prize amount to the agent who sold the winning ticket.”
If the prize money is small, in the daily lotteries, then the prize for the agent comes from the prize amount itself, Renn said. “However, in the larger bumper prizes, the state government pays for the agent’s prize,” he added.
That said, it’s not all okay with the Kerala lottery system. The CAG, in a 2018 report on Kerala’s lotteries, not only found the existence of fake tickets being sold, but also noted that “there was neither an enforcement wing to curb this practice nor manual prescribing the procedures to be followed in such occasions”.
Since then, however, ThePrint has found that matters have improved significantly, with several safety measures put in place to curb the prevalence of fake tickets.
Also Read: Banning electoral bonds won’t cure corporate capture of politics. Bigger reforms are needed
The lucky winners get sixty cents. The sovereign, Centre and states, twenty eight. The rest of the loose change really doesn’t matter.