Preferential Share Sale Proceeds from Misrepresentation Are ‘Proceeds of Crime’ Under PMLA: Delhi High Court Restores ED’s ₹122 Cr Attachment Against Prakash Industries

“Misrepresentation to Stock Exchange Artificially Inflated Share Prices... The Resulting Gains Are Tainted in Origin and Fall Squarely Within the Scope of Section 3 of PMLA” – In a significant ruling Delhi High Court Division Bench comprising Justice Anil Kshetrapal and Justice Harish Vaidyanathan Shankar allowed appeals filed by the Directorate of Enforcement (ED) and restored a Provisional Attachment Order (PAO) worth ₹122.74 crore issued under the Prevention of Money Laundering Act, 2002 (PMLA) against M/s Prakash Industries Ltd. and M/s Prakash Thermal Power Ltd.

The case stemmed from allegations of fraudulent coal block allocation and misrepresentation before the Bombay Stock Exchange (BSE), which, according to ED, caused an artificial spike in share prices, enabling the sale of 62.5 lakh preferential shares, thereby generating proceeds allegedly laundered through seemingly legal corporate mechanisms.

The Court overturned the earlier decision of the Single Judge who had quashed the PAO, ruling that the ED’s attachment powers under Section 5 of PMLA were validly exercised, and "the gains from preferential share allotment had a direct and traceable nexus with the scheduled offence."

“Money Laundering Is a Continuing Offence... Proceeds of Crime Retain Their Illicit Nature Despite Legal Facade” – Court Rejects PIL’s Stand That Share Sale Was Lawful

The appeals arose out of LPA Nos. 102 and 138 of 2023, where the ED challenged a Single Judge’s January 2023 judgment that quashed its attachment of ₹122.74 crore in assets of the respondent companies. The High Court was tasked with deciding whether the PAO could be sustained despite the fact that the sale of preferential shares—the act which allegedly generated the proceeds—was not explicitly mentioned in the FIR or chargesheet filed in the predicate offence.

The Division Bench ruled that such specific mention is not necessary as long as there exists a clear nexus between the proceeds and the criminal activity. The Court held:

“The use of proceeds through preferential allotment of shares, inflated through misrepresentation, even if not explicitly listed in the predicate FIR, forms a connected chain of laundering under Section 3 of PMLA.”

“Share Price Inflation via False BSE Declarations Tainted Subsequent Transactions – Proceeds Remain Illicit Despite Legal Form”

The Court took note of the sequence of events wherein M/s Prakash Industries Ltd. (PIL) falsely informed the Bombay Stock Exchange in November 2007 that it had been allocated a coal block in Chhattisgarh, even though the actual allocation was made only in February 2008. This false public declaration led to a dramatic rise in share value—from ₹31 to ₹254 per share.

Shortly thereafter, the company issued preferential shares and allegedly earned ₹118.75 crore in undue profits.

Rejecting PIL’s defence that share allotment was a separate and lawful transaction, the Court noted:

“The gains from the sale of preferential shares, even if ostensibly legal in form, are directly traceable to a tainted origin—i.e., fraudulent misrepresentation—thereby constituting proceeds of crime.”

“The appreciation in value does not cleanse or purify the tainted origin... the augmented value is inextricably and indirectly derived from the original illicit source of fraud.”

“PMLA’s Attachment Powers Not Dependent on Prior Action Under Section 66(2)... Preventive Power Cannot Be Thwarted by Procedural Delay”

A key issue before the Court was whether the ED's failure to first inform the jurisdictional police under Section 66(2) of PMLA rendered the PAO invalid. The Single Judge had quashed the PAO partly on this basis.

The Division Bench strongly disagreed and held that Section 66(2) is directory, not mandatory, and does not impose a precondition for invoking Section 5 of the PMLA.

The Court ruled:

“Section 5 is a complete and self-contained provision. There is no bar that prohibits attachment merely because the ED has not shared information under Section 66(2).”

Further, the Court warned against a narrow reading of PMLA’s scheme:

“The purpose of Section 5 is preventive—to preserve assets that may be dissipated. To hold otherwise would defeat the object of the Act.”

“Whirlpool Doctrine Not Attracted – Writ Jurisdiction Cannot Be Invoked to Quash Attachment Amidst Disputed Facts”

The Court also found fault with the entertainment of the writ petition by the Single Judge, holding that the respondent had an efficacious alternative remedy under the PMLA’s appellate framework (Sections 8, 26, and 42).

The Bench relied on the Supreme Court’s ruling in Whirlpool Corporation v. Registrar of Trademarks, and observed:

“There was no infringement of fundamental rights, no violation of natural justice, and no jurisdictional error. Hence, the writ petition was not maintainable.”

The Court found it especially problematic that the same issue was already pending before another Bench as an appeal under Section 42 of the PMLA, which the Single Judge failed to account for, resulting in “two parallel proceedings concerning the same issue, which is impermissible in law.”

“Proceeds of Crime Need Not Be Directly Named in Predicate Chargesheet If Taint Is Traceable” – Expansive Interpretation of Section 2(1)(u) and Section 3 of PMLA Affirmed

A key legal point addressed was whether a PAO can stand when the specific property or act generating proceeds of crime is not mentioned in the chargesheet or FIR. The Court answered in the affirmative, holding that:

“Even if no separate predicate offence is registered in relation to the preferential share allotment, the classification of the illegal gains used by means of a legal transaction—emanating from fraudulent coal block allocation—remains within the definition of proceeds of crime.”

Citing the Supreme Court’s landmark decision in Vijay Madanlal Choudhary v. Union of India, the Court reiterated:

“Money laundering is a stand-alone offence. The taint of proceeds derived through criminal means remains, regardless of the route or form they later assume.”

The Court categorically held: “The process of money laundering is a continuing offence linked to the possession and use of the illicit gains—until such proceeds are fully exhausted or confiscated.”

“Attachment Power Under PMLA Includes Both Tangible and Intangible Property Including Financial Instruments”

The Division Bench relied heavily on its earlier decision in Prakash Industries I, wherein it had already held that:

“The definition of property under Section 2(1)(v) of the PMLA is broad and inclusive... encompassing all forms of assets, including intangible and incorporeal property such as rights and interests derived from allocation letters, share allotments, or trading benefits.”

It reiterated that:

“The definition of proceeds of crime under Section 2(1)(u) is designed to include not just direct assets from crime, but also indirect gains arising from such property.”

Setting aside the Single Judge’s ruling, the Division Bench restored the ED’s provisional attachment of ₹122.74 crore, holding that:

“Preferential share allotment proceeds, gained through misrepresentation before a statutory body, traceable to a scheduled offence, are proceeds of crime under PMLA. The Directorate was fully empowered to attach such property provisionally under Section 5.”

The Court also made it clear that its findings are limited to adjudicating the present appeal and shall not prejudice or influence the pending proceedings before the trial court or the Supreme Court.

Final Directions: “Appeals allowed. Judgment of the learned Single Judge set aside. Provisional Attachment Order under Section 5 PMLA restored.”

Date of Decision: 3 November 2025