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Does the Banning of Unregulated Deposit Schemes Act, 2019 over-ride or (impliedly) repeal State Depositor Protection Laws in view of the judgment in Raveendran Pilla & Ors. v State of Kerala & Ors.?

The enactment of the Banning of Unregulated Deposit Schemes Act, 2019 (“BUDS Act”) marked a significant intervention by Parliament into the field of depositor protection, an area in which many States had already legislated through “M/TN-PID-type” statutes. This has raised an important constitutional and practical question: does the central BUDS Act override or impliedly repeal these pre-existing State enactments, especially in light of judicial consideration in Raveendran Pilla & Ors. v State of Kerala & Ors., 2020 SCC OnLine Ker 5507 : 2021(1) KHC 38 :  2020 (6) KLT 838 : MANU/KE/3198/2020? This article examines that question through a plain but holistic reading of the BUDS Act, the lens of the federal distribution of legislative powers, the doctrine of repugnancy under Article 254 of the Constitution, and the specific reasoning adopted by the Court in Raveendran Pilla & Ors. v State of Kerala & Ors.

The BUDS Act, 2019 is a central legislation enacted to comprehensively prohibit unregulated deposit schemes and to protect the interests of depositors. It was brought into force to address large-scale frauds and unregulated schemes that exploited regulatory gaps across States laws, Central laws and regulations of independent Regulators. Broadly, the Act pursues three objectives: (a) a complete ban on promotion and operation of unregulated deposit schemes, (b) attachment and realisation of properties to repay depositors, and (c) deterrent criminal penalties. The Act applies to all “unregulated deposit schemes” read with the exhaustive “Regulated Deposit Scheme” listed in the First Schedule. In effect, any scheme or arrangement that: (a) involves acceptance of money by way of deposit, (b) is not specifically listed as a regulated scheme overseen by an identified regulator (such as RBI, SEBI, IRDAI, etc.), and (c) falls within the expansive notion of “deposit” under section 2(4), is potentially caught by the Act. At the same time, the BUDS Act carves out a range of exclusions (for example, certain advances in the course of business, security deposits, amounts received by way of loan from banks and regulated financial institutions, and sums received by way of contributions in businesses where the contributor is in management or control). These exclusions indicate that Parliament intended to target schemes that raise money from the public at large, without regulatory oversight, rather than all forms of borrowing or capital raising.

The State of Kerala was one of the few states to implement the BUDS Act, prompted by the judgment of the Kerala High Court in Raveendran Pilla & Ors. v State of Kerala & Ors. The Court inter alia held that, there is a complete ban in the conduct of ‘Unregulated Deposit Scheme’ under Section 3(a) of the BUDS Act. Hence, the court held that even if deposits were received prior to the commencement of the Act and if it is an “Unregulated Deposit Scheme” and continued after the commencement of the Act, Section 3(a) would come into play.

Thus, even if a financial establishment/deposit taker raised money before the enactment of the BUDS Act the continued payment of interest thereafter, and deposits were not returned but there was a subsequent default after the BUDS Act had come into force, the BUDS Act was deemed applicable because the scheme was ‘conducted’ after the BUDS Act came into force irrespective of whether deposits were made prior to or after BUDS Act commencement. There was no allegation of funds being raised or any act of solicitation being done to promote such raising after the BUDS Act came into force. It may be noted that proceedings under the Kerala Protection of Interests of Depositors in Financial Establishments Act, 2013 (KPID Act) had already been initiated and it was the contention of the accused respondents that the BUDS Act does not have retrospective operation in respect of deposits received prior to commencement of the BUDS Act. The Court also held that Section 34/35 of the BUDS Act over-rode the KPID Act.

Reference to this judgment arose recently before the Bombay High Court in Vanita Harish Shetty & Ors. v State of Maharashtra & Ors., Criminal Appeal No. 1152/2024, where the issue of BUDS Act impliedly repealing the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act) was raised to avoid attachment of director’s properties under the MPID Act; since the BUDS Act apparently has no provision to attach property of directors of Deposit taking establishment (it was a strange case of an accused seeking application of the ‘correct’ Central law instead of the State law to take advantage of a glaring lacunae in the BUDS Act, to vitiate the attachment under the State Depositor Protection laws) however the appeal was finally disposed off on 2nd April 2026, without deciding the issue. But it is clear that the issue remains at large.

The Author is of the view that there are fundamental flaws in the judgment of Hon’ble Kerala High Court; both in the plain reading of the BUDS Act, as well as, constitutional interpretation, namely, viz., –

  1. On a wholistic plain reading of the BUDS Act, it is not the intention of Parliament to apply it to deposits collected prior to its date of coming into force;
  2. A State Law (KPID Act) made under List II, cannot be affected/repealed by a law made by Parliament under List I or List III (which was never raised before the Court).

I. The Kerala High Court appears to have read Section 3 of the BUDS Act in insolation. On a plain reading of entire BUDS Act the interpretation seems unwarranted, in the context of the pre-BUDS Act deposit taking and fraudulent default because, –

  1. As per Section 2 (5) “depositor” means any person who makes a deposit under this act, whereas all deposits were made prior to the enactment, thus none of the aggrieved depositors under the KPID Act are depositors within the meaning of the BUDS Act;
  2. Further section 3 of the BUDS Act has to be read along with section 21 which makes it clear that section 3 requires on and from the commencement of the BUDS Act, either, –
  3. Soliciting deposit in contravention of section 3;
  4. Accepting deposit in contravention of section 3; or
  5. Fraudulent default of deposit accepted in contravention of section 3.
Section 21. Punishment for Contravention of Section 3.Section 3. Banning of Unregulated Deposit Schemes.
(1) Any deposit taker who solicits deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.  

(2) Any deposit taker who accepts deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years and with fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees.  

(3) Any deposit taker who accepts deposits in contravention of section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service, shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to ten years and with fine which shall not be less than five lakh rupees but which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the Unregulated Deposit Scheme.   Explanation.—For the purposes of this Act,—   (i) the expression “fraudulently” shall have the same meaning as assigned to it in section 25 of the Indian Penal Code (45 of 1860);   (ii) where the terms of the Deposit Scheme are entirely impracticable or unviable, the terms shall be relevant facts showing an intention to defraud.		On and from the date of commencement of this Act,—   (a) the Unregulated Deposit Schemes shall be banned; and   (b) no deposit taker shall, directly or indirectly, –promote, operate, issue any advertisement soliciting participation or enrolment in or   -accept deposits in pursuance of an Unregulated Deposit Scheme.    
  1. Thus, Section 3 does not encompass any deposit which has been solicited, accepted prior to section 3 coming into force. It encompasses only issue of advertisement or ‘accepting’ deposit post the commencement date. This cannot cover a deposit already accepted prior thereto.
  2. Since neither the BUDS Ordinance (2019) nor the BUDS Act (w.r.e.f. 21.02.2019 in view of the Ordinance) existed at the time of collection, they cannot apply retrospectively in the teeth of Article 20 of the Constitution. Collection is not a continuing action, and ‘possession’ not specifically prohibited under the Act.
  3. Further, the judgement of the Kerala High Court in the matter of Soumya Muraleedharan v Union of India, in WP (C) No. 17600/2021 dated April 12, 2024 (SLP rejected by the Hon’ble Supreme Court), pertains to the BUDS Act, notified on 31st July 2019 being given retrospective effect from 21st of February 2019 in view of the earlier Ordinance issued by the President of India on 21st February 2019. It is well settled that a judgement does not be read as a statute but in the context relating thereto. This judgement which upheld the retrospective operation of BUDS Act to the date of the Ordinance is not an authority for the proposition that the BUDS Act can operate retroactively in relation to the deposits collected before the commencement of BUDS Act but remained to be returned.
  4. Similarly, Section 7(3) of the BUDS Act, mandates the jurisdictional requirement, that attachment is permissible when the competent authority takes notice that “any deposit taker is soliciting deposits in contravention of section 3” however such section 3 has effect only from the commencement date i.e. 21st February 2019 and therefore cannot apply to deposits taken prior to that date. How the attachments can be validly done in respect of deposits collected prior to BUDS Act coming into force has never been considered by the Kerala High Court;
  5. Further, Section 3 r/w Section 21 of the BUDS Act, does not use prohibit ‘conduct of any pre-existing scheme, which does not involve fresh deposits or soliciting’ after BUDS coming into force.

II. A State Law (KPID Act) made under List II, cannot be affected/repealed by a law made by Parliament under List I/ III even though it has an over-riding provision such as Section under our constitutional regime, –

  1. The Hon’ble Supreme Court in Innoventive Industries Ltd. v ICICI Bank & Anr. (2018) 1 SCC 407, para 9, 34 [in the context of IBC which had a similar over-riding provision in Section 238 vis-à-vis Maharashtra Relief Undertakings (Special Provisions) Act, 1958, para 52, 58, 60] has settled the issue that in such instances the issue has to be decided in context of the constitutional position of repugnancy;
  2. It is settled law that the doctrine of repugnancy under Article 254 applies only in respect of a situation where both Central and State Laws are made under List III of Schedule 7 of the Constitution [Innoventive Industries Ltd. v  ICICI Bank & Anr. (2018) 1 SCC 407, para 51.1 and 51.2; Central Bank of India v State of Kerala & Ors., (2009) 4 SCC 94, para 35 and 36].
  3. Constitutionality of the KPID Act is not in dispute since various similar state enactments have been upheld by the Hon’ble Supreme Court in K. Baskaran Vs. State represented by its Secretary, Tamil Nadu & Ors.  2011 (3) SCC 793, para 9, 14 to 18, 24, 27, 31 and 32 as falling in List II(State List) followed in State of Maharashtra v Vijay C. Puljal and Ors., (2012) 10 SCC 599; Sonal Hemant Joshi & Ors. v State of Maharashtra & Ors., (2012) 10 SCC 601.
  4. Even as late as 2022 i.e. after the passing of BUDS Act, the Hon’ble Supreme Court has affirmed the application of the MPID in State of Maharashtra v 63 Moons Technologies Ltd., (2022) 9 SCC 457, para 99-102;
  5. The Supreme Court has specifically held that the subject matter of the state depositor protections laws in pith and substance falls in List II (State list) of the Schedule 7 of the Constitution therefore it is clear that the doctrine of repugnancy and Article 254 of the Constitution and consequently the doctrine of implied repeal have no application to the present matter;
  6. The matter now turns solely on the subjugation clause of Article 246(3) of the Constitution i.e. Subject to clauses (1) and (2), the Legislature of any State *** has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the “State List”). If it applies it can result in an implied/deemed repeal of the KPID Act and other state depositor laws on the passing of the BUDS Act, especially in view of Section 34 of the BUDS Act;
  7. This issue is now no longer res integra, it is now governed by the judgment of the Constitution bench of 9-judges of the Hon’ble Supreme Court in State of U.P. v Lalta Prasad Vaish and sons, (2024) 17 SCC 1, para 46, 50-53, 76, 77, 77.3, 77.4. 77.5, 78, 136.2 affirming its earlier Full bench decision of the Hon’ble Supreme Court in State of A. P. & Ors. v McDowell & Co. & Ors., (1996) 3 SCC 709, para 18, 19, 36 and 38 that the State enjoys absolute, plenary power over entries falling under List II (State list) of the Schedule 7 which even Parliament cannot over-ride under Article 246 or 254 of the Constitution. Consequently, it was held that the Parliament has no power to impinge on the power of the State Legislatures falling within List II (State List) [State of U.P. v Lalta Prasad Vaish and sons, 2024 SCC Online SC 3029, para 78 & 136.2; Hindustan Lever and Anr. v State of Maharashtra & Anr., (2004) 9 SCC 438, para 34 and 35];
  8. It is relevant to note that federal supremacy ticks in only at the time of overlap of legislative entries. [State of U.P. v Lalta Prasad Vaish and sons, 2024 SCC Online SC 3029, para 53] However, it is clear from the various judgments upholding the MPID and TNPID Acts relates to fraudulent defaults deposit falls entirely into the State List and there is no conflict or overlap with any entry in List I or List III. Once the State law is declared valid, the question of Parliamentary law subjugating or over-riding  
  9. Instead it rather clear, that in some respects the BUDS Act may be constitutionally invalid in so far as it seeks to cover matters already covered by State Depositor Protection Laws which fall under the exclusive domain of the State under List II, Schedule VII of the Constitution.

Thus, the Author is of the view that the judgment in Raveendran Pilla & Ors. v State of Kerala & Ors., needs reconsideration as it does not reflect the correct view of law and rather a detailed examination of the subject may in fact yield constitutional lacunae in the validity of the BUDS Act.

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– Suraj Chaudhary, Advocate, Bombay High Court.

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