Share value appreciation from criminal activity can be attached by ED: Delhi High Court

The Delhi High Court has held that appreciation of share value based on illegal activity amounts to proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA) [Directorate of Enforcement v M/s Prakash Industries Ltd]. 

A Division Bench of Justices Anil Kshetarpal and Harish Vaidyanathan Shankar said that the offence of money laundering includes any process or activity connected with proceeds of crime, including subsequent layering or projection of illicit gains.

Hence, the same can be attached by the Enforcement Directorate (ED), the Court said.

“The usage of the word “indirectly” while defining proceeds of crime under PMLA, establishes the intentional expansive definition provided thereunder, which goes on to establish that once the proceeds are generated through any criminal activity, routing it through multiple channels or transactions, thereby creating layers of ostensible legitimacy does not prevent the accused from escaping liability within the rigours of Section 3 of the PMLA,” the Court observed. 

By way of an example, the Court explained that if a public servant receives a bribe and invests that money in narcotics trade, real estate, preferential shares or any other avenue, the taint of illegality would continue.

The entire corpus shall be liable to be attached as proceeds of crime irrespective of the subsequent channels through which it has been routed or the forms it assumes subsequently, the Court said.

“Similarly, if the sum received as bribe is invested in share market, which later increases or goes beyond and above the value of actual investment owing to market forces or corporate actions, the entire enhanced amount shall constitute as proceeds of crime. Meaning thereby the appreciation in value does not cleanse or purify the tainted origin, more so since the augmented value is inextricably and indirectly derived from the original illicit source of bribe,” the Bench ruled. 

Further, the Court deprecated the recurring practice of challenging the provisional attachments under Article 226 of the Constitution of India and said that same amounts to an abuse of the process of law. 

“Accordingly, the jurisdiction under Article 226 of the COI [Constitution of India], being discretionary and equitable in nature, ought not to be exercised to supplant the statutory remedies specifically envisaged under the relevant statute,” the Court said. 

The Court made these observations while setting aside a single-judge’s judgment of January 2023, quashing the provisional attachment order (PAO) issued by the ED by which it attached properties worth over ₹122 crores belonging to Prakash Industries Limited (PIL) and its group company Prakash Thermal Power Limited (PTPL). 

As per the allegations, PIL applied for the allocation of the Fatehpur coal block in Chhattisgarh in 2007 but misrepresented its net worth in its application. Before formal allocation, PIL informed the Bombay Stock Exchange (BSE) that it had the coal block, leading to a sharp rise in its share price. PIL and promoters sold shares on a preferential basis, generating proceeds of crime. 

The CBI and the ED initiated probes against the firm. 

However, a single-judge set aside the PAO after noting that the CBI FIR and the chargesheet are limited to PIL’s misrepresentation to obtain the allocation of coal block and since the issuance of preferential share did not form part of either the CBI FIR, chargesheet or ECIR, the ED lacked the power and jurisdiction to issue the PAO. 

It was also held that given that the allotment of shares was not reflected in the FIR, chargesheet and ECIR, the ED was under an obligation to comply with the mandate of Section 66(2) of PMLA by sharing the relevant information with the jurisdictional police before invoking its power of attachment under second proviso to Section 5 of PMLA, which it failed to do, rendering its action infructuous. 

The ED challenged the judgment before the Division Bench and the same was allowed today. 

The Division Bench said that the single-judge’s observation that the probe would not extend to the allotment of preferential shares was based on a fundamental misconception of the nature, scope and legal implications provided under PMLA. 

Further, the Bench held that ED’s power to attach properties under Section 5 of the PMLA is “distinct, independent and autonomous” with the information to be shared to a predicate agency under Section 66(2). 

In light of the above, the Court set aside the single judge’s order. 

ED was represented through its Special Counsel Zoheb Hossain, Panel Counsel Vivek Gurnani as well as advocates Pranjal Tripathi, Kartik Sabharwal and Sheikh Raqueeb. 

Senior Advocate Dayan Krishnan with advocates Ankur Chawla, Chander B Bansal, Gurpreet Singh, Jatin S Sethi, Bukul Jain, Kunal Aggarwal, Shivam Bansal and Yash Pandey represented Prakash Industries. 

[Read Judgment]