BUDS Act vs State Deposit Act: Which Law Applies to an Unregulated Deposit Scheme?

When a chit-like scheme, an assured-return investment plan or a “guaranteed buy-back” arrangement collapses, two very different statutes are usually pulled off the shelf at once. The BUDS Act vs State deposit Act question — the Banning of Unregulated Deposit Schemes Act, 2019 on one side, and a State depositor-protection Act such as the Gujarat, Maharashtra or Tamil Nadu enactment on the other — decides who investigates, who attaches the property, which court tries the case, and how long the accused can go to prison. The two laws are not alternatives. They were built to do different jobs, and they now run in parallel.

What the BUDS Act, 2019 Actually Does

The Banning of Unregulated Deposit Schemes Act, 2019 (Act 21 of 2019) received assent on 31 July 2019 and is deemed to have come into force on 21 February 2019, the date of the Ordinance it replaced.

Its architecture is prohibitory. Section 3 provides that unregulated deposit schemes “shall be banned”, and that no deposit taker shall directly or indirectly promote, operate, advertise or accept deposits under such a scheme. An “Unregulated Deposit Scheme” is defined in s.2(17) as a scheme under which deposits are accepted or solicited by a deposit taker by way of business and which is not a Regulated Deposit Scheme listed in the First Schedule — that Schedule maps the recognised regulators (SEBI, RBI, IRDAI, NHB, PFRDA, EPFO, the Ministry of Corporate Affairs, the State Government for co-operative societies, chits and money-lending, and the Central Registrar for multi-State co-operatives).

Section 2(4) defines “deposit” expansively — money received by way of advance, loan “or in any other form” with a promise to return it, in cash, kind or as a specified service — subject to a long list of carve-outs. Two of those carve-outs are worth knowing by heart in a real-estate context. Clause (l)(ii) protects an advance received against the consideration for immovable property, provided it is adjusted against that property as the agreement specifies. But the first proviso deems such amounts to become deposits fifteen days after they fall due for refund, and the second proviso deems them deposits where they became refundable because the taker never obtained the permission or approval the law required. Section 41 keeps deposits taken in the ordinary course of business outside the Act altogether.

Enforcement runs through a Competent Authority of at least Secretary rank with power to attach provisionally (s.7) and a Designated Court presided over by a District and Sessions Judge (s.8). Depositors’ dues take priority over other debts and government revenue (s.12), and a provisional attachment takes precedence over other attachments (s.13). Where a scheme spans more than one State and the amounts are large enough to affect the public interest, s.30 lets the Competent Authority route the matter to the CBI, with the reference deemed to be the State’s consent.

The punishments are severe and graded. Soliciting in breach of s.3 attracts one to five years and a fine of ₹2–10 lakh; accepting attracts two to seven years; and accepting plus a fraudulent default attracts three to ten years with a fine going up to twice the aggregate funds collected (s.21). Repeat offenders face up to ten years and fines up to ₹50 crore (s.24). Every offence except those under ss.22 and 26 is cognizable and non-bailable (s.28).

What a State Depositor-Protection Act Does

The State statutes came first and were written for a narrower mischief. Gujarat’s Act — the Gujarat Protection of Interest of Depositors (in Financial Establishments) Act, 2003 (Gujarat Act 1 of 2004) — received the President’s assent on 6 January 2004, a detail that matters constitutionally. Maharashtra’s MPID Act, 1999 and Tamil Nadu’s TNPID Act, 1997 follow the same template.

The offence is default, not deposit-taking. Section 3 of the Gujarat Act punishes a Financial Establishment that fraudulently defaults in repaying a deposit or in rendering the promised service, with imprisonment up to six years and a fine up to ₹10 lakh, subject to a proviso setting a floor of three years and ₹1 lakh absent special reasons. The Explanation to s.3 does the heavy lifting: a default is deemed fraudulent where it flows from promises that were “impracticable or commercially not viable” when made, or from deploying the money in a way carrying inherent risk of non-recovery. That is how a scheme with unsustainable arithmetic becomes a criminal offence without proving deceit transaction by transaction.

The recovery machinery is fast. On a complaint — which the Collector may receive and forward (s.4(3)) — the State Government may attach by an order published in the Official Gazette (s.4(1)), whereupon the property vests in a Competent Authority of at least Deputy Collector rank (ss.4(2), 5). That authority must move the Designated Court within thirty days, assess assets and liabilities and invite claims (ss.5(3), 7). The Designated Court has exclusive jurisdiction (s.9(2)), absorbs pending proceedings about the same property (s.9(3)), tries objections under the summary procedure of Order 37 CPC (s.10(5)), and can reach mala fide transferees (s.12). Appeal lies to the High Court in thirty days (s.15). Two provisions matter directly to an accused: s.17(2) applies the criminal procedure code before the Designated Court except the anticipatory-bail section, and s.18 gives the Act overriding effect over inconsistent laws.

Side by Side : BUDS Act vs State Deposit Act

Why Both Laws Survive: The Constitutional Answer

The instinctive objection — that deposit-taking is “banking”, and banking is Entry 45 of the Union List — has been considered and rejected. In K.K. Baskaran v. State, (2011) 3 SCC 793, the Supreme Court upheld the Tamil Nadu Act, reasoning that the statute “is not focused on the transaction of banking or the acceptance of deposit, but is focused on remedying the situation of the depositors who were deceived by the fraudulent financial establishments”, and that “the Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do not occupy the field which the impugned Tamil Nadu Act occupies, though the latter may incidentally trench upon the former.” The Court also disagreed with a Full Bench of the Bombay High Court that had struck down the Maharashtra Act, holding expressly that its view “will also apply in relation to the Maharashtra Act”.

In M/s New Horizon Sugar Mills Ltd. v. Government of Pondicherry, Civil Appeal Nos. 6673–6674 of 2009, decided 27 September 2012, the Court answered the entry question directly: “The power to enact the Pondicherry Act, the Tamil Nadu Act and the Maharashtra Act is relatable to Entries 1, 30 and 32 of the State List”. It then added an alternative holding of some importance — that even if the enactment were also referable to Entries 43, 44 and 45 of List I, the field would be “open, both to the Central Legislature as well as the State Legislature”, and absent repugnancy the State Act would have primacy; and in any event the State Act, having received the President’s assent, was saved by Article 254(2).

The line held in State of Maharashtra v. 63 Moons Technologies Ltd., (2022) 9 SCC 457 : 2022 INSC 465, where the challenge to the MPID Act failed and the Court read “deposit” purposively — noting that “the repeated use of the expression ‘any’ by the statute… is a clear reflection of the legislative intent to cast the net of the regulatory provisions of the law in a broad and comprehensive manner”, and holding that even custody of a commodity, without transfer of title, can amount to a deposit. In National Spot Exchange Ltd. v. Union of India, 2025 INSC 694 (15 May 2025), the Court went further on the recovery side, holding that secured creditors cannot claim priority under s.26E of the SARFAESI Act over property attached under the MPID Act, because defrauded investors’ deposits are not a “debt” in that sense, and that no repugnancy arises with the Insolvency and Bankruptcy Code because the statutes occupy distinct fields.

BUDS Act vs State Deposit Act: Which Law Applies in Practice?

Answering the BUDS Act vs State deposit Act question in a live matter is less about hierarchy than about facts. Four questions usually settle it.

1. Was the money taken “by way of business” and outside every recognised regulator?

If yes, the scheme is an Unregulated Deposit Scheme and s.3 of the BUDS Act is engaged from the first rupee — no default required. If the taker is a registered NBFC, a Chapter V company deposit, a sanctioned chit or a registered co-operative society, the First Schedule takes the scheme out of the “unregulated” category, and only the State Act (and general criminal law) remains in play.

2. Has there been a default, and was it “fraudulent”?

The State Act needs a default; the deeming Explanation then does the rest where the promised returns were never viable. Without a default there is nothing for the State Act to bite on, however dubious the scheme.

3. How far does the scheme reach?

A single-State scheme is naturally handled by the State machinery. A scheme spread across States, with a magnitude that “significantly affects the public interest”, is the paradigm case for a s.30 BUDS reference to the CBI.

4. What is the enforcement objective — conviction or recovery?

For recovery, the State route is often quicker to start: an order in the Gazette attaches, and the property vests immediately. For deterrence and sentence, the BUDS Act carries the heavier stick, including a fine geared to the money actually collected.

The Contested Ground — Stated Fairly

Two things in this area are genuinely unsettled, and a reader is entitled to be told so.

Sections 34 and 35 of the BUDS Act pull in opposite directions. Section 34 says the Act has effect “notwithstanding anything contained in any other law for the time being in force, including any law made by any State or Union territory”. Section 35 says the Act’s provisions are “in addition to, and not in derogation of” any other law. The harmonising reading — and the one that matches practice — is that s.35 preserves the State Acts as concurrent regimes, while s.34 resolves any operative clash in favour of the central Act. But no Supreme Court decision has yet squarely construed the two together against a State depositor Act, and an accused facing simultaneous proceedings has a respectable argument to make. Against that, s.44 of the BUDS Act repeals only the preceding Ordinance, and Parliament plainly knew the State Acts existed, which tells strongly against implied displacement.

The breadth of “deposit” is being tested, and not always in one direction. The expansive line continues — in Alka Agrawal v. State of Maharashtra, 2026 SCC OnLine SC 866, decided 15 May 2026, the Supreme Court held that money advanced with a promise of repayment with interest is a “deposit” under s.2(c) of the MPID Act whatever it is called, that private individuals may answer the description of a “financial establishment”, and that the failure of earlier proceedings under the penal code is no bar to invoking the State Act, since the two “operate in separate legal spheres”. The Karnataka High Court took the same approach to form-over-substance in Nishchay Babu Arkalgud v. State of Karnataka (6 March 2026), declining to quash a BUDS prosecution over a digital-gold platform and observing that to confine “money” to physical currency “would become a pedantic and myopic construction, which would render the statute otiose”. But breadth is not boundlessness: in Dr Rayagada Santosh Patnaik v. State of Andhra Pradesh [2026 LiveLaw (AP) 186], the Andhra Pradesh High Court granted pre-arrest bail after observing that the application of s.21 of the BUDS Act was “prima facie doubtful” where the accused was himself an investor and did not answer the description of a deposit taker at all. Who is a deposit taker remains a real threshold, not a formality.

Frequently asked questions

Did the BUDS Act, 2019 repeal the State depositor-protection Acts?

No. Section 44 repeals only the Ordinance of 2019 that the Act replaced. No State Act is repealed, and s.35 expressly preserves other laws.

Can a person be prosecuted under both the BUDS Act and a State Deposit Protection Act for the same scheme?

Charge-sheets frequently invoke both, and the offences do have different ingredients — taking the deposit versus defaulting on it. Whether concurrent proceedings are fair in a given case is a fact-specific objection, and there is no Supreme Court decision squarely resolving the interaction of the two statutes.

Is a State depositor Act valid now that Parliament has legislated?

The State Acts have been upheld repeatedly, most recently in the MPID litigation. Their competence rests on Entries 1, 30 and 32 of the State List, and several of them carry the President’s assent, which engages Article 254(2).

Which route recovers money faster?

Usually the State route, because attachment follows a gazette order and the property vests at once. The central Act adds a statutory priority for depositors over other creditors and a CBI referral for multi-State schemes.

Does it matter that the money was documented as a “loan”?

Not by itself. The Supreme Court has held that nomenclature is irrelevant where the statutory ingredients — receipt of money, an obligation to return it, and a promised return — are satisfied.

Glossary

• Deposit taker — under the BUDS Act, an individual, firm, LLP, company, trust, society or “any other arrangement” receiving or soliciting deposits; banks and statutory corporations are excluded.
• Financial establishment — under the State Acts, any person or group accepting deposits, excluding government-controlled corporations and banking companies.
• Regulated Deposit Scheme — a scheme listed in the First Schedule to the BUDS Act against a named regulator; anything outside it, taken by way of business, is “unregulated”.
• Competent Authority — the officer who attaches and holds the property pending orders of the Designated Court.
• Designated Court — the special court, at District and Sessions Judge level, with exclusive jurisdiction over attachment, restitution and trial under these statutes.

Related Reading

• The GPID Act explained: a complete guide to depositor-protection law
• Is a real-estate builder a “financial establishment”?
• Assured-return and buy-back property MOUs: civil breach, RERA violation or deposit fraud?
• Bail in economic-offence and deposit cases: the deposit-condition trap

Sources

1. The Banning of Unregulated Deposit Schemes Act, 2019 (Act 21 of 2019) — bare text, India Code.
2. The Gujarat Protection of Interest of Depositors (in Financial Establishments) Act, 2003 (Gujarat Act 1 of 2004) — bare text, India Code.
3. K.K. Baskaran v. State, (2011) 3 SCC 793 (Supreme Court of India, 4 March 2011).
4. M/s New Horizon Sugar Mills Ltd. v. Government of Pondicherry, Civil Appeal Nos. 6673–6674 of 2009, decided 27 September 2012 (Supreme Court of India).
5. State of Maharashtra v. 63 Moons Technologies Ltd., (2022) 9 SCC 457 : 2022 INSC 465 — judgment.
6. National Spot Exchange Ltd. v. Union of India, [2025] 7 S.C.R. 252 : 2025 INSC 694, decided 15 May 2025.
7. Alka Agrawal v. State of Maharashtra, 2026 SCC OnLine SC 866, decided 15 May 2026 — report.
8. Nishchay Babu Arkalgud v. State of Karnataka (Karnataka High Court, 6 March 2026) — report and judgment.
9. Dr Rayagada Santosh Patnaik v. State of Andhra Pradesh, Criminal Petition No. 4501 of 2026, 2026 LiveLaw (AP) 186 — report.
10. The Banning of Unregulated Deposit Schemes Rules, 2020 (Ministry of Finance, February 2020) — central database and intimation requirements for deposit takers.