Will BUDS be effective in stopping illicit deposit-taking schemes?

Ramendra Verma
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The Banning of Unregulated Deposit Schemes Act (BUDS) was passed to ban illicit deposit-taking schemes in 2019. Initially, in the form of an ordinance, the act was enacted in July 2019. The rules were notified in 2020. In July 2022, Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) was appointed as the authority for creating, maintaining, and operating an online database for information on deposit takers operating in India. The project is of immense importance and, if implemented properly, can plug various loopholes in the fraudulent ecosystem. The pace at which it is being implemented is worrisome as a software developer is still to be appointed. However, it is worth the delay if time is utilised to design a system that can comprehensively address the problem.

Conversely, if not appropriately designed, it will have a limited impact in addressing these challenges. In a country like India, people have innovative ways of bypassing the rules and the laws. In such a scenario, the initiative needs to address challenges at the design level and not be understood plainly as a routine registry development.

The act presumes that an ordinary investor will check the website to see whether the deposit taker is authorised to do so. However, since many schemes fall outside the purview of the registry, such as loan or credit facilities, deposits with central / state / UT Govt, /ULB / any other source where repayment is guaranteed, etc., it might confuse the investor about the registry's efficacy. Therefore, the implementation of the BUDS registry program must be accompanied by investor awareness campaigns in the country. However, this continues to be an area of challenge to the government. While a corpus of over INR 25,000 crores has already been set up under the Depositor Education and Awareness Fund, the government is yet to find effective ways to utilise it.

Further, in our multilingual country, unauthorised deposit takers may exploit languages not covered in the registry, which could still exclude millions of people from benefitting under the BUDS registry. Hence should include features covering not only the scheduled languages, but as many local languages as possible along with a text-to-speech conversion feature accessible for the masses.

The registry portal is a useful resource for intelligence gathering by the government, as it receives alerts in cases of failed searches by depositors It can also send notifications to concerned authorities such as RBI, SEBI, NHB, IRDAI, PFRDA, EPFO and MCA(SFIO) for proactive actions in curbing unregulated deposit schemes.

The processes involved in the BUDS registry’s platform must be designed to ensure inclusion of all statutory and regulatory compliances across the central and states’ / union territory levels for ensuring acceptability of the BUDS registry by all stakeholders. It is critical to set-up a rating mechanism for the depositors, like a credit rating model, even if they have been authorised to receive deposits. Currently the act or rule do not guarantee this to investors.

The BUDS registry needs to be integrated with various registries of state / union territory governments, RBI, and other entities. This can facilitate auto-population and validation of information provided by deposit takers in the BUDS registry for practical usage. However, this is a complicated exercise as any data sharing data between two government entities is not a common practice.

The BUDS registry also needs to be integrated with centre’s/states' specific grievance redressal systems so that status of restitution of depositor’s cases is updated timely. The BUDS registry can further be integrated with the upcoming Public Credit Registry (PCR), one that is conceptualised and advocated by the RBI.

Given that the system is one of the first of its kind, it is anticipated to be a high-visibility target for cyber-attacks. Hence adequate cyber-security measures need to be taken while operating the system.

It has taken nearly 75 years to develop a measurement tool to control unauthorised depositors. Now that the enabling regulations are in place, the initiative must address the challenges highlighted above. We are aware that the scammers generally remain one step ahead of the authorities. Hence, the system should possess the nimbleness to take prompt action against new tricks being deployed by the unauthorised deposit-takers.