The Delhi High Court has ruled that profits earned from trading shares whose value was artificially inflated through fraud constitute “proceeds of crime” under the Prevention of Money Laundering Act (PMLA) and can therefore be attached by the Enforcement Directorate.
A division bench of justices Anil Kshetarpal and Harish Vaidyanathan Shankar delivered the verdict on Monday, setting aside a single judge’s January 2023 ruling that had quashed the ED’s provisional attachment order against Prakash Industries Limited (PIL) and its group company, Prakash Thermal Power Limited (PTPL) — entities that were caught in the coal block allocation irregularities controversy of 2012.
The case stems from investigations that began after PIL’s fraudulent acquisition of the Fatehpur coal block in Chhattisgarh, one of 214 coal blocks whose allocations the Supreme Court cancelled in September 2014 after finding them illegal and arbitrary.
According to the ED, which subsequently began probing the company, PIL had falsely declared to the Bombay Stock Exchange on November 19, 2007,that it had been allocated the Fatehpur coal block—months before the actual allocation was granted on February 6, 2008. This misrepresentation caused PIL’s share price to surge from ₹31 to ₹254.60 between November 2007 and February 2008.
The company and its promoters then sold 6.25 million equity shares on a preferential basis during this period, earning an undue gain of approximately ₹118.75 crore, the ED alleged.
Following the Supreme Court’s cancellation of the coal block allocation, the CBI registered a case, prompting the ED to launch its own probe under the PMLA. In 2018, the ED attached PIL’s properties worth ₹122.74 crore on the premise that these assets were acquired using profits from the artificially inflated share sales.
The single judge had quashed the provisional attachment order, ruling that share trading does not constitute a criminal activity or scheduled offence since it did not form part of the FIR, chargesheet or enforcement case information report (ECIR). Consequently, the judge held that gains from such trading could not fall within the meaning of “proceeds of crime”.
The ED, represented by special counsel Zoheb Hossain and panel counsel Vivek Gurnani, challenged this ruling, arguing that any process or activity linked to the generation of proceeds of crime falls within the scope of money laundering. The issuance and premium allotment of preferential shares, being directly connected to the fraudulent coal block allocation, squarely came within that ambit, Hossain asserted.
PIL’s lawyer, senior advocate Dayan Krishnan, countered that the preferential share allotment to investors cannot be termed proceeds of crime.
The division bench ultimately sided with the ED, holding that even without a separate predicate offence, illegal gains acquired through legal transactions that originated from unlawful means constitute proceeds of crime.
“To put it in other words, even if no separate predicate offence is registered in relation to the subsequent act of utilisation of property to acquire funds through a legalised transaction, the classification of the illegal gains used by means of a legal transaction emanating from an illegal means adopted for attaining coal block allocation would still be construed as ‘proceeds of crime’. This is because the proceeds nevertheless are traceable either directly or indirectly, to the original criminal activity relating to a scheduled offence,” the court held.
The bench added: “The aforesaid facts and circumstances when read together establishes a clear nexus between the rise in the share price of PIL and the coal block allocation, thereby prima facie satisfying the conscience of this Court that the issuance of the PAO to the PIL may not be incorrect. Therefore, even if the share allotment on 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 scheduled offences in this case include criminal conspiracy and fraudulent coal block allocation.
