By Dr. Ajay Kummar Pandey, Advocate Supreme Court of India,

www.4Csupremelawint.com/www.drajaypandey.com

The Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act) was enacted to address the growing menace of unregulated deposit schemes that exploited unsuspecting investors, particularly in the wake of high-profile financial scams like the Saradha Chit Fund scam in West Bengal and the Pearls Group scam. These scams defrauded millions of investors, often from economically weaker sections, leading to widespread financial distress and social unrest. The Act aims to protect investors by banning unregulated deposit schemes and providing a mechanism for the repayment of deposits in case of default.

However, the Act has faced criticism for its complicated and unclear provisions, which have inadvertently harmed genuine businesses and created an environment of regulatory overreach. Below is an analysis of the issues:

1. Previous Crimes Leading to the Implementation of the Act Saradha Chit Fund Scam (2013): The Saradha Group collected billions of rupees from small investors, promising high returns. When the scheme collapsed, lakhs of investors lost their savings, leading to protests and suicides. Pearls Group Scam: The Pearls Group allegedly defrauded investors of over ₹60,000 crore through illegal collective investment schemes. Other Ponzi Schemes: Numerous unregulated schemes, such as those run by Rose Valley and PACL, exploited regulatory loopholes to defraud investors. These scams highlighted the lack of a robust legal framework to regulate deposit schemes and protect investors, prompting the government to enact the BUDS Act.

2. Shortcomings of the Act

a. Complicated and Unclear Provisions Vague Definitions: The Act does not clearly define an "unregulated deposit scheme." This ambiguity has led to confusion among small and medium enterprises (SMEs), often relying on informal funding mechanisms.

Overlap with Other Laws: The Act overlaps with other financial regulations, such as the SEBI Act, RBI Act, and Companies Act, creating a complex regulatory environment. Businesses often struggle to determine which laws apply to their operations.

Excessive Compliance Burden: The Act imposes stringent reporting requirements and penalties, which are disproportionately burdensome for small businesses. Many legitimate companies have been forced to shut down due to compliance costs.

b. Impact on Genuine Businesses Choking Legitimate Fundraising: The Act has made it difficult for genuine businesses to raise funds through informal channels, such as loans from friends, family, or community members. These practices, common in India, are now scrutinized as potential violations of the Act.

Fear of Prosecution: The broad and vague provisions of the Act have created a climate of fear among business owners, who risk being prosecuted for unintentional violations. This has stifled entrepreneurship and innovation

c. Silence of the Judiciary Lack of Clarity from Courts: The judiciary has not provided sufficient guidance on interpreting the Act's provisions, leaving businesses and enforcement agencies uncertain.

Delayed Justice: Cases related to the Act often involve lengthy legal battles, delaying justice for investors and businesses.

d. Highhandedness of Enforcement Agencies Misuse of PMLA: The Enforcement Directorate (ED) has been accused of using the Prevention of Money Laundering Act (PMLA) to target businesses under the guise of enforcing the BUDS Act. The ED's powers under PMLA, such as asset seizure and arrest without bail, have been criticized for being draconian.

Lack of Accountability: Enforcement agencies often act without proper due process, harassing legitimate businesses. The lack of accountability and oversight has further exacerbated the problem.

3. Recommendations for Reform: Clarify Definitions: The government should provide clear definitions of key terms, such as "unregulated deposit scheme," to reduce ambiguity and prevent misuse.

Simplify Compliance: The compliance burden on small businesses should be reduced by introducing simpler reporting mechanisms and exemptions for low-risk activities. Judicial Intervention: The judiciary should take a proactive role in interpreting the Act and clarifying its provisions. Fast-track courts could be established to expedite cases related to the Act. Rein in Enforcement Agencies: To prevent misuse, the powers of agencies like the ED should be curtailed. A robust oversight mechanism should be established to ensure accountability.

Killing Genuine Businesses While the Banning of Unregulated Deposit Schemes Act 2019 was enacted to protect investors, its complicated provisions and overzealous enforcement have created significant challenges for genuine businesses. The Act needs to be reformed to balance investor protection and the ease of doing business. Additionally, the judiciary and enforcement agencies must act responsibly to ensure that the Act is not used as a tool for harassment or overreach.