Federalism under Stress: Role of Judiciary

Supreme Court’s recent remarks on the Enforcement Directorate (ED) raids on the Tamil Nadu State Marketing Corporation

INTRODUCTION 

India's constitution establishes a federal system that divides power and responsibilities between central and state governments to promote cooperative governance, effective administration, and regional self-rule. In recent times, however, the quasi-federal balance has faced mounting challenges, especially when Central agencies are perceived as encroaching on areas constitutionally reserved for the states. A prominent illustration of this training is the recent dispute over enforcement directorates' raid on the Tamil Nadu State Marketing Corporation, a state-owned entity. Acting under the prevention of money laundering the ED launched investigations and conducted raids on TASMAC citing alleged financial misconduct. The Tamil Nadu government contested these actions asserting that the Ed's unilateral intervention in a state-run corporation undermined federal principles and upset the constitutional division of powers. The Supreme Court intervention highlights the critical role of judicial oversight in upholding India's federal structure, particularly when executive agencies are seen to be acting beyond their constitutional mandates. 

FEDERAL STRUCTURE IN INDIA 

Federalism is a system of governance wherein the powers are distributed among the units at central, provincial, and local levels. Each level has its own responsibilities, power, and autonomy allowing them to operate independently in their pre-determined areas. This system is particularly relevant in India's context where at every 100 kilometers, there is a difference in language and cultural practices to ensure adequate representation of each section of the society. When the Constitution was adopted, India had only 14 states. With the due course of time, these 14 states are divided into the present 28 states, to ensure representation of each community and such diverse population at the grassroots level. The aim of such devolution and division was to lead India to the growth and development of the nation, increase the living standards of the individuals, and put herself on the global platform in such a polarized world.  

The federal structure is evident under Articles 1, 2, and 3 of the Indian Constitution which has leaning towards the Centre. The Constitution makers made India a quasi-formal nation. However, central leaning should not be misunderstood with central authority overpowering the others, it calls for a harmonious balance for the distribution of powers and responsibilities and a clear separation of powers. When the central government exercises its power over the autonomous units or interferes in the functioning of the units, it becomes a confederation against the fundamental principles of federalism.  

In the contemporary times, this federal structure is being challenged in India. The central government, which ought to be a catalyst in the exercise of the power of the autonomous unit, creates hurdles for them and disrupts the smooth functioning of the states. This reality is most glaring in the opposition-run states. The recent instances include the Tamil Nadu Governor shadowing pocket veto on reserving the bills for the president’s assent. Another case is of the enforcement directorate exercising his power arbitrarily.  

ROLE AND EXPANSION OF E.D. 

The enforcement directorate is the ‘centralized investigative agency’ which was established in 1956 as an enforcement unit. It was tasked to handle violations of the Foreign Exchange Regulation Act 1947 (FERA). Its initial purpose was to investigate and enforce laws relating to foreign exchange and prevent illegal outflows of money from India. Over time, with economic liberalization and the emergence of more complex financial crimes, the ED's mandate expanded to include enforcement of the Foreign Exchange Management Act, 1999 (FEMA) and Prevention of Money Laundering Act 2002 (PMLA). The ED investigates economic crimes, money laundering, and fugitive economic offenders and plays a crucial role in safeguarding the country's financial integrity. 

These acts were amended several times to match the pace of the ever-evolving society and one such amendment was made in 2019, in the Prevention of Money Laundering Act 2002 via Finance Act. The said amendment made the following changes, 

• It clarified that money laundering is a continuing offense, and a person can be held guilty as long as they're enjoying the proceeds of crime, not just at any point of initial concealment or possession.  
• The ED was empowered to conduct searches and arrests without the need for a prior report or a court-issued warrant. This means the action can be taken even in the absence of a formal FIR.  
• Section 45 of the Act was amended to make all offenses under the Act cognizable and non-bailable regardless of the punishment prescribed.  
• The burden of proof shifted from the prosecution to the accused, implying the onus of the accused to prove his innocence. It is against the principle of ‘innocent until proven guilty’. 

Around 241 petitions were filed for the judicial review of the amendment in the Act.  In 2022, a three-judge bench of the Supreme Court sat to decide the petition challenging the constitutionality of the amendments. The bench, however, approved the impugned amendments, providing more powers to the central agency.  

A special bench sat on 19th October 2023 to review the three-judge bench judgment, but the government challenged the review on the grounds that the courts cannot do academic review without any merit or substance to the issue of the case. Therefore, the case was closed. Therefore, the agency was granted unbridled powers, and the trend was evident in the abused functioning of the Directorate.  

CASE ANALYSIS (TAMIL NADU AND TASMACT V. ED)  

Tamil Nadu State Marketing Corporation or TASMAC, was responsible for the wholesale distribution of alcoholic beverages in 1983. In recent times, multiple FIRs were filed against the organization alleging corrupt practices and fraud of around 1000 crore rupees. The Enforcement Directorate took charge. The centralized agency investigated the matter of financial irregularity and concluded that the corporation was involved in corrupt practices, including charging of excess amounts by the retail shops, bribing senior officials for transferring, promoting, etc., manipulation of tender allocation, and inflation of monthly sales figures, among other things.  

With this, the agency conducted raids at the TASMAC’s headquarters in Chennai The Tamil Nadu government, in response, filed petitions in the Madras High Court challenging the authority to conduct raids on the grounds of absence of consent of the state and on violation of the principle of federalism and separation of powers between central and state government.  

However, the Madras High Court dismissed the petition filed by the Tamil Nadu government and upheld the legality of the investigation and raped by the Enforcement Directorate, citing that the Prevention of Money Laundering Act extends to India in its entirety and does not require prior consent from state authority. 

The government, aggrieved, filed an appeal to the Supreme Court of India. The apex court overturned the permission granted by the Madras High Court and continued the Enforcement Directorate investigation. Apart from criticizing the ED for overstepping its jurisdiction and infringing the principles of federalism, the Supreme Court observed that the allegations were without any backing of the evidence and were politically motivated. In addition to that, the ED has been following this trend for quite a while.  

In August 2024, the government submitted to the legislature, its report citing that between 2014 to 2024, the number of cases registered under the Enforcement Directorate was around 5297 with only 40 being convicted.  

In the data collected by the Indian Express in September 2022, there has been a fourfold rise in the number of cases under the Prevention of Money Laundering Act.  

In November 2024, in West Bengal, a 73-year-old former minister of the state was put in custody on trial for more than two and a half years for money laundering. 

The bench of Justice Abhay Oka and Ujjal Bhuyan expressed concern over the investigating agency and said “What we have seen in umpteen Number of cases filed by the ED. This is the pattern. Just make allegations without reference to anything.”  

IMPLICATIONS AND CHALLENGES 

The implications of the overreaching of the central investigating authority are far-reaching.  

• It challenges the very structure of the federalism. In the present case, the government's contention was that the investigations should respect state jurisdictions especially when they pertain to the state-run entities that are under the state list (List II, Schedule VII of the Constitution of India). The Supreme Court’s intervention highlighted the need for a balanced approach that caters to the needs of both central agency and state autonomy. 
• The opposition-ruled states are frequently targeted by the central majority government. This undermines their authority and creates disruption in the proper functioning of the state. In the present case and cases of the past, it is glaringly evident that the central government or its agency’s functioning is politically motivated. 
• It undermines the democratic principle of the prevalence of the will of the people and the basic structure doctrine. When it is just a power play.  
• With the Supreme Court's intervention and stay on the Enforcement Directorate functioning, the court has reiterated the judicial autonomy and the importance of the judiciary as a fair and prejudice-free institution. However, the present case undermines the trust of the citizens in the state machinery.  
• The Supreme Court called for transparency and reliance on due process of law highlighting the broader principle of democracy, wherein every agency or authority should act in a free, fair, and transparent manner. This creates reasonable doubt in the minds of the citizens on whether the law is being bent to meet the selfish interests of the state without being accountable to the people.  

CONCLUSION 

The dispute between the enforcement directorate action and the Tamil Nadu government tried to self-governance highlights the persistent pressure on India's federal framework. The Enforcement Directorate's enhanced authority under the Prevention of Money Laundering Act, combined with central governments' increasing sway over the legislative bodies, has sparked significant concerns about institutional overreach and the diminishing autonomy of the states as protected by the constitution. The TASMAC episode serves as a clear example of how unchecked central intervention- especially in states governed by opposition parties- can claim both the foundation of cooperative federalism and public confidence in the neutrality of law enforcement agencies. 

The Supreme Court's decision to stay the enforcement directorate’s proceeding and its pointed criticism of the agency's conduct emphasized the judiciary's vital function as a constitutional safeguard against the executive excess. Through its intervention, the court has reinforced the importance of due process, openness, and maintaining a balance between central and state. The court action also made it clear that investigative agencies must remain insulated from political influence, particularly in a federal democracy like India. 

AUTHOR: KAVYA GUPTA

https://www.thehindu.com/news/national