New Delhi: A Delhi court on Friday refused to take cognisance of the Enforcement Directorate’s money laundering chargesheet in a case related to coal block allocation, holding that the agency had no jurisdiction to treat a routine share transaction as proceeds of crime without establishing any link to the underlying offence.
Special CBI Judge Dheeraj Mor, who presides over coal block allocation cases dating to the UPA government’s tenure at the Centre, called it a “clear and classical” example of the agency assuming jurisdiction contrary to evidence. The judge also quashed the ED’s attachment of properties worth Rs 30 lakh in the case.
The ruling came in a money laundering prosecution complaint filed by ED in August 2024 against Rathi Steel & Power Ltd (RSPL), its former managing director Udit Rathi, CEO Pradeep Rathi, and a former manager—all of whom were convicted by a Special CBI Court in 2016 on charges of cheating and criminal conspiracy.
A prosecution complaint is ED’s equivalent of a chargesheet.
The underlying case & ED’s probe
The CBI alleged that RSPL, as part of a conspiracy, misrepresented the ownership of a land parcel in a feedback form submitted to the now-defunct screening committee for coal block allocation. On the basis of those false representations, the Ministry of Coal allocated the Kesala North Coal Block in Chhattisgarh to the firm in August 2008, it said.
The ED’s prosecution complaint, stemming from the CBI case, alleged that, having benefited fraudulently from the allocation, RSPL subsequently allotted 14 lakh preferential equity shares to two non-promoter entities for Rs 3.08 crore. This, ED said, constituted proceeds of crime under the Prevention of Money Laundering Act, 2002.
The court rejected that argument, holding that a connection—direct or indirect—between the share transaction and the ‘scheduled offence’ is a prerequisite for any amount to qualify as proceeds of crime.
Under PMLA, proceeds of crime are defined as any property, movable or immovable, tangible or intangible, derived directly or indirectly from criminal activity relating to a scheduled offence. A scheduled offence is a provision under the Bharatiya Nyaya Sanhita (formerly the Indian Penal Code) or specific statutes such as the Prevention of Corruption Act, 1988, that forms the basis of a money laundering probe.
“The Directorate of Enforcement does not possess jurisdiction to treat every subsequent commercial transaction of an accused of the scheduled offence as ‘proceeds of crime’ in absence of demonstrable nexus with the scheduled offence. Not each and every transaction by the accused after accomplishment of the scheduled offence can be termed as ‘proceeds of crime’ unless it is directly or even indirectly has any connection, relation or it resulted as a consequence of criminal activity relating to the scheduled offence,” Judge Mor held.
He added: “The material on record does not disclose even a prima facie connection between the coal block allocation and the subscription amount of Rs 3.08 crores of the preferential equity shares of A-1 RSPL by the non-promoter entities.”
‘Self contradictory, self-destructive, inconsistent, preposterous’ case
Beyond the jurisdictional question, the court found the ED’s complaint factually flawed on multiple counts—and inconsistent.
On the timing of the share transaction, the court found that the ED had misconstrued the financial year in which the allotment occurred. The non-promoter entities had already been allotted share warrants in FY2007-08, convertible into equity shares within 18 months.
A share warrant gives the holder the right to purchase or sell the issuing company’s shares at a set price.
In exercising their conversion rights during FY 2009-10, they paid the price already fixed at the time of the original warrant allotment—not a newly inflated price linked to the coal block allocation. The court further held that the conversion and allotment did not violate rules set by the Securities and Exchange Board of India (SEBI).
On valuation, the court dismissed the ED’s allegation—that shares worth Rs 10 each were sold at the exorbitant price of Rs 22—as “extremely preposterous and unfounded”.
It noted that under SEBI rules, the price of preferential shares in a listed company is determined by the higher of two averages: the weekly high and low of the closing price over the preceding six months, or the same over the preceding two weeks.
RSPL’s shares had traded between Rs 17.40 and Rs 47 during FY 2007-08, making Rs 22 a price fixed squarely in accordance with SEBI guidelines, the court observed.
“The allegation of the prosecution that the preferential equity shares were fixed at the price of Rs 22/- though their price was Rs 10/- is extremely preposterous and unfounded. The Annual Report of A-1 RSPL for the FY 2007-08 at its Page No.15 depicts that the shares of A-1 RSPL were trading in the market between Rs 17.40 to Rs 47/- during the said financial year. Therefore, it is incomprehensible as to how the prosecution arbitrarily concluded that its price was Rs 10/- during the relevant period,” the judge said.
The court also noted that RSPL’s share price had actually fallen after the coal block allocation—from Rs 26.10 in August 2008 to Rs 21.45 the following month—undermining ED’s claim that the firm derived a financial benefit from the allocation.
“Thus, the coal block allocation to A-1 RSPL on 05.08.2008 had no positive impact on the value of its shares which continued to decline after the said allocation. Thus, it is apparent that the value of the shares of A-1 RSPL was governed by the market forces unrelated to and independent of coal block allocation letter,” Judge Mor said.
The court further observed that the company’s promoters were allotted 56 lakh preferential shares during the same period at the identical price of Rs 22, demonstrating that the pricing was “uniform, transparent, reasonable and justifiably fixed as per law”.
On the prosecution’s contradictory framing, the court noted that the ED had simultaneously alleged that RSPL induced the non-promoters to subscribe to shares on the strength of the coal block allocation letter, while also alleging that those very non-promoters were complicit in money laundering.
“Another important aspect of the present complaint which warrants consideration is the self-contradictions inherent in the story of the prosecution. On one hand, the prosecution has alleged that A-1 RSPL induced the non-promoters to subscribe to its 14 lakh preferential equity shares on the strength of the coal block allocation letter and on the other hand, the prosecution has alleged them to be complicit in commission of the present offence of money laundering,” Judge Mor said.
“Therefore, it creates a substantial inconsistency in the prosecution’s case, thereby rendering prosecution’s narrative self-contradictory and self-destructive. The said vital self-contradiction has further decimated the already weak case of the prosecution,” he added.
In closing, the judge held that “the prosecution has miserably failed” to establish that RSPL “derived any economic or financial benefit, even indirectly,” from the use of coal block allocation letter.
(Edited by Prerna Madan)
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