Kochi: The Kerala High Court on Tuesday granted an interim stay on further proceedings initiated by the Enforcement Directorate (ED) against the Kerala Infrastructure Investment Fund Board (KIIFB) concerning the utilisation of funds raised through Masala Bonds.
Justice V.G. Arun, while admitting the KIIFB’s writ petition, held that the issues raised required detailed examination and stayed the show-cause notice for three months, observing that a prima facie case had been made out. The ED has been directed to file its counter-affidavit.
The interim order followed KIIFB’s petition challenging enforcement proceedings initiated under the Foreign Exchange Management Act (FEMA), 1999. The board sought the quashing of a June 27, 2025, complaint filed by the ED before the Adjudicating Authority, along with the consequential show-cause notice proposing adjudication under Section 13 of FEMA.
The ED had alleged that KIIFB violated Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECB) by using proceeds from Rupee-denominated Masala Bonds for land acquisition. According to the agency, such utilisation constituted prohibited real estate activity under RBI’s 2015–16 Master Direction on ECBs.
KIIFB, however, contended that acquiring land for infrastructure projects cannot be equated with speculative real estate activity. It argued that the land acquisition was carried out under the state’s power of eminent domain, involving compensation to landowners without any commercial transfer for profit, and squarely fell within the infrastructure sector—expressly excluded from the definition of real estate activity under RBI norms.
The board further noted that the governing law at the time of bond issuance in March 2019 was the revised ECB framework introduced by RBI in January 2019 and the Master Direction of March 26, 2019, which superseded earlier guidelines. Under this framework, infrastructure projects listed in the Centre’s Harmonised Master List of Infrastructure Sub-Sectors are excluded from prohibited end uses.
KIIFB also highlighted that it had obtained prior RBI approval for the bond issuance and had submitted regular ECB-2 returns certified by authorised dealer banks and chartered accountants. It added that the RBI, as the sectoral regulator, had never raised objections and that the bonds were fully redeemed in March 2024.
Alleging malafides, KIIFB claimed that the ED action coincided with multiple election cycles and amounted to a “fishing and roving enquiry.” It warned that continuation of the proceedings could disrupt Kerala’s infrastructure financing, noting that projects worth over Rs 90,000 crore had already been approved.
The ED opposed the petition, arguing that KIIFB should have approached the appropriate FEMA forum to challenge the notice.
With IANS inputs