Kochi, Dec 17 The Enforcement Directorate (ED) on Wednesday moved a division bench of the Kerala High Court challenging a single-bench order that stayed further proceedings against the Kerala Infrastructure Investment Fund Board (KIIFB) over the utilisation of funds raised through Masala Bonds, escalating a high-stakes legal battle with significant financial and political implications.
On Tuesday, the single bench of Justice V.G. Arun had granted an interim stay on the ED’s enforcement action after admitting KIIFB’s writ petition.
The court stayed, for three months, the show-cause notice issued to the state-owned infrastructure financing body and held that the issues raised warranted detailed examination.
Observing that a prima facie case had been made out, the court directed the ED to file its counter-affidavit.
The ED proceedings stem from a complaint filed on June 27, 2025, before the Adjudicating Authority under the Foreign Exchange Management Act (FEMA), 1999, alleging violations of Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECBs).
The agency has accused KIIFB of misusing proceeds from rupee-denominated bonds -- popularly known as Masala Bonds -- by deploying them for land acquisition, which it claims amounts to prohibited real estate activity under the RBI’s 2015–16 Master Direction on ECBs.
KIIFB has strongly contested the allegation, arguing that land acquisition for public infrastructure projects cannot be equated with speculative real estate activity.
KIIFB also pointed out that it had obtained prior RBI approval for the Masala Bond issuance in March 2019, filed regular ECB-2 returns certified by authorised dealer banks and chartered accountants, and faced no objections from the RBI.
The bonds were fully redeemed in March 2024.
Alleging mala fides, KIIFB claimed the ED action coincided with multiple election cycles and amounted to a “fishing and roving enquiry”, warning that continuation of proceedings could disrupt infrastructure financing for projects worth over Rs 90,000 crore.
The ED, however, has argued that KIIFB should have exhausted alternative remedies available under FEMA.
The appeal now sets the stage for a larger bench to examine the scope of regulatory oversight over state-backed infrastructure financing.
The division bench is likely to take up the plea on Thursday.
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