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by sayum
09 March 2026 10:43 AM
“Law is concerned not with the cosmetic garb in which a transaction is clothed, but with its intrinsic character and its economic substance.” In a significant ruling dealing with emerging digital financial schemes, the High Court of Karnataka at Bengaluru refused to quash criminal proceedings against a digital gold platform accused of collecting money from the public under an allegedly unregulated scheme.
Justice M. Nagaprasanna held that allegations relating to acceptance of public money through a digital gold investment model raise serious and triable issues under the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act). The Court ruled that investigation cannot be stifled at the FIR stage, particularly when the scheme involves large-scale public funds.
The petition seeking quashing of FIR No. 25 of 2026 registered for offences under Sections 21(1) and 21(2) of the BUDS Act was therefore dismissed.
The case arose from a suo motu complaint filed by the Koramangala Police in Bengaluru against Jar Gold Retail Private Limited, a company operating a mobile application called “JAR”, which allowed users to purchase digital gold starting from as little as ₹10.
The company claimed that every transaction conducted on its platform represented a completed sale of physical gold bullion, stored in secure vaults managed by a third-party custodian, Brinks India Private Limited. According to the petitioners, ownership of the gold transferred immediately to customers, and the company merely facilitated the purchase and storage.
The platform reportedly grew rapidly after its launch in 2021, reaching an estimated turnover of ₹4,000 crores within a few years.
However, concerns were raised following communications from regulatory authorities. An RBI Market Intelligence Unit email dated 13 October 2025 flagged issues with the platform, noting that investors were depositing money to purchase digital gold while the product did not fall within RBI regulation. The communication also indicated that users were receiving referral bonuses ranging from 30% to 40%, raising further suspicion.
Subsequently, SEBI issued a public notice on 08 November 2025 cautioning investors about digital gold products, stating that such products operate outside the regulatory framework of securities markets and may expose investors to operational and counterparty risks.
Following these developments, the police initiated an investigation, conducted searches, seized documents and electronic devices, and froze certain bank accounts of the company.
Aggrieved by the registration of the FIR, the company and one of its directors approached the High Court under Articles 226 and 227 of the Constitution and Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023, seeking quashing of the proceedings.
The central issue before the Court was whether the digital gold transactions conducted through the platform could be treated as “deposits” within the meaning of Section 2(4) of the BUDS Act, thereby attracting penal provisions under Sections 21(1) and 21(2).
The petitioners contended that their business involved sale and purchase of gold as a commodity, not the acceptance of deposits. They argued that every payment made by a user resulted in instant purchase of physical gold, supported by invoices and tax payments. Since the gold was stored in a third-party vault and could be delivered to customers on request, the transactions were merely commercial sales of movable property.
They further emphasized that no investor had filed a complaint alleging loss of money, and the criminal proceedings were initiated only on the basis of a third-party email complaint and regulatory communications.
The State, represented by the Additional State Public Prosecutor, opposed the petition. It argued that the scheme involved collection of large sums from the public without regulatory oversight, combined with incentives such as referral bonuses. Given the magnitude of funds involved and the absence of regulation by RBI or SEBI, the State maintained that the matter warranted thorough investigation under the BUDS Act, which was enacted to curb precisely such financial schemes.
Digital Gold and Regulatory Vacuum
Justice Nagaprasanna noted that digital gold as a commercial concept emerged in India around 2013, when a government company launched online gold purchase facilities. However, the regulatory landscape surrounding such products remains uncertain.
The Court observed that both RBI and SEBI communications indicated that digital gold products fall outside their existing regulatory frameworks, creating a regulatory vacuum.
Importantly, the Court clarified that the absence of regulation by RBI or SEBI does not immunize such transactions from criminal scrutiny.
The Court observed:
“The absence of express regulatory supervision by bodies such as SEBI or the RBI over the purchase or storage of gold… does not confer upon such transactions a sanctuary beyond the reach of the statute.”
Thus, even if digital gold platforms operate outside the direct regulatory jurisdiction of financial regulators, their activities may still fall within the ambit of criminal statutes like the BUDS Act if they involve acceptance of public money under an unregulated scheme.
Interpretation of “Deposit” Under the BUDS Act
A key contention of the petitioners was that payments made by customers represented consideration for the purchase of gold, and therefore could not be classified as “deposits”.
Rejecting this narrow interpretation, the Court emphasized that the definition of “deposit” under Section 2(4) of the BUDS Act is deliberately broad and includes money received in any form with a promise of return.
The Court cautioned that focusing only on the form of the transaction rather than its economic substance could allow innovative financial schemes to evade regulatory scrutiny.
Justice Nagaprasanna observed:
“Law is concerned not with the cosmetic garb in which a transaction is clothed, but with its intrinsic character and its economic substance.”
The Court further noted that modern financial frauds increasingly adopt sophisticated structures, including digital assets, commodity-linked schemes and technology-driven platforms, making it necessary to interpret the law in a manner that addresses evolving financial realities.
Scope of Quashing at the FIR Stage
The Court reiterated settled principles governing the exercise of inherent powers to quash criminal proceedings under Section 528 BNSS, which is analogous to Section 482 of the CrPC.
Relying on Supreme Court precedents such as Kaptan Singh v. State of Uttar Pradesh and Neeharika Infrastructure Pvt. Ltd. v. State of Maharashtra, the Court held that quashing of an FIR is an exception rather than the rule, and courts must refrain from evaluating disputed facts during the investigation stage.
Quoting the Supreme Court, the Court observed that:
“The first information report is not an encyclopaedia which must disclose all facts and details relating to the offence reported… Police must be permitted to complete the investigation.”
Since the allegations involved large public investments and contested factual issues, the Court concluded that determining whether the scheme actually involved deposits could only be done after a full investigation and examination of evidence.
The High Court held that the allegations raised serious and triable issues regarding acceptance of public funds through a potentially unregulated financial scheme. At this preliminary stage, it would be inappropriate for the Court to examine the merits of the evidence or determine the nature of the transactions.
Consequently, the Court dismissed the writ petition and allowed the investigation in Crime No. 25 of 2026 to proceed.
The Court clarified that the observations made in the order are limited to adjudication under Section 528 BNSS and shall not influence the trial or proceedings against other accused persons.
The ruling underscores the judiciary’s cautious approach towards emerging fintech models such as digital gold platforms, particularly when large sums of public money are involved.
By emphasizing a purposive interpretation of the BUDS Act, the Karnataka High Court signaled that innovative financial structures cannot escape legal scrutiny merely by adopting new technological forms. The decision reinforces that courts will prioritize economic substance over transactional form while addressing modern financial schemes that may potentially affect public investors.
Date of Decision: 04 March 2026
