KIIFB and issue of Masala Bonds

In 1999, KIIFB was formed as the principal funding arm of the Kerala government under the Kerala Infrastructure Investment Fund Act, 1999 to mobilise funds for important, large public infrastructure projects in the state. On its website, the KIIFB has said that projects worth ₹60,102 crore have been approved covering sectors such as transportation, education, power supply, and healthcare.

In 2019, under the LDF government, KIIFB raised over ₹2000 crore to fund infra projects in the state through the issue of Rupee Denominated Bonds also known as Masala Bonds, which were listed on the London and Singapore stock exchanges. The masala bonds are debt instruments through which designated domestic entities can raise funds by accessing overseas capital markets, while the bond investors hold the currency risk.

In May 2018, Axis Bank, appointed as the advisor by KIIFB on the issue, had written to the RBI seeking permission for the issuance of the Masala Bonds worth ₹2672.8 crore. In June of that year, the RBI issued its 'no-objection' through a letter.

ED probe

Cut to 2021, when the ED began an investigation and issued summons to KIIFB officials under section 37(1) and (3) of the FEMA (power of search and seizure) read with section 131(1) of the Income Tax Act, 1961 (power to issue commissions) and section 30 of the Code of Civil Procedure, 1908.

The counsel for the ED told the Kerala high court that its inquiry is being conducted to find out whether proceeds from the Masala Bonds have been invested in real estate or other prohibited activities included in the negative list drawn up as part of the External Commercial Borrowing (ECB) framework of the RBI.

"The ED has every authority to conduct such inquiry since Clause 12 (of the RBI's Master Direction detailing the ECB) imposes the borrower with the primary responsibility of ensuring that the borrowing is in compliance with the applicable guidelines and makes any contravention of the applicable provisions actionable under FEMA," its counsel told the court as mentioned in the order dated October 10, 2022.

It also added that the Comptroller and Auditor General (CAG) had reported that raising funds through the issue of Masala Bonds is a 'classic case of off-budget borrowings' which bypasses limits set on borrowings under article 293 of the Constitution and violates the provision of entry 37 of list 1.

‘CAG report cannot be the basis for probe’

In response, the counsel for Isaac and KIIFB told the court that the CAG report cannot be the basis for the ED inquiry as its defects were considered and rejected by the Kerala Assembly via a resolution in 2021. It also termed the ED's moves as 'illegal' as the Masala Bonds were issued with prior approval from RBI under relevant provisions of FEMA.

While the former Kerala finance minister has not appeared before the ED so far and has chosen to fight its summons legally, officials of KIIFB have appeared at least five times in connection with the probe.

On Jan 8, Isaac told an online portal that he was 'not afraid' of the ED's investigation. "It's a question of harassment. They have taken it as a prestige issue. The ED has not been able to do much in the last one and a half years. So, they are saying that they will come after you. Very well. It's a political move. "