The Kerala High Court on Friday reserved its judgment on an appeal filed by the Enforcement Directorate (ED) challenging a single judge’s order that stayed further proceedings on a show cause notice issued to the Kerala Infrastructure Investment Fund Board (KIIFB) in the Masala Bonds case.
A division bench of Justices Sushrut Arvind Dharmadhikari and P V Balakrishnan, while hearing the ED’s appeal, questioned KIIFB on why it had not responded to the show cause notice and awaited the outcome before the adjudicating authority under the Foreign Exchange Management Act (FEMA).
“When a statutory authority is there, why should we examine all this? What was the problem in filing a reply and waiting for the decision of the adjudicating authority? They have not said you have committed an offence. They are asking why proceedings should not be initiated against you,” the bench observed.
At the same time, the court also raised concerns with the ED over the mention of a penalty figure at the show cause stage, asking how the agency could have “pre-decided” an amount of Rs 466.91 crore without any adjudication having taken place.
The bench was referring to the amount mentioned in the show cause notice, which relates to the alleged contravention of FEMA provisions and Reserve Bank of India (RBI) master directions by KIIFB and its officials.
Clarifying the ED’s stand, Additional Solicitor General A R L Sundaresan submitted that the notice does not quantify any penalty, but merely calls upon the noticees to explain why proceedings should not be initiated on the basis of a complaint alleging preliminary FEMA violations to the tune of about Rs 467 crore.
The court was hearing the ED’s appeal, filed through advocate Jaishankar V Nair, against a single judge’s interim order dated December 16, which had stayed all further proceedings pursuant to the show cause notice for a period of three months.
In its appeal, the ED contended that KIIFB’s writ petition was premature and not maintainable, arguing that FEMA provides a complete adjudicatory and appellate mechanism. According to the agency, all objections relating to jurisdiction, factual disputes, or interpretation of RBI directions ought to be raised before the adjudicating authority.
“However, on a total wrong appreciation of law and facts, an interim order was passed by the single judge,” the ED stated in its plea.
The single judge, while granting interim relief, had noted that under the RBI’s External Commercial Borrowings (ECB) framework effective from January 16, 2019—which governed KIIFB’s Masala Bonds—the definition of real estate activity does not include activities related to the infrastructure sector.
The ED, however, maintained that acquisition of land for infrastructure projects amounts to real estate activity and that Masala Bond funds cannot be utilised for such purposes. ASG Sundaresan told the court that while Masala Bond funds may be used for developing infrastructure on land already owned by the state, they cannot be used to purchase land for infrastructure development.
Counsel appearing for KIIFB opposed the appeal, contending that being compelled to approach the adjudicating authority would be an “ordeal” for the Board. It was argued that replying to the show cause notice and waiting for a decision would adversely affect KIIFB’s financial standing and credibility in the market. The Board also alleged that the ED’s complaint and the issuance of the notice were done without proper application of mind.
The ED had issued the Rs 467-crore FEMA contravention show cause notice in November to Chief Minister Pinarayi Vijayan, former Finance Minister Thomas Isaac, and KIIFB CEO K M Abraham, who is also the Chief Minister’s chief principal secretary.
KIIFB is the state government’s primary agency for financing large and critical infrastructure projects. In 2019, it raised Rs 2,150 crore through its debut Masala Bond issuance as part of its plan to mobilise Rs 50,000 crore for infrastructure development in Kerala.
