Profits from fraudulently inflated shares qualify as proceeds of crime: Delhi HC

The court delivered the verdict on Monday in the Enforcement Directorate’s petition challenging the single judge’s January 2023 ruling.

Profits derived from trading stock market shares, whose value was fraudulently inflated, constitute “proceeds of crime” under the Prevention of Money Laundering Act (PMLA), the Delhi high court has ruled.

The Bombay Stock Exchange. (HT File)

A bench of justices Anil Kshetarpal and Harish Vaidyanathan Shankar delivered the verdict on Monday in the Enforcement Directorate’s (ED) petition challenging the single judge’s January 2023 ruling.

In the case, a single-judge bench had earlier quashed the provisional attachment order (PAO) issued by the ED, which had attached assets worth over ₹122 crore belonging to Prakash Industries Limited (PIL) and its group company, Prakash Thermal Power Limited (PTPL).

According to the ED, the PIL had fraudulently secured the allocation of the Fatehpur coal block and falsely represented to the Bombay Stock Exchange that the allocation had already been granted. This misrepresentation allegedly led to a sharp increase in PIL’s share price—from ₹31 to ₹254.60—after which the company and its promoters sold 62.5 lakh equity shares on a preferential basis, earning an undue gain of approximately ₹118.75 crore.

Though the Supreme Court in 2012 had cancelled the allocation, the CBI had registered a case, following which the ED also launched its probe under the PMLA. The ED in 2018 attached PIL’s properties worth ₹122.74 crore, on the premise that the undue financial gains obtained by PIL through the sale of shares constituted proceeds of crime. The ED had claimed that these properties were acquired using profits from the sale of shares whose value was artificially inflated through unlawful means.

The single judge had quashed the POA, ruling that trading in shares does not constitute a criminal activity or a scheduled offence since the same did not form a part of either of the FIR, chargesheet or ECIR, and the gains arising therefrom would not fall within the meaning of proceeds of crime.

In its petition, the ED represented by ED’s special counsel Zoheb Hossain and panel counsel Vivek Gurnani argued that any process or activity linked to or resulting in the generation of proceeds of crime falls within the scope of money laundering and thus the issuance and premium allotment of preferential shares, being directly connected to the fraudulent coal block allocation, squarely came within that ambit. Hossain further asserted that illegal gains from the rise in share prices were directly linked to the scheduled offences of criminal conspiracy and fraudulent coal block allocation.

Advocating for the PIL, lawyer Dayan Krishnan opposed the petition, asserting that the investment made through his client by way of allotment of preferential shares to the investors cannot be termed as proceeds of crime.

Ultimately, the court set aside the single judge’s ruling, holding that even without a separate predicate offence, any illegal gains acquired through legal transactions that originated from unlawful means would 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 maintained.

It 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.”