The High Court of Chhattisgarh at Bilaspur Bench has clarified that where frozen or attached property under the PMLA consists of market-linked securities such as listed shares, preservation of the property necessarily includes preservation of its economic value, and not merely retention of the asset in its original frozen form. In the absence of any express statutory mechanism under the PMLA or the Prevention of Money-laundering (Taking Possession of Attached or Frozen Properties Confirmed by the Adjudicating Authority) Rules, 2013, for protecting the value of such volatile financial assets, the High Court may, in exercise of jurisdiction under Article 226, issue limited protective directions to permit consideration of liquidation and reinvestment of the assets into regulated, low-risk instruments under the exclusive supervision and control of the ED, provided the corpus remains fully secured, identifiable, traceable, and beyond the petitioners’ control, and without affecting the merits of pending PMLA proceedings.
Accordingly, the Court directed the petitioners to submit to the ED a detailed proposal identifying the securities sought to be liquidated, the mode of liquidation, and the SEBI-regulated instruments in which the proceeds were proposed to be invested. Upon receipt, the ED was permitted to obtain the opinion of an independent SEBI-registered investment adviser, portfolio manager or other financial expert. If satisfied that liquidation of any part or whole of the frozen securities was necessary or desirable for preservation of value, the ED could permit such liquidation strictly under its supervision and through a SEBI-registered intermediary. The sale proceeds were not to be released to the petitioners and were to remain subject to the freezing order and PMLA proceedings.
The Court further directed that the sale proceeds be transferred into a separate escrow or custodial account or another designated account identified by the ED, with no operational control of the petitioners. The realized amount could then be invested only in low-risk and regulated financial instruments, including government-backed securities, treasury-linked instruments, debt-oriented mutual funds, liquid funds, money-market instruments, or other SEBI-regulated products approved by the ED upon expert advice, keeping in view preservation of capital and liquidity. Any income, dividend, interest, appreciation, redemption amount or other accretion was also to remain subject to the PMLA and abide by the final outcome of proceedings.
The petitioners were specifically restrained from claiming any right of possession, withdrawal, transfer, encumbrance, pledge, lien, beneficial enjoyment or management in respect of either the original securities or the sale proceeds and accretions during the pendency of proceedings. If the ED formed the view that liquidation would prejudice pending proceedings or would not serve preservation of value, it was required to pass a reasoned order within eight weeks from submission of the proposal. The Court clarified that it had not adjudicated upon whether the assets constituted proceeds of crime, or upon the validity of the freezing order, retention order or prosecution complaint, and left all such issues open for decision by the Appellate Tribunal, the Special Court and other competent forums.
A Single Judge Bench of Justice Ravindra Kumar Agrawal observed that the limited issue before it was not the legality of the freezing order or the confirmation order, since those were already under challenge before the Appellate Tribunal, but whether a mechanism could be devised to preserve the value of frozen market-linked securities pending culmination of proceedings under the PMLA. It noted that the assets were not static assets such as land or fixed deposits, but listed equity shares whose value remained subject to constant market fluctuation. The Bench held that the object of attachment, seizure or freezing under the PMLA is preservative in nature, and where the property is market-linked, preservation cannot be understood merely as retention of legal title or custody, but must extend to preservation of economic value as well.
The Bench further found substance in the submission that neither the PMLA nor the 2013 Rules provided a specific mechanism for management or preservation of the value of market-linked securities after freezing. While Rule 4(4) contemplates transfer of shares, debentures, mutual fund units or instruments in favour of the Director of Enforcement, the Rules are silent on protection against adverse market movements. The Bench considered that this statutory silence could not be treated as a prohibition against adopting reasonable measures for preservation of value, particularly when the statutory objective itself is preservation of property pending adjudication.
The Bench also observed that the apprehension of the ED regarding dissipation of assets could be addressed by safeguards, because the petitioners were not seeking control over the sale proceeds and had stated that the proceeds could remain under the exclusive control of the ED. It reasoned that if the corpus remained identifiable, traceable, fully secured and beyond the control of the petitioners, conversion from market-traded equities into regulated and low-risk financial instruments would not prejudice the ED or frustrate proceedings under the PMLA.
The Bench also held that the writ petition was maintainable because the specific relief sought, namely preservation of value through conversion into another regulated form of investment, was not one that could effectively be granted in the pending statutory proceedings.
Briefly, the petition was filed by eight companies whose DEMAT accounts, shares, securities and related investment portfolios had been frozen by the Enforcement Directorate under Section 17(1-A) of the Prevention of Money Laundering Act, 2002, pursuant to investigation in an ECIR concerning the alleged “Mahadev Online Book” betting syndicate. The petitioners contended that they were not seeking release of the frozen assets, but only permission for liquidation of the listed shares and reinvestment of the proceeds in SEBI-regulated mutual funds or AIFs under the supervision and control of the ED, so that the value of the assets could be preserved against market volatility. The freezing order was confirmed by the Adjudicating Authority and appeals against that order were already pending before the Appellate Tribunal under Section 26 of the PMLA. The aggregate value of the investment portfolios of the eight entities as on Feb 29, 2024 was stated to be approximately Rs. 423.60 crores.
Appearances:
Vijay Agrawal, Advocate appeared through virtual mode along with Ashish Mittal, Advocate, for Petitioner
Anpurna Tiwari, Advocate, for Respondent no.1 / UOI
Dr. Saurabh Kumar Pande, Advocate, for Respondent no. 2 & 3
Vijay Kumar Sahu, Advocate, for Respondent no.4