The Karnataka High Court (Bengaluru Bench) has held that the definition of ‘deposit’ under Section 2(4) of the Banning of Unregulated Deposit Schemes Act, 2019, is to be interpreted expansively and purposively. It is not confined to transactions involving physical currency but extends to arrangements clothed as sales of commodities like digital gold, where the intrinsic character and economic substance of the transaction resemble a deposit scheme designed to circumvent regulatory oversight.
The High Court said that its inherent power to quash an FIR under Section 528 of the BNSS should not be exercised when the case involves serious and triable allegations, sharply contested questions of fact, and requires a thorough investigation. Essentially, an FIR is only a trigger for investigation, and the court should not stifle a legitimate inquiry by delving into the merits of the evidence at a preliminary stage.
A Single Judge Bench of Justice M. Nagaprasanna observed that rejected the petitioners’ primary contention that their business involves the sale of gold and does not constitute a ‘deposit’ under Section 2(4) of the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act), noting that the definition of the term ‘deposit’ is expansive. It added that the argument to construe the statute narrowly to exclude digital or gold-backed arrangements must be repelled.
The Bench emphasized that the law is concerned with the ‘intrinsic character and its economic substance of a transaction, not the ‘cosmetic garb’ it is clothed in. Further, in the modern landscape of financial frauds, deception assumes subtle forms like commodities and digital assets to circumvent regulatory vigilance.
The Bench also addressed the petitioners’ submission that the transactions are in gold, not currency or cash, and opined that confining the expression ‘money’ to only physical currency would be a pedantic and myopic construction. Such a narrow interpretation would render the BUDS Act, a remedial and protective legislation, ineffective against evolving financial stratagems and would defeat the very purpose for which it was enacted.
Further, the Bench observed that it must refrain from appreciating disputed facts or evaluating the probative worth of material at the investigation stage. It noted that an FIR is not an encyclopaedia of all facts and that the police must be permitted to complete the investigation, especially when the allegations disclose serious and triable issues.
Also, the Bench noted that serious allegations have surfaced, including assertions that physical gold could not be traced when demanded by customers, and that searches allegedly yielded gold with the Company’s branding at the premises of its office bearers. Given these sharply contested questions of fact, the Bench found that it could not lend its protective hands to the petitioners to obliterate the crime at its incipient stage. It concluded that an investigation is imperative as investors have already raised concerns about not receiving their gold or money.
Briefly, the petitioners are Nishchay Babu Arkalgud, a director, and Jar Gold Retail Private Limited, which being co-founded by the first petitioner, operates as an e-commerce seller of gold through a mobile application called ‘JAR’. The business model allows customers to purchase 24-karat physical gold for amounts starting from Rs. 10, with payments made via UPI and other electronic modes. The Company claims that upon each purchase, ownership of the physical gold is transferred to the customer, an invoice is generated, and the corresponding gold is stored in a secure, insured, independent vault managed by a third-party custodian, Brinks India Private Limited.
The dispute arose when the criminal proceedings were initiated after the Reserve Bank of India (RBI) sent an email highlighting a complaint against the ‘JAR’ app, describing it as ‘structurally opaque, legally unguaranteed and manipulative’. The RBI noted that the company accepts investments for digital gold, offers 30-40% referral bonuses, and is not regulated by the RBI. Subsequently, the Securities and Exchange Board of India (SEBI) issued a public notice cautioning that ‘Digital Gold’ products operate outside its regulatory purview and expose investors to significant risks.
Following these communications and several customer complaints, the Koramangala Police Station registered a suo motu complaint and filed an FIR for alleged offences under Sections 21(1) and 21(2) of the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act). Pursuant to the FIR, searches were conducted, documents were seized, and debit freeze orders were issued against the Company’s accounts.
Appearances:
Senior Advocate K.G. Raghavan and Advocate P. Chinnappa, for the Petitioner
Advocate B.N. Jagadeesha, for the Respondent
