Kerala HC reserves verdict on ED appeal in KIIFB Masala Bond case
Kochi, Dec 19
The Kerala High Court on Friday reserved its judgment on an appeal filed by the Enforcement Directorate (ED) challenging a single judge bench's interim order that stayed a show cause notice issued to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act (FEMA), in connection with the utilisation of funds raised through masala bonds.
The appeal was heard by a division bench of Justice Sushrut Arvind Dharmadhikari and Justice P.V. Balakrishnan.
The ED questioned the interim relief granted by the single judge's bench as well as the maintainability of the writ petition filed by the KIIFB.
Appearing for the ED, Additional Solicitor General A.R.L. Sundaresan submitted that the agency had only issued a preliminary notice under Rule 4 of the FEMA Adjudication Rules, calling upon the KIIFB to explain why adjudication proceedings should not be initiated.
Citing Supreme Court and High Court precedents, he argued that courts should ordinarily refrain from interfering at the show cause notice stage, particularly in matters involving financial statutes, unless there is a clear lack of jurisdiction.
The ED contended that the single judge's bench had granted interim relief without examining the full statutory framework under the FEMA or the question of maintainability.
It maintained that the adjudicating authority must be allowed to conduct an inquiry to determine whether the utilisation of funds raised through masala bonds violated the External Commercial Borrowings (ECB) policy.
Opposing the appeal, Advocate General Gopalakrishna Kurup, appearing for the KIIFB, argued that the proceedings were initiated without proper application of mind.
He submitted that the RBI circulars relied upon by the ED had been superseded and that the KIIFB, a statutory body, had obtained RBI approval and regularly reported the utilisation of funds.
He also pointed out that there had been no complaint from the RBI alleging misuse of funds.
The respondent further contended that allowing the adjudication proceedings to continue would jeopardise ongoing infrastructure projects and adversely affect investor confidence.
During the hearing, the division bench observed that the proceedings had not yet resulted in any finding of violation and asked whether the KIIFB could raise all its objections before the adjudicating authority itself.
The court orally observed that the ED had not decided to prosecute and had merely sought an explanation on why proceedings should not be initiated.
The appeal arises from a writ petition filed by the KIIFB seeking to quash a complaint filed by the ED on June 27, 2025, and the consequent show cause notice proposing adjudication under Section 13 of FEMA.
The ED has alleged that the KIIFB violated RBI guidelines by using proceeds from masala bonds for land acquisition, which it claims amounts to prohibited real estate activity.
The single judge's bench, while granting an interim stay, had held that there was prima facie merit in the KIIFB’s contention that its infrastructure activities could not be classified as real estate activity.
Subsequently, Chief Minister Pinarayi Vijayan, in his capacity as KIIFB Chairman, along with former Finance Minister T.M. Thomas Isaac and KIIFB CEO K.M. Abraham, also obtained similar interim relief.
— IANS
Reader Comments
As someone who works in finance, the legal principle is important here. Courts usually don't interfere at the show-cause stage. Let the adjudicating authority do its inquiry first. Due process must be followed, regardless of the politics involved.
Kerala's infrastructure has improved so much because of KIIFB projects! The roads, the water treatment plants... everything is better. If this investigation delays projects, it's the common people who will suffer. Hope the court sees the practical impact. ðŸ™
The argument about land acquisition for infrastructure being "real estate activity" seems like a stretch. Building a hospital or a road requires land. This looks like a technicality being exploited. The HC's final verdict will be crucial for all state funding bodies.
Respectfully, while I support infrastructure development, transparency is non-negotiable. If the ED has questions about fund utilisation under FEMA, they have a duty to ask. The KIIFB should confidently present its case to the adjudicating authority instead of blocking the inquiry at the threshold.
Masala bonds are an innovative way for Indian entities to raise money. If every issuance gets tangled in legal battles like this, investor confidence will truly be hit. We need clearer guidelines and less political interference in financial instruments. 🇮🇳
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