Deposit Scheme:

A deposit scheme is a financial arrangement whereby a person or entity gathers money from the public, generally with the commitment to return the funds after a designated period, often with interest or some other benefit. Such schemes can be offered by banks, financial institutions, or various other entities, and their structures and terms can vary significantly.

Deposit schemes can either be regulated or unregulated. Nonetheless, the majority of frauds involving individuals occur through unregulated deposit schemes set up by dishonest entities that lack registration with any regulatory bodies, such as SEBI or RBI.

Unauthorized activities conducted by Non-Banking Financial Institutions (NBFIs) pertain to financial services offered by entities that lack the necessary registration or approval from regulatory authorities such as the Reserve Bank of India (RBI). These operations may encompass accepting deposits, providing loans, or participating in investment schemes without complying with legal standards.

Such unauthorized activities present considerable risks to consumers because these entities operate without regulatory supervision, which could result in fraud, financial losses, and legal conflicts. The Banning of Unregulated Deposit Schemes (BUDS) Act of 2019 aims to combat these illegal practices and safeguard the public from financial exploitation.

Section 33 of the BUDS Act, 2019 deals with advertising unregulated deposit schemes. In cases where a newspaper or any type of publication includes statements, information, or advertisements that promote, solicit deposits for, or encourage individuals to join any Unregulated Deposit Scheme, the relevant Government authority may require that newspaper or publication to issue a comprehensive and honest retraction, at no charge, in a manner and location within the publication as determined by applicable regulations.

The enforcement of the Banning of Unregulated Deposit Schemes (BUDS) Act, 2019, has yielded varied outcomes. Although the Act established a legal structure to combat unauthorized deposit schemes, enforcement challenges persist, especially across various states.

The establishment of a central database and specialized courts has enhanced transparency and accelerated legal processes; however, resource constraints and coordination problems among regulatory bodies have impeded its overall effectiveness. Moreover, public knowledge of the Act and its safeguards remains inadequate, leaving many individuals at risk of falling victim to fraudulent schemes. Additional initiatives are required to bolster enforcement and increase awareness.

Key Characteristics of Deposit Schemes:

Fund Collection: Deposit schemes involve collecting funds from the public, either as loans, advances, or investments.

1. Return Guarantee: Typically, the offering entity commits to returning the deposited money after a specific time, usually along with interest or dividends.
2. Government Oversight: Legitimate deposit schemes are regulated by governmental bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), or Insurance Regulatory and Development Authority of India (IRDAI), depending on their nature.

Types of Deposit Schemes:

• Bank Fixed Deposits (FDs): Customers place money in a bank for a fixed period at a predetermined interest rate.
• Recurring Deposits: Customers periodically deposit a fixed amount, earning interest on the total accumulated sum.
• Non-Banking Financial Companies (NBFCs) Deposits: NBFCs are permitted to accept public deposits through regulated frameworks.
• Chit Funds: Individuals contribute to a collective pool, with a member receiving the funds each month.
• Unregulated Deposit Schemes: These schemes operate outside regulatory oversight, often promising high returns accompanied by substantial risks.

Important Provisions of the BUDS Act, 2019:

The Banning of Unregulated Deposit Schemes (BUDS) Act of 2019 was enacted to combat the problem of unlawful deposit-taking activities in India.

Here are some key features of this legislation:

1. Ban on Unregulated Deposit Schemes: The Act prohibits all unregulated deposit schemes, which are those not registered with official regulators such as the RBI and SEBI.
2. Definition of Deposits: The Act provides a clear definition of what qualifies as a "deposit," encompassing money received as loans or advances, while excluding financial products that are regulated by law.
3. Promotion Prohibition: It is unlawful to advertise, promote, or accept deposits for unregulated schemes.
4. Strict Penalties: Offenders face severe consequences, with potential imprisonment for up to 10 years and fines reaching Rs 50 crore.
5. Central Database Creation: The Act requires the establishment of a central online database to track both regulated and unregulated deposit schemes, enhancing transparency.
6. Designation of Competent Authority: State governments are tasked with appointing a "Competent Authority" empowered to investigate offences and seize the properties of offenders.
7. Property Seizure Powers: The Competent Authority has the authority to attach and confiscate properties belonging to individuals or entities involved in unregulated deposit schemes.
8. Timely Legal Proceedings: The Act stipulates that investigations and adjudication must be completed within 180 days for attachment and forfeiture proceedings.
9. Specialized Courts: Designated courts are established to facilitate quick trials for cases under the Act.
10. Restitution for Depositors: The return of funds to depositors is prioritized through the sale of attached properties.
11. Severe Consequences for Recidivists: Repeat offenders face more severe penalties, including longer prison sentences.
12. Cognizable and Non-Bailable Offenses: Violations of the Act are classified as cognizable and non-bailable, ensuring swift legal action against offenders.
13. Reporting Obligations for Financial Institutions: Banks and financial institutions are required to report any suspicious deposits to the appropriate authorities.
14. Exemption for Regulated Financial Schemes: Deposits made to financial institutions regulated by the RBI, SEBI, IRDAI, and similar bodies are exempt from the provisions of the Act.
15. Appeals Process: The Act allows for the appeal of decisions made by the Competent Authority or the designated courts.
16. Involvement of Law Enforcement: Police are empowered to investigate violations of the Act, providing extra enforcement capabilities.
17. Penalties for Scheme Promoters: Individuals or organizations involved in promoting or managing unregulated deposit schemes are subjected to harsh penalties.
18. Preventive Measures: Authorities are authorized to take pre-emptive actions to halt the operation of unregulated schemes before they inflict harm.
19. Public Education: The Act highlights the importance of raising public awareness about the risks linked to unregulated deposit schemes.

Collectively, these features aim to safeguard depositors from fraudulent schemes and ensure that deposit-taking operations comply with established regulations.

Limitations of BUDS ACT, 2019:

1. Section 43(1) of the Act may be defective as it says that no order shall be made under this section after the expiry of three years from the commencement of this Act.
    
2. Instead of holding isolated meetings, the print, electronic, and social media may be used by the RBI to give mass publicity regarding the dangers of unregulated deposit schemes.
    
3. Advisories are not regularly issued by the RBI to the print and electronic media regarding precautions to be taken before the advertisement of Deposit Schemes.
    
4. The general public does not know who is the competent authority under the State as per Section 7. There is no provision of appointing a competent authority at the Centre in this regard.
    
5. Regarding Sections 32 or 31(4) and some other sections, there may be a requirement to issue a notification for application of BNSS (Bharatiya Nagarik Suraksha Sanhita, 2023) instead of Code of Criminal Procedure under the BUDS Act, 2019.
    
6. There may be a separate agency preferably under the department of Information and Broadcasting to keep watch over the advertisement of Deposit Scheme and issue notice under Section 33 for advertisement of unregulated deposit schemes.
    
7. The lack of specific provisions for whistleblower protection in the BUDS Act could be viewed as a shortcoming in its structure, especially considering the important role whistleblowers can have in uncovering and reporting unregulated deposit schemes. Implementing protections for these individuals could strengthen the Act's effectiveness by motivating more people to report issues without the fear of facing reprisals.
    
8. The BUDS Act is designed to oversee programs where individuals invest money with the anticipation of receiving financial returns or interest. However, when a company raises funds by offering a future product or service instead of a cash return, such transactions might not qualify as a "deposit" according to the Act. This situation can enable some companies to function outside the regulatory boundaries of the BUDS Act, despite effectively gathering funds in a manner akin to deposit schemes.
    
9. The effectiveness of the BUDS Act depends on the collaboration between various state governments and their regulatory bodies. A lack of resources or poor communication can result in delays in identifying and penalizing individuals involved in unlawful schemes. This issue is particularly pronounced when the schemes span multiple states or involve intricate financial arrangements, complicating the processes of investigation, legal action, and restitution for the victims.
    
10. Despite the stringent regulations of the BUDS Act, financial schemes often remain quite complex, leaving many individuals with a limited understanding of them. This lack of clarity provides an opportunity for scammers to deceive unsuspecting victims. These fraudsters are adept at manipulating the regulations or concealing their real motives, making it challenging for ordinary people to identify whether a scheme is legitimate or fraudulent. Consequently, individuals may still become victims of scams, even with the legal protections in effect.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565