The Kerala High Court on Tuesday granted interim relief to the Kerala Infrastructure Investment Fund Board (KIIFB), staying for three months all proceedings linked to a show cause notice issued by the Enforcement Directorate (ED) over the use of Masala Bonds funds for land acquisition tied to infrastructure projects.
Justice V.G. Arun passed the order while considering KIIFB’s challenge to the ED notice, which alleged violations of the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) norms. The court also issued notice to the ED and scheduled the matter for further hearing on January 20, 2026.
The controversy stems from KIIFB’s use of funds raised through Masala Bonds for acquiring land required for infrastructure development in Kerala. The ED had taken the position that such land acquisition amounted to “real estate activity,” which it claimed was barred under the RBI’s External Commercial Borrowings (ECB) framework governing the bonds.
However, the High Court noted that the ECB framework, which came into effect on January 16, 2019 and applied to KIIFB’s Masala Bonds, does not treat infrastructure-related activities as real estate. The court observed that there was no allegation from the ED that the funds were used for projects outside those notified as infrastructure projects by the Union Finance Ministry.
In its interim order, the court said there was prima facie merit in KIIFB’s argument that infrastructure activities cannot be equated with real estate under the ECB framework. It further observed that the adjudicating authority may lack the power to initiate proceedings on this basis.
Justice Arun also drew a distinction between the purchase of land listed in the negative list under earlier RBI frameworks and the compulsory acquisition of land by the State for public purposes. The court accepted the State government’s contention that the exercise of eminent domain for infrastructure development cannot be equated with land purchases for personal or commercial gain.
The court additionally noted KIIFB’s submission that the acquired land was not transferred to the Board but was used directly for infrastructure development, a factor it said warranted deeper examination.
In its plea, KIIFB argued that the ED’s complaint and the show cause notice were unsustainable in law and did not justify adjudication proceedings. The Board warned that continued proceedings would severely affect its ability to fund welfare and infrastructure projects across Kerala, citing reluctance among financial institutions to extend funding while the matter remains pending.
KIIFB informed the court that it has approved infrastructure projects worth over ₹90,000 crore so far. Of this, works worth ₹21,881 crore have been completed, while projects worth ₹42,765 crore have been tendered and are at various stages of execution. It cautioned that the proceedings could jeopardize its functioning and make it impossible to meet legitimate claims of contractors executing public projects.
In November, the ED issued a ₹467-crore FEMA contravention show cause notice in the KIIFB Masala Bonds case to Chief Minister Pinarayi Vijayan, former Finance Minister Thomas Isaac, and K.M. Abraham, Chief Principal Secretary to the Chief Minister and CEO of KIIFB. The notice alleges contraventions amounting to ₹466.91 crore under FEMA and RBI master directions.
KIIFB, the State’s primary agency for financing large and critical infrastructure projects, had raised ₹2,150 crore in 2019 through its debut Masala Bond issue as part of a plan to mobilise ₹50,000 crore for infrastructure development in Kerala.
With the interim stay now in place, the High Court will take up the matter for detailed consideration early next year.
