IPC Does Not Stand Repealed by FEMA: Delhi High Court Upholds ED Arrests, Quashes Delhi Police Custody Over Violation of Supreme Court’s Arrest Guidelines

“Forgery and conspiracy are distinct criminal offences under the IPC… these do not get obliterated merely because the ultimate infraction relates to FEMA” – In a far-reaching decision that redefines the interplay between civil and criminal liability in foreign exchange cases, the Delhi High Court ruled that the enactment of FEMA does not grant immunity from prosecution under the Indian Penal Code (IPC).

Delivering a sharp indictment of procedural lapses by the Delhi Police, the Court upheld the validity of arrests by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA), but quashed the arrests by the Crime Branch for violating the Supreme Court’s mandate on communicating grounds of arrest in writing.

Justice Anup Jairam Bhambhani declared, “The petitioners’ arrest by the Delhi Police is not in compliance with the mandate of the Supreme Court in Prabir Purkayastha… It is therefore quashed.”

“No Immunity from IPC Merely Because the Same Act Also Violates FEMA”

The petitioners, businessmen Manideep Mago and Sanjay Sethi, had challenged their arrests in connection with alleged ₹3,500 crore hawala operations involving forged invoices, fake crypto transactions, and international money laundering.

Their primary contention was that FEMA, being a civil statute, decriminalized foreign exchange violations and precluded parallel prosecution under IPC. The Court was unequivocal in rejecting this premise.

Referring to the doctrine of implied repeal, the Court observed: “The offences of criminal conspiracy, cheating, forgery and related offences under the IPC do not get obliterated… merely because they were the underlying actions for the infractions of foreign exchange regulations.” [Para 28]

Citing the Supreme Court’s decision in Union of India v. Venkateshan S., the judgment clarified: “The enactment of FEMA does not repeal the IPC either expressly or by implication… FEMA and IPC address different and distinct infractions of law.” [Para 27]

The Court further emphasized that “What was decriminalised under FEMA was the end-action – the violation of foreign exchange norms. But the preparatory acts, such as forging documents or conspiring to defraud banks and regulatory agencies, remain squarely within the penal contours of IPC.” [Para 25]

“FIR Cannot Be Faulted When It Discloses Cognizable Offences”: Court Backs Police Action

The FIR, which was registered on May 30, 2024, by the Delhi Police Crime Branch on a complaint from the ED, was challenged on the ground that it was based solely on FEMA proceedings, particularly on statements recorded under Section 37 of FEMA, and no preliminary enquiry was conducted.

Justice Bhambhani held firmly: “In the present case, there can be no cavil that the complaint received by the police from the ED disclosed the commission of cognizable offences; and therefore the law mandated that the police must register an FIR.” [Para 36]

Relying on the Lalita Kumari Constitution Bench ruling, the Court reiterated:

“At the stage of registration of FIR, what is to be seen is merely whether the information given ex facie discloses the commission of a cognizable offence… Other considerations are not relevant.” [Para 35]

Further rejecting the petitioners’ reliance on K.T.M.S. Mohd., the Court clarified: “Even if some parts of the FIR are based on statements recorded under FEMA, the FIR is not founded solely on those… substantial material was recovered during the ED’s searches, including forged documents and unused notary stamps.” [Para 32]

“Kejriwal Verdict Not Retrospective”: ED Arrests Held Legally Compliant

The petitioners sought to invalidate their arrest by the ED under Section 19 of PMLA, arguing that they were not furnished with “reasons to believe” as required under the recent Supreme Court ruling in Arvind Kejriwal v. Directorate of Enforcement.

The Court, however, made it clear: “The requirement to serve ‘reasons to believe’ upon an arrestee was introduced only on 12.07.2024. The petitioners were arrested before that date. The mandate in Arvind Kejriwal cannot apply retrospectively.” [Para 39]

Addressing compliance under Section 19(2) of PMLA, Justice Bhambhani found that the ED had acted lawfully: “Copies of the arrest orders and other material were forwarded to the Adjudicating Authority within the stipulated time, accounting for holidays… statutory compliance stands satisfied.” [Para 40]

On the charge that non-cooperation was wrongly used as a ground for arrest, the Court explained: “Non-cooperation is not the sole ground… the arrest memos contain other specific allegations that justified the ED’s action.” [Para 42]

“Only Reasons for Arrest, Not Grounds”: Delhi Police Arrests Declared Unconstitutional

The most critical censure came in the context of the arrests made by the Delhi Police under IPC charges. The Court noted that the arrest memos failed to communicate the actual grounds for arrest, thus violating the constitutional safeguards laid down by the Supreme Court in Prabir Purkayastha v. State (NCT of Delhi).

Justice Bhambhani observed: “What have been recorded are not ‘grounds of arrest’… but only general reasons like need for custodial interrogation or fear of tampering evidence.” [Para 46]

This distinction between “reasons” and “grounds” proved decisive. “The arrest memos do not spell out the specific roles or incriminating circumstances attributable to the petitioners… Their arrest is in clear violation of the Supreme Court mandate.” [Para 48]

Accordingly, the Court ordered: “The petitioners’ arrest by the Delhi Police is quashed… They shall be released on personal bonds of ₹5 lakh each with two sureties of the like amount.” [Para 49.4]

This decision marks a significant reaffirmation of legal boundaries between civil and criminal law in economic offences. While upholding the ED’s authority to investigate and arrest for money laundering linked to scheduled offences, the Court strongly reasserted the constitutional safeguards against arbitrary arrest, particularly the right to be informed of grounds of arrest in writing.

In Justice Bhambhani’s words, “The enactment of FEMA cannot grant immunity from IPC… The civil wrong under FEMA and the penal offence under IPC are distinct legal consequences.” [Para 29]

Date of Decision: May 15, 2025