The Banning of Unregulated Deposit Schemes Act, 2019
✅ The Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act)
1. Introduction
The Banning of Unregulated Deposit Schemes Act, 2019 was enacted by the Parliament of India to prohibit and criminalize unregulated deposit schemes. It was introduced to protect the interests of small and vulnerable depositors from fraudulent schemes that promise high returns but are neither regulated nor legal.
This law came in response to rising scams involving Ponzi schemes and fraudulent investment firms that duped millions of people across India, such as the Sahara, Rose Valley, and Saradha scams.
2. Objective of the Act
Ban all unregulated deposit schemes.
Create deterrence through stringent punishment for fraudulent deposit takers.
Protect depositors from exploitation and financial fraud.
Provide coordination between regulators and law enforcement agencies.
Ensure transparency in legitimate financial transactions.
3. What Is a Deposit Under the Act?
Deposit means any money received by way of an advance, loan, or in any other form with a promise to return, with or without interest, in cash or kind.
However, certain exclusions are provided under Schedule I, such as:
Deposits accepted by banks
Loans from relatives
Contributions in cooperative societies
Amounts received in the course of business (e.g., advance for goods/services)
Government-approved schemes
These regulated deposits are not banned.
4. What Are Unregulated Deposit Schemes?
A scheme that accepts deposits without being registered or regulated under any law such as RBI Act, SEBI Act, Companies Act, etc.
So, any entity taking public deposits without proper legal oversight and promising unrealistic returns falls under the "Unregulated Deposit Scheme."
5. Key Features of the Act
| Feature | Details |
|---|---|
| Ban on Schemes | Completely bans all unregulated deposit schemes. |
| Offences & Penalties | Creates criminal liability for promoters and agents of such schemes. |
| Competent Authority | State governments to appoint one or more authorities to investigate. |
| Central Database | Government to create an online database of all authorized deposit schemes. |
| Attachment of Property | Authorities can provisionally attach properties of offenders. |
| Special Courts | Designated courts for speedy trial of offences. |
| Refund to Depositors | Authorities can realize attached property to compensate victims. |
6. Punishment and Penalties
| Offence | Punishment |
|---|---|
| Soliciting deposits in an unregulated scheme | Up to 10 years imprisonment and/or fine up to ₹10 crore |
| Fraudulent default in repayment | Minimum 3 years, extendable to 10 years, plus fine up to ₹5 crore |
| Repeat offences | Additional fine and extended imprisonment |
7. Authorities Under the Act
Competent Authority (appointed by State Government): Investigates and attaches properties.
Designated Court: Tries the offences and issues directions for refund.
Central Government: Maintains online database and coordinates inter-agency efforts.
8. Important Sections of the Act
| Section | Description |
|---|---|
| Section 3 | Bans all unregulated deposit schemes |
| Section 4 | Prohibits advertising or promoting such schemes |
| Section 7 | Powers of attachment of properties |
| Section 8 | Designated Courts for speedy trials |
| Section 10 | Central database of regulated deposit schemes |
| Section 12 | Penalty for fraudulent default |
⚖️ Relevant Case Law
While this Act is relatively recent, courts have addressed related issues around fraudulent deposit schemes. Here are some important judgments that relate to the spirit and application of this law:
1. Sahara India Real Estate Corp. Ltd. v. SEBI (2012–2014)
Court: Supreme Court of India
Issue: Raising ₹24,000 crore from investors through Optionally Fully Convertible Debentures without SEBI approval.
Judgment: The SC ruled that Sahara violated SEBI regulations and ordered it to refund the entire amount with interest.
Relevance: Highlighted the risk of unregulated deposit schemes and the need for stricter oversight, forming part of the background for the 2019 Act.
2. CBI v. Sudipta Sen (Saradha Scam Case)
Court: Various, including Calcutta High Court
Issue: Saradha Group ran a Ponzi scheme, collecting thousands of crores from depositors with a promise of high returns.
Judgment: Multiple arrests were made, and property attachments ordered. The case exposed gaps in regulatory mechanisms.
Relevance: One of the key cases that triggered the need for comprehensive legislation, leading to the CAF Act and this Act.
3. Rose Valley Chit Fund Scam (In Re: Enforcement Directorate v. Gautam Kundu)
Court: Supreme Court
Issue: Rose Valley Group was found to have collected around ₹15,000 crore from investors illegally.
Judgment: SC upheld ED’s power to attach properties and stressed the importance of a regulatory framework to stop such frauds.
Relevance: Reinforced the need for laws like the Banning of Unregulated Deposit Schemes Act, 2019.
📌 Summary
| Aspect | Details |
|---|---|
| Full Name | The Banning of Unregulated Deposit Schemes Act, 2019 |
| Enforced On | 21st February 2019 |
| Main Objective | Protect depositors from fraudulent deposit schemes |
| Regulates | Unregulated deposit schemes that operate outside legal supervision |
| Penalties | Imprisonment up to 10 years, fine up to ₹10 crore |
| Authorities | Competent Authority, Designated Courts, Central Registry |
| Inspired by | Financial fraud cases like Saradha, Rose Valley, Sahara, etc. |
✅ Conclusion
The Banning of Unregulated Deposit Schemes Act, 2019 is a landmark law in India’s financial regulatory framework. It:
Closes legal loopholes that allowed Ponzi and pyramid schemes to flourish.
Provides strong enforcement powers to authorities.
Empowers depositors with legal protection and mechanisms for recovery.
Acts as a deterrent to fraudulent financial activities that exploit the poor and uneducated.
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