Companies Act, 2013, Prevention of Money Laundering Act, 2002, and Section 45 of PMLA: A Critical Analysis

Shivani Bhardwaj

The Prevention of Money Laundering Act, 2002 (PMLA) stands as a law against financial malfeasance, yet its provisions, notably the definitions under Section 2 (u), Section 2 (y), Section 3 relating to Scheduled Offence like misuse of funds attracting Section 447 of the Companies Act, 2013 and Section 45 of PMLA, have stirred a maelstrom of debate regarding the delicate balance between justice and security.

Section 447, which even provides for a seven year jail term, can be imposed and prosecution proceedings initiated against someone who may not even be guilty merely on the subjective, biased or vindictive Inspection Report or a Supplementary Inspection report prepared by the Regional Director & Inspecting Officer of the Ministry of Corporate Affairs.

Mark it, grossly illegal Supplementary Inspection reports are being submitted by RD & IOs on instructions of senior officers who even go to the extent of directing the RDs & IOs what to add in these reports even after the submission of Inspection reports under Section 208 of the Companies Act, 2013 on conclusion of Inspection of Books of Accounts and other books under Section 206(5).

What needs to be noted in this matter is that there is no Section under the Companies Act under which a Supplementary Inspection Report can be submitted. However, this is being done by the enforcement authorities of the Ministry of Corporate Affairs in gross violation of the Companies Act, 2013.

This amounts to the subversion of the entire process under the Companies Act.

The matter could be worst confounded if the proceedings under the Companies Act, 2013 are vitiated and inspection findings and the conclusion in the Inspection Report is distorted on instructions by senior officers, who even go to the extent of trampling upon the objectivity of Inspection and autonomy of the IOs, who have quasi-judicial powers under Section 207(3), by ordering them to add Section 447 of the Companies Act, 2013 in a Supplementary Inspection Report. The point that needs to be underscored is that under no circumstances the RD & IOs can be instructed what to write either in the Inspection Report or a blatantly illegal Supplementary Inspection Report.

In the case of a few companies, it has come to notice that even as there is no provision under the law for submitting a Supplementary Report, these are being submitted by RD & IOs who even officially bring it on record that the Supplementary Inspection Report is being submitted under Section 208 of the Companies Act, 2013.

With regard to the above assertion, it is pertinent to quote Section 208 relating to Report on inspection made:

“The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206 and other books and papers of the company under section 207, submit a report in writing to the Central Government along with such documents, if any, and such report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support.”

Once a court takes cognizance of prosecution complaint under Section 447 based on an illegal Supplementary Inspection Report, the Enforcement Directorate automatically steps in and lodges an ECIR treating the matter as a Scheduled offence. After that every money transaction linked with the charge sheet filed in court by the Registrar of Companies under Section 447 of the Companies Act, 2013, is treated by the Enforcement Directorate as Proceeds of Crime. Once a case is filed in court against an accused person by the ED under different Sections of PMLA, the application for anticipatory or regular bail by the accused is dealt with under Section 45 of the PMLA. It delineates stringent conditions for granting bail to individuals accused of money laundering. However, the constitutional validity and ethical implications of this provision have sparked fervent discourse within legal circles and beyond.

At the heart of the matter lies the presumption of innocence, a sacrosanct principle enshrined in Article 21 of the Constitution of India. Section 45 of the PMLA, with its stipulation that an accused must demonstrate their innocence to secure bail, seemingly contravenes this fundamental tenet of justice. The burden placed on the accused to prove their innocence runs counter to the foundational premise that one is deemed innocent until proven guilty.

The judicial prouncements surrounding the constitutionality of Section 45 is emblematic of this conundrum.

In the landmark case of Nikesh Tarachand Shah v. Union of India, the Supreme Court struck down Section 45, decrying it as arbitrary and antithetical to the principles of natural justice. The court’s verdict underscored the primacy of the presumption of innocence and articulated the necessity of a compelling state interest to abrogate this presumption.

Subsequent legislative amendments in 2018 sought to assuage the concerns raised by the judiciary, ostensibly aligning Section 45 with constitutional imperatives. Yet, the contentious nature of this provision persists, as evidenced by ongoing judicial scrutiny and dissenting voices within legal academia.

Critics argue that Section 45, despite its revisions, remains a draconian instrument that empowers law enforcement agencies at the expense of individual liberties. Senior advocate Kapil Sibal’s impassioned indictment of the PMLA as a draconian statute underscores broader apprehensions regarding the erosion of civil liberties in the name of terrorism and national security.

Moreover, the disparate treatment of certain categories of individuals under Section 45 exacerbates concerns of discrimination and unequal access to justice. While ostensibly safeguarding vulnerable groups such as women, children, and the infirm, these exemptions on “welfare grounds” arguably rob those not exempted of their constitutional rights within the criminal justice system.

The judicial pendulum swings once more with the Supreme Court’s recent pronouncement in Vijay Madanlal Choudhary v. Union of India, wherein the constitutional validity of Section 45 was reaffirmed. The court’s rationale, anchored in the purported rectification of legislative defects and international obligations, underscores the complex interplay between domestic imperatives and global commitments in shaping legal jurisprudence.

However, amidst the legal labyrinthine, the fundamental question persists: can a statute designed to combat financial crimes justify abrogating the foundational principles of justice and individual rights? As India navigates the nexus between security imperatives and constitutional liberties, the contours of justice continue to evolve, beckoning a nuanced reevaluation of legislative frameworks and judicial interpretations.

In essence, India’s Prevention of Money Laundering Act and Section 45 of the PMLA epitomizes the perennial struggle to reconcile the imperatives of security with the sanctity of justice. As the nation grapples with the exigencies of a rapidly evolving legal landscape, the quest for equilibrium between enforcement agencies that are not above adjudication and those who may not be guilty but yet get wrongfully entangled in legal wrangle remains an enduring imperative.

Even as the Supreme Court is reviewing the matter, it is important for the sake of justice and to protect the constitutional rights of the citizens, the law makers should revisit the PMLA and set right the wrongs without wasting any time.

Shivani Bhardwaj, SBLA