The Enforcement Directorate (ED) has escalated its investigation into the Kerala Infrastructure Investment Fund Board's (KIIFB) Masala Bond issuance by issuing a ₹466 crore Foreign Exchange Management Act (FEMA) show cause notice to Kerala Chief Minister Pinarayi Vijayan, former Finance Minister Thomas Isaac, and ex-principal secretary K.M. Abraham. The notice, which does not require the personal appearance of the recipients, was issued about 10-12 days ago.
The probe revolves around potential violations of FEMA regulations in connection with the issuance of Masala Bonds by KIIFB. Specifically, the ED is scrutinizing the end-use of the funds raised through these bonds and whether KIIFB adhered to FEMA norms. The ED has been investigating the overseas borrowing of KIIFB for alleged FEMA violations since November 2020.
Masala Bonds are debt instruments issued by Indian entities in overseas markets but denominated in Indian rupees, rather than the local currency. In 2019, KIIFB became the first sub-sovereign entity in India to issue Masala Bonds, raising ₹2,150 crore on the London Stock Exchange. The Comptroller and Auditor General (CAG) raised concerns that KIIFB had raised ₹2,150 crore from the international market in 2019 without the central government's consent. According to the CAG, prior consent from the Indian government is necessary before a state government raises a loan. The CAG also stated that KIIFB had overstepped its legal bounds by issuing masala bonds to raise money from foreign markets, violating Article 293 (1) of the Constitution. Article 293 (1) says that the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits.
The issuance of Masala Bonds by KIIFB has been a subject of controversy and political contention. The opposition has alleged irregularities in the issuance of these bonds, claiming that they were issued to an overseas pension fund with links to a controversial foreign company. They have called for transparency and questioned the role of the Chief Minister and Finance Minister in the issuance process. CM Vijayan has countered that the controversies were an attempt to stall Kerala's development. He stated that KIIFB adheres to all guidelines and mobilizes funds through the stock exchange in accordance with RBI guidelines.
The Kerala government has maintained that KIIFB is a corporate entity and not the state government, and thus can issue masala bonds to raise funds from foreign markets as per FEMA provisions. KIIFB CEO K.M. Abraham stated that the ED case "fizzled out" in 2024 after KIIFB repaid the ₹2,150 crore borrowed through masala bonds on time.
The ED's investigation has included seeking clarifications from the Reserve Bank of India (RBI) regarding the No Objection Certificate (NOC) issued to KIIFB, which enabled the agency to secure loans from foreign financial markets. Concerns have been raised about the potential impact of the investigation on KIIFB's revenue streams and its ability to secure future loans from international institutions. Some experts have suggested that KIIFB should focus on revenue-generating projects to ensure long-term sustainability.
