It has been more than a decade since the Saradha and Rose Valley schemes, which had taken money from households with the promise of high returns, made headlines. The Government of India enacted the Banning of Unregulated Deposit Schemes Act 2019, also known as the BUDS Act, to protect investors from such fraudulent products and practices. Further, the Central Registry of Securitisation Asset Reconstruction and Security Interest of India – CERSAI – was designated as the authority to establish a publicly accessible portal that would provide information on deposit takers.
Since early 2024, CERSAI has been requesting information from all regulated entities defined under the BUDS Act, including capital market players such as mutual funds and Alternative Investment Funds (AIFs). This brings to light the first flaw in the drafting of the BUDS Act – the definition of a regulated deposit scheme. This assumes more importance because of the second flaw in the Act – the power to carry out search and seizure operations without a judicial warrant.
In contrast, the defining feature of capital market products such as equities, mutual funds, and AIFs, is the absence of the promise to return the money invested. When we buy shares of a company, we acquire ownership of the company to the extent of our shares. When we invest in mutual funds, we buy into a pool of diversified assets, whose value fluctuates based on the underlying assets. When we invest in an AIF, we buy into even more sophisticated risk-return tradeoffs. The essence of all these products is that there is no assurance of a return, and no money-back guarantee. This distinction has regulatory implications. Deposits are subject to more stringent regulations around risk-taking as there is a promise that has to be honoured. Capital market regulations protect against fraud, but not against risk.
The definition of a deposit in the BUDS Act recognises this distinction. According the Act, “A deposit is an amount of money received by way of an advance or loan or in any other form, by any deposit taker with a promise to return whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form…”
But the Act contradicts its own definition of a deposit, ignoring the fundamental difference between a deposit and a capital market product by including the latter in the definition of “regulated deposit schemes”. It is possible that capital market products were included in this list because they are regulated products. But just because one is a regulated product does not mean it should be classified as a deposit scheme.
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The BUDS Act further provides local police the power to search and seize without a judicial warrant. For example, if the police receive information about a company running an “unregulated deposit scheme”, it can raid the premises without seeking approval from a court. It is not hard to understand where the desire for granting such powers is coming from. It’s important for authorities to take swift action to protect vulnerable depositors from fraudulent schemes. However, if this protection comes at the cost of the erosion of procedural safeguards, there’s the possibility of unchecked power leading to harassment, extortion, or targeting of political and business rivals.
Further, unchecked state power has economic and social consequences. Businesses that operate genuine deposit schemes may feel threatened by the possibility of sudden interventions by authorities on the basis of information that may be false. Citizens may begin to perceive the law not as an instrument to help them, but as an instrument of coercion. Unchecked power, however well-intentioned, carries the seeds of its own excess. The sidelining of judicial oversight is to risk undermining the legitimacy of the law itself.
It is not clear whether the BUDS Act, passed in 2019, went through a rigorous process of cost-benefit analysis and stakeholder consultation. It is likely that it didn’t because these gaps would have been recognised in the process. Further, any legislation should be reviewed every few years to understand if it has had the intended impact, and to measure unintended consequences that may have arisen. The BUDS Act should go through such a review.
Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Views are personal.
(Edited by Zoya Bhatti)
