Digital Gold Transactions Cannot Escape BUDS Act Scrutiny Merely Because They Are Not In Currency Form: Karnataka High Court

The High Court emphasised that the legal character of a transaction must be determined by its economic substance rather than the form in which it is presented.

The Court was hearing a writ petition seeking the quashing of criminal proceedings registered for alleged offences under the Banning of Unregulated Deposit Schemes Act arising from an online gold-based investment platform.

A Single Judge Bench of Justice M. Nagaprasanna observed that “The BUDS Act, being a remedial and protective legislation, was enacted precisely to arrest such ingenuity in evasion. To confine the expression money within the narrow confines of physical currency would become a pedantic and myopic construction, which would render the statute otiose in the face of evolving financial stratagems and defeat the very mischief it was designed to suppress”.

Background

The case arose from a criminal complaint registered following communications from regulatory authorities highlighting concerns regarding an online platform that enabled users to invest small amounts in digital gold. The platform allowed customers to purchase gold through a mobile application, beginning from small monetary amounts, with assurances that equivalent physical gold was stored in secure vaults on behalf of customers.

The petitioners contended that their business model involved legitimate purchase and sale of physical gold through electronic transactions and that every purchase was supported by invoices and payment through recognised electronic modes. It was further asserted that the gold corresponding to each purchase was stored with independent custodians in secured vaults and that the company did not retain ownership or possession of the bullion after sale.

It was argued that the business did not involve acceptance of deposits and therefore did not fall within the scope of the Banning of Unregulated Deposit Schemes Act. According to the petitioners, neither the Reserve Bank of India nor the Securities and Exchange Board of India regulated such transactions, which, according to them, demonstrated that the activity was merely a commercial sale of movable property.

The State, however, opposed the plea for quashing of the proceedings. It was contended that the business involved a large-scale collection of money from members of the public through a digital platform, accompanied by referral incentives and promises linked to gold. The prosecution argued that the scheme operated outside any regulatory oversight and therefore warranted investigation under the statute enacted to curb unregulated deposit schemes.

Court’s Observation

The Court noted that the concept of digital gold had evolved as a commercial model in which investors could purchase gold through online platforms. However, the materials placed before the Court revealed allegations raising questions about the nature of the transactions and the assurances made to investors regarding the existence and storage of physical gold.

The Court emphasised that the definition of “deposit” under the Banning of Unregulated Deposit Schemes Act is framed in expansive terms and cannot be restricted to traditional forms of monetary deposits. The Court rejected the argument that transactions involving gold rather than currency would fall outside the statutory framework.

Observing that modern financial frauds often assume sophisticated forms, the Court held that deceptive schemes may be structured around commodities, digital assets, or other instruments designed to circumvent regulatory oversight. In such circumstances, the law must examine the real nature of the transaction rather than its outward description.

The Court further held that the absence of regulatory supervision by institutions such as SEBI or the RBI over the purchase or storage of gold does not create a legal vacuum, placing such transactions beyond the reach of statutory provisions. The Court observed that the BUDS Act was enacted precisely to address evolving mechanisms used to mobilise funds from the public without regulatory safeguards.

Referring to precedents of the Supreme Court on the exercise of inherent powers to quash criminal proceedings, the Court reiterated that such powers must be exercised sparingly and only in exceptional circumstances. Where allegations raise disputed questions of fact requiring investigation, the High Court ought not to interfere at the stage of registration of the case.

The Court held that the materials placed on record disclosed issues that required investigation and could not be adjudicated in proceedings seeking quashing of the FIR.

Conclusion

The High Court declined to quash the criminal proceedings and held that the investigation into the alleged unregulated deposit scheme must continue in accordance with the law. The Court observed that determining whether the transactions constitute deposits within the meaning of the statute requires examination of evidence during investigation and trial.

Cause Title: Nishchay Babu Arkalgud v. State of Karnataka

Appearances

Petitioners: Senior Advocate KG Raghavan, Advocate P Chinnappa

Respondents: BN Jagadeesha, Additional SPP

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