This article is for educational and legal awareness purposes only. It does not constitute legal advice or solicitation. Please consult a qualified advocate for advice on specific legal matters.
Overview
Foreign investment into India — whether structured as foreign direct investment, NRI remittances, venture capital, or funds routed through a branch or liaison office — is regulated on two separate legal tracks that are often confused with each other. The Foreign Exchange Management Act, 1999 (FEMA) is a civil, adjudicatory regime concerned with exchange-control compliance. The Prevention of Money Laundering Act, 2002 (PMLA) is a quasi-criminal regime concerned with tracing and confiscating the proceeds of a predicate criminal offence, and it can result in arrest, prosecution, and attachment of property. Both statutes are administered by the same authority — the Enforcement Directorate (ED) — a frequent source of confusion for investors and advisors who assume a FEMA compliance issue and a PMLA proceeding sit on the same footing. They do not.
Because a PMLA case can follow from proceeds of crime routed through — or disguised as — a cross-border investment structure, courts have in recent years clarified three things that matter to anyone exposed to ED action in a foreign-investment context: how an arrest must be effected, when a person is entitled to bail, and which court has territorial jurisdiction. This article sets out the FEMA/PMLA distinction and then examines the Supreme Court’s and the Allahabad High Court’s (Lucknow Bench) most significant recent rulings on these three questions.
Two Regimes, One Enforcer: FEMA (Civil) and PMLA (Criminal)
FEMA, 1999 replaced the Foreign Exchange Regulation Act, 1973 (FERA). Under Section 49 of FEMA, FERA was repealed, and the Act built in a deliberate transition from criminal to civil enforcement: Section 49(3) provides that “no Court shall take cognizance of an offence under the repealed Act and no adjudicating officer shall take notice of any contravention under section 51 of the repealed Act after the expiry of a period of two years from the date of the commencement of this Act,” while Section 49(4) preserved FERA-era offences already in the pipeline for that transitional window. The effect was to convert exchange-control contraventions from a criminal prosecution model into an adjudicatory, penalty-based model.
That civil character is visible in the operative penalty provision. Section 13(1) of FEMA provides that a person who contravenes the Act, or any rule, regulation, notification, direction, or order issued under it, “shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable,” with a further daily penalty for a continuing contravention. There is no provision for arrest built into an ordinary Section 13 adjudication; the remedy is a monetary penalty (and, under Section 13(2), possible confiscation of the property involved), decided by an Adjudicating Authority, not a criminal court. This is the track on which most day-to-day foreign-investment compliance questions — RBI approval routes for FDI, reporting for a branch or liaison office, pricing guidelines for share transfers, NRI investment limits — are ultimately tested.
PMLA operates on a separate trigger. An offence of money laundering under Section 3 of PMLA requires “proceeds of crime” derived from a scheduled offence — predicate offences under other statutes (the Indian Penal Code / Bharatiya Nyaya Sanhita, the Prevention of Corruption Act, 1988, the Customs Act, 1962, and others) set out in the Schedule to the Act. A FEMA contravention, by itself, is not a scheduled offence under PMLA. Where a foreign-investment matter crosses onto the PMLA track, it is typically because the transaction is alleged to conceal, possess, use, or project as untainted the proceeds of one of those predicate offences — for example, funds linked to corruption or customs fraud routed through an investment structure, a shell entity, or an FCRA-registered recipient. At that point, PMLA’s materially more severe arrest, bail, and attachment machinery comes into play, which is why the recent case law on how that machinery must operate matters to this practice area.
The Constitutional Foundation: Vijay Madanlal Choudhary v. Union of India (2022)
The Supreme Court’s decision in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors., delivered on 27 July 2022 by a three-judge bench of Justices A.M. Khanwilkar, Dinesh Maheshwari, and C.T. Ravikumar, remains the foundational ruling on PMLA’s constitutional validity and continues to govern the field. Review petitions against it are pending before the Supreme Court, so the position stated below should be checked for any subsequent development before it is relied on. Several of its holdings bear directly on foreign-investment-linked proceedings:
1. Section 45’s twin conditions for bail were upheld. The original twin conditions in Section 45(1) — that a court must be satisfied there are reasonable grounds to believe the accused is not guilty, and that the accused is not likely to commit any offence while on bail, before bail can be granted — had earlier been struck down as unconstitutional in Nikesh Tarachand Shah v. Union of India, (2018) 11 SCC 1. Parliament responded by amending Section 45 in 2018 to cure that defect. The Court in Vijay Madanlal Choudhary held the amended Section 45 “is reasonable and has direct nexus with the purposes and objects sought to be achieved by the [2002] Act,” and rejected the challenge to its validity — reviving the practical difficulty of obtaining bail in a PMLA prosecution, subject to the later clarifications discussed below.
2. Section 19’s arrest power was upheld, subject to safeguards. The Court rejected the challenge to the constitutional validity of Section 19 (the ED’s power of arrest), holding that “[t]here are stringent safeguards provided in Section 19 … [t]he provision does not suffer from the vice of arbitrariness” — while affirming that an arresting officer must record, in writing, the “reason to believe” that the arrestee is guilty, and must inform the arrested person of the grounds of arrest as mandated by Article 22(1) of the Constitution.
3. An ECIR is not an FIR. The Court held that “in view of [the] special mechanism envisaged by the 2002 Act, ECIR cannot be equated with an FIR under the [1973 Code] … ECIR is an internal document of the ED,” and that supply of a copy of the ECIR to the person concerned is not mandatory — it is sufficient if the grounds of arrest are disclosed at the time of arrest. This distinguishes PMLA proceedings from the ordinary criminal process, and repeatedly surfaces in disputes involving investment intermediaries and NRI account holders questioned or summoned by the ED without ever seeing a document equivalent to a police FIR.
Refining the Arrest Safeguard: Pankaj Bansal v. Union of India (2023)
While Vijay Madanlal Choudhary affirmed that grounds of arrest must be conveyed to the arrestee, it did not settle exactly how — orally or in writing. That question reached the Supreme Court in Pankaj Bansal v. Union of India & Ors., decided on 3 October 2023 by Justices A.S. Bopanna and Sanjay Kumar. The Court found that ED practice on this point was inconsistent across the country: in some cases grounds of arrest were furnished in writing, while in others they were merely read out to, or allowed to be read by, the arrested person.
The Court held that this “dual and disparate procedure” could not be sustained, and directed that, “to give true meaning and purpose to the constitutional and the statutory mandate of Section 19(1) of the Act of 2002 of informing the arrested person of the grounds of arrest, … it would be necessary, henceforth, that a copy of such written grounds of arrest is furnished to the arrested person as a matter of course and without exception.” The judgment specifically held that earlier Delhi and Bombay High Court decisions taking the contrary view “do not lay down the correct law.” For an accused in a PMLA matter arising from a foreign-investment structure — an FDI-linked entity, an FCRA-registered recipient, or an NRI account holder — this ruling makes written grounds of arrest a mandatory procedural step, and their absence a live ground to challenge the arrest and any consequent remand.
Clarifying Bail Without Custody: Tarsem Lal v. Directorate of Enforcement (2024)
A further, and in practical terms significant, clarification followed in Tarsem Lal v. Directorate of Enforcement, Jalandhar Zonal Office, decided on 16 May 2024 by Justice Abhay S. Oka. The question was what happens when the ED does not arrest a person during investigation, but instead files a complaint under Section 44(1)(b) of PMLA and the Special Court issues a summons to that person to appear.
The Court’s conclusions, summarised in the judgment, include: once a complaint is filed and the accused was not arrested before it, the Special Court should, as a normal rule, issue a summons rather than a warrant, even if the accused is already on bail elsewhere. If the accused appears pursuant to that summons, “he shall not be treated as if he is in custody. Therefore, it is not necessary for him to apply for bail” — the Special Court may instead direct the accused to furnish a bond under Section 88 of the Code of Criminal Procedure, 1973. Because that is not a bail application, the Court held that “Section 45(1) will have no application to such an application” — the twin conditions apply to bail sought by a person in custody, not to a bond furnished by a person who was never taken into custody. The Court further held that once cognizance has been taken on a complaint, “the ED and its officers are powerless to exercise power under Section 19 to arrest a person shown as an accused in the complaint” without approaching the Special Court for custody and a reasoned order.
This is a qualification, not a reversal, of Vijay Madanlal Choudhary’s holding on Section 45: the twin conditions remain valid for a person seeking bail from custody, but Tarsem Lal confirms they are not a hurdle for a person who appears on a summons and was never arrested — a distinction of real consequence for investors and intermediaries who cooperate with an ED complaint rather than being taken into custody at the investigation stage.
Jurisdiction at the Lucknow Bench: Dr. Vijay Kumar Sharma v. Ashish Rawat (2024)
The fourth question — which court has jurisdiction to hear a PMLA-related application — was addressed by the Allahabad High Court, Lucknow Bench, in Dr. Vijay Kumar Sharma v. Ashish Rawat, Asst. Director (PMLA), Directorate of Enforcement, Lko., decided on 23 January 2024 (Neutral Citation 2024:AHC-LKO:6268) by Justice Mohd. Faiz Alam Khan. The applicant sought anticipatory bail at the Lucknow Bench in a PMLA complaint (ECIR/05/LKZO/2019/AD(SJ)) that had originally been registered and taken cognizance of at the Special Court, Lucknow, but had subsequently been transferred to the Special Court, Ghaziabad, on the basis that the predicate offence had been committed within the territorial jurisdiction of Ghaziabad/Gautam Buddh Nagar.
The Court examined Sections 43 and 44 of PMLA, which govern the constitution and territorial jurisdiction of Special Courts, and relied on Section 44(1)(a), under which an offence under Section 4 of PMLA “and any scheduled offence connected to the offence under that Section shall be triable by the Special Court constituted for the area in which the offence has been committed.” Applying Vijay Madanlal Choudhary’s own holding that “the trial of the offence of money-laundering should proceed before the Special Court constituted for the area in which the offence of money-laundering has been committed,” the Bench held that since the scheduled and PMLA offences were committed within Noida or Ghaziabad, jurisdiction lay with the Special Court at Ghaziabad, and any challenge to that Court’s order lay at the High Court’s principal seat at Allahabad, not the Lucknow Bench. The application was accordingly held “not maintainable at Lucknow Bench and is dismissed as such.”
The ruling is a reminder that territorial jurisdiction in PMLA matters follows the place where the offence (and the connected scheduled offence) was committed, and the relevant Central Government notification constituting Special Courts for that area — not where the ECIR was first registered. For a foreign-investment matter with a multi-state footprint, establishing the correct forum before filing is a threshold step, not an afterthought.
Practical Points
- FEMA and PMLA are separate legal tracks administered by the same authority. A FEMA contravention alone is not a PMLA scheduled offence; PMLA exposure in a foreign-investment matter typically arises where investment funds are alleged to be linked to a predicate offence under a different statute.
- Following Pankaj Bansal, written grounds of arrest must be furnished under Section 19(1) of PMLA “as a matter of course and without exception” — a mandatory procedural safeguard, not a matter of ED discretion.
- Following Tarsem Lal, a person who is never arrested and instead appears before the Special Court pursuant to a summons after a PMLA complaint is not required to apply for bail, and the Section 45 twin conditions do not govern a bond under Section 88 CrPC in that scenario.
- Territorial jurisdiction for a PMLA application follows the place where the offence was committed and the applicable Special Court notification — not the location where the ECIR was initially registered, as the Lucknow Bench held in Dr. Vijay Kumar Sharma.
- Vijay Madanlal Choudhary continues to govern the constitutional validity of Section 45’s twin bail conditions, the ED’s Section 19 arrest power, and the ECIR-is-not-an-FIR position; the later rulings refine its application rather than displace it.
Takeaway
The distinction between FEMA’s civil, penalty-based track and PMLA’s criminal, arrest-based track is the starting point for understanding ED exposure in any cross-border investment matter. Where a matter crosses onto the PMLA track, the governing law has continued to develop since 2022: Vijay Madanlal Choudhary supplies the constitutional foundation, Pankaj Bansal mandates written grounds of arrest, Tarsem Lal distinguishes custody-based bail from a summons-based appearance, and the Lucknow Bench’s ruling in Dr. Vijay Kumar Sharma confirms that territorial jurisdiction, not the place of initial registration, governs which court can hear a PMLA application. None of these rulings dilutes the seriousness of PMLA proceedings; they clarify the procedural guardrails within which that seriousness must operate.
Useful Resources
- Indian Kanoon — Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. (27 July 2022)
- Indian Kanoon — Pankaj Bansal v. Union of India (3 October 2023)
- Indian Kanoon — Tarsem Lal v. Directorate of Enforcement, Jalandhar Zonal Office (16 May 2024)
- Indian Kanoon — Dr. Vijay Kumar Sharma v. Ashish Rawat, Asst. Director (PMLA) (23 January 2024)
- Indian Kanoon — Section 13, Foreign Exchange Management Act, 1999
- Indian Kanoon — Section 49, Foreign Exchange Management Act, 1999
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