Kochi Dec 16 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) over 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.
Staying the show cause notice for three months, the court observed that a prima facie case had been made out.
The ED has been directed to file its counter-affidavit.
The interim order came on a petition filed by the KIIFB challenging enforcement proceedings initiated under the Foreign Exchange Management Act (FEMA), 1999.
It has sought the quashing of a June 27, 2025, complaint filed by the ED before the Adjudicating Authority, along with a consequential show-cause notice proposing adjudication under Section 13 of the FEMA.
The ED has alleged that the KIIFB violated Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECB) by using proceeds from Rupee Denominated Bonds, popularly known as Masala Bonds, for land acquisition.
According to the agency, such utilisation amounted to prohibited real estate activity under the RBI’s 2015–16 Master Direction on ECBs. The KIIFB, however, contended that the acquisition of land for infrastructure projects cannot be equated with speculative real estate activity.
It argued that land acquisition was undertaken in exercise of the state's power of eminent domain, involving compensation to landowners without any commercial transfer of land for profit.
Such activity, it said, squarely fell within the infrastructure sector and was expressly excluded from the definition of real estate activity under the applicable RBI framework.
The Board further maintained that the governing law at the time of issuance and utilisation of the Masala Bonds in March 2019 was the revised ECB framework introduced by the RBI in January 2019 and the Master Direction dated March 26, 2019, which superseded earlier guidelines.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.
The KIIFB pointed out 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 also noted that the RBI, as the sectoral regulator, had never raised objections, and that the bonds were fully redeemed in March 2024.
Alleging malafides, the KIIFB claimed the ED action coincided with multiple election cycles and amounted to a "fishing and roving enquiry".
It warned that continuation of 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 the KIIFB should have approached the appropriate FEMA forum to challenge the notice.
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