New Delhi: The Enforcement Directorate (ED) can attach assets from an ostensibly legal business transaction, such as a share sale, if the original asset was obtained through fraud or any other criminal activity. The Delhi High Court ruling Monday upheld an ED attachment order of more than Rs 122 crore, relating to the Chhattisgarh’s Fatehpur coal block case.
A legitimate transaction becomes tainted if it is based on misrepresentation and fraud, the Delhi High Court said, while pronouncing its judgment.
“Even if the share allotment on [a] preferential basis appears to be a ‘legal transaction’ in form, its foundation is inherently rooted in misrepresentation and fraud, underlying the core predicate offence, enabling the directorate to trace and connect such transactions to the proceeds of crime,” the court observed.
The judgment assumes significance as this is the second time in a month that the Delhi High Court bench of Justices Anil Kshetarpal and Harish Vaidyanathan Shankar has handed down a ruling that broadens the scope of the Prevention of Money Laundering Act (PMLA).
The first order by the two-judge bench in October—also relating to Prakash Industries—had held that coal block allocations constitute “property” under the PMLA, and if allocations are made via fraudulent activities, all profits made since fall under “proceeds of crime”.
Their orders signal a tougher interpretation of “proceeds of crime” under the Prevention of Money Laundering Act, 2002, thereby strengthening the ED’s powers and enabling it to attach assets that fall under “proceeds of criminal acts”.
The court was hearing an appeal by the ED against a single-judge order in a case of Delhi-based Prakash Industries. This previous order, which came in response to a writ petition, earlier quashed the ED’s provisional attachment of assets worth Rs 122.74 crore, belonging to the company.
The ED alleged that assets arising from “undue financial gains”, in this case, from the sale of shares relating to the Fatehpur coal block, constituted the “proceeds of crime”.
In the present case, the two-judge bench rebuked Prakash Industries for filing a writ petition, noting that the PMLA is a “self-contained and comprehensive statute”. The filing of a writ petition, at the provisional attachment stage, was improper, it held. The bench called such petitions a “wholly unwarranted, amounting to an abuse of process of law”.
In this report, ThePrint explains the court’s latest decision.
The Fatehpur coal block case
The case stems from the allocation of the Fatehpur coal block in Chhattisgarh to Prakash Industries in 2008, in what the court has called a “series of connected acts”.
The Central Bureau of Investigation (CBI) first filed the case, alleging that Prakash Industries misrepresented its net worth in 2007—Rs 532 crore—to the Union Ministry of Coal. The ministry, thereafter, allocated the Fatehpur coal block to the company.
Investigators claim the company’s actual net worth was negative, at (-) Rs 144.16 crore.
In November 2007, before the formal allocation, Prakash Industries informed the Bombay Stock Exchange that the block had already been allotted to the company.
The ED argued the company’s false announcement led to an “artificial inflation” of its share price, which shot up from Rs 31 in April 2007 to Rs 254.6 by January 2008.
Days later, on 3 January 2008, the company sold preferential shares at inflated prices, generating Rs 118.75 crore, which the ED termed as ‘proceeds of crime’ under the PMLA.
The formal allocation letter from the ministry arrived over a month later, in February 2008.
The CBI registered an FIR in 2014 and later filed a charge sheet for cheating and criminal conspiracy under provisions of the Indian Penal Code and Prevention of Corruption Act. The ED, acting in parallel, initiated separate proceedings under the money laundering law. In 2018, it attached Prakash Industries’ properties as “proceeds of crime”.
What can be considered ‘crime proceeds’
The high court’s single-judge bench earlier quashed the attachment order of the ED, holding that the agency had no jurisdiction, because the issue of share and stock exchange disclosure were not part of the CBI’s FIR or chargesheet.
The judge, agreeing with Prakash Industries, had reasoned that the ED’s powers were “restrictive” and “derivative” and could not extend beyond the predicate offence. A predicate offence is the underlying crime listed as a scheduled offence under the PMLA, generating ‘proceeds’, in the form of cash or property.
However, the division bench rejected this interpretation.
It said that the ED’s power to attach property under Section 5 is separate from the investigation conducted by the predicate agency, the CBI in this case. They found the share sale was not a separate act but a continuation of the offence beginning with a false application to the coal ministry.
Once a scheduled offence exists and material suggests that assets are linked to crime proceeds, the ED can attach them provisionally. And, this can be done, even if the assets concerned do not figure in the FIR or the charge sheet, provided a clear connection between such proceeds and a scheduled offence has been established.
“To put the above view summarily, the Directorate, under Section 5(1) of the PMLA, is empowered to attach a property of equivalent value when the original proceeds of crime obtained by the accused is untraceable,” the court observed.
“However, before issuing such an order of attachment, the [Enforcement] Directorate must necessarily record a ‘reason to believe’ that the person is in possession of proceeds of crime and also establish a clear nexus of such proceeds to a scheduled offence,” it added.
The single-judge bench had said the attachment was invalid, as the ED had failed to share its findings on the sale of shares with the CBI, as required under Section 66 (2) of the PMLA.
The division bench, however, held that the power to attach property under Section 5 is “distinct, independent, and autonomous” from the obligation to share information under Section 66(2). It clarified that Section 66(2) is “not a condition precedent” to take out an attachment order. Any failure to share information does not invalidate an attachment order.
The HC also dismissed the company’s constitutional contention under Article 20(1), which bars punishment under ex post facto laws, enacted after an act is committed.
Prakash Industries argued that alleged acts of cheating and conspiracy occurred in 2007-2008, but the offences were added to the PMLA’s list of scheduled offences in June 2009. The company claimed it was being punished retrospectively, which Article 20(1) forbade. The bench rejected this by holding that money laundering is a “continuing offence”.
Citing the Supreme Court’s Satyendar Kumar Jain case, the court explained that the offence was not limited to the “initial act of criminal acquisition”. Instead, the offence subsisted as long as the accused possessed or utilised such illicit gains.
So, while the original act was from 2007-08, possessing, using, and projecting those illicit gains continued after the offences were inserted under the PMLA in 2009, making the constitutional challenge unsustainable.
“The offence of money laundering being continuing in nature is not confined only to the initial act of criminal acquisition but also extends to every process or activity connected with the proceeds, including layering through multiple transactions, integration into the legitimate economy, and projection of the acquired wealth as lawful”, the court said.
(Edited by Madhurita Goswami)
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