ED Issues Show-Cause Notice to Kerala CM Over Alleged FEMA Violations in Masala Bond Utilisation
New Delhi: The Enforcement Directorate (ED) has issued show-cause notices to Kerala Chief Minister Pinarayi Vijayan, former state finance minister T.M. Thomas Isaac, and Kerala Infrastructure Investment Fund Board (KIIFB) Chief Executive Officer K.M. Abraham over alleged foreign exchange rule violations linked to the state’s 2019 masala bond issuance.
The notices were served as part of an ongoing investigation into whether ₹2,150 crore raised through KIIFB-issued masala bonds were diverted in violation of the Foreign Exchange Management Act (FEMA), particularly norms regarding the usage of foreign-sourced funds for land acquisition.
Context: ED Questions Use of Masala Bond Funds
The investigation stems from KIIFB’s move in 2019 to raise capital through masala bonds listed on the International Securities Market (ISM) in London. Masala bonds are rupee-denominated bonds issued abroad, allowing Indian entities to access global capital without taking on foreign currency risk.
In its preliminary findings, the ED is examining whether KIIFB’s utilisation of these funds — specifically for land acquisition — violated FEMA regulations. According to foreign exchange norms, funds raised through masala bonds are generally meant for infrastructure development, but cannot be directly used for purchasing land.
The ED has submitted its report to the Special Director (Adjudication) in Delhi, asking the three senior officials to respond with explanations before further proceedings.
Details of the ED Allegations
According to reports, the ED believes that a portion of the ₹2,150 crore raised in 2019 may have been used to purchase land related to certain KIIFB-backed projects.
The agency's core questions revolve around three issues:
- Whether KIIFB funds were diverted for prohibited activities, such as land purchase
- Whether the state government or KIIFB failed to comply with FEMA requirements
- Whether the issuance and utilisation complied with RBI rules applicable at the time
Masala bonds were introduced with specific utilisation limitations under RBI’s External Commercial Borrowing framework. The ED alleges that these limits were violated.
Reactions: “Politically Motivated Gimmick,” Says Thomas Isaac
Reacting strongly, former finance minister T.M. Thomas Isaac described the ED’s action as politically motivated, particularly since Kerala is heading toward local body elections on December 9 and 11.
Speaking to Manorama News, Isaac rejected the allegations, stating:
- KIIFB followed all RBI rules at the time of issuance
- The funds were used for infrastructure development, not prohibited land purchase
- The ED action is part of a “political agenda” aimed at influencing elections
Isaac also said the RBI restriction on land purchase through masala bonds did not apply when KIIFB issued the bonds in 2019.
He added, “A portion of the funds was utilised only to acquire land for a KIIFB project. This is not a violation. The ED wants to create political sensation. This is part of a BJP conspiracy ahead of elections.”
Chief Minister Pinarayi Vijayan has not made a direct statement yet, but senior leaders of the ruling Left government echo Isaac’s stance, calling the ED’s timing “highly suspicious.”
Background: What Are Masala Bonds and Why the Scrutiny?
Masala bonds are a strategic financing tool:
- Issued abroad, but denominated in Indian Rupees
- Protect issuers from foreign exchange risk
- Encourage foreign investment in Indian infrastructure
KIIFB was among the first state-level institutions in India to leverage masala bonds, attracting attention globally for its ₹2,150 crore issue.
However, RBI guidelines state that proceeds of such bonds cannot be used to purchase land, as land acquisition is considered a non-permissible end-use category. This remains the core of the ED’s legal scrutiny.
Past audits and political debates have also raised questions over KIIFB’s borrowing model, though multiple state-appointed committees have defended its legitimacy.
Political Significance Ahead of Kerala Elections
The ED notice arrives just weeks before Kerala’s two-phase local body elections, escalating political tensions.
- Voting dates: December 9 and 11
- Counting: December 13
The Opposition BJP has accused the government of financial irregularities, while the ruling Left alleges central agencies are being misused to influence Kerala’s polls.
The ED’s move could fuel campaign narratives on both sides, especially as KIIFB projects remain central to development politics in the state.
Analysis: What Happens Next?
The case now moves to adjudication under FEMA, where officials must respond to the ED’s notice. The process involves:
- Review of KIIFB’s financial utilisation documents
- Verification of RBI circulars applicable in 2019
- Opportunity for the accused to present their defence
- Final adjudication order on whether FEMA violations occurred
If violations are established, penalties could involve:
- Monetary fines
- Reversal of transactions
- Restrictions on future fundraising activities
However, given the political backdrop, legal experts say the matter is likely to face prolonged litigation.
Economists note that masala bonds have been crucial for infrastructure financing, and this case may influence how other states evaluate foreign borrowing practices.
Conclusion
The ED's notice to Kerala’s top leadership over the KIIFB masala bonds marks a significant development in India’s ongoing debates around foreign-funded infrastructure financing and political accountability. While the agency pursues FEMA-linked inquiries, Kerala’s government maintains that the bonds complied with all RBI rules.
With elections underway and KIIFB central to the state’s development model, the case is expected to draw major political and legal attention over the coming weeks.
Final Thoughts from TheTrendingPeople
The ED’s move adds another layer of friction between the Kerala government and central agencies, raising questions about regulatory compliance, political timing, and federal relations. While the legal process will decide the validity of the allegations, the episode underscores the need for transparent borrowing practices and clearer RBI guidelines. For now, the political impact may be immediate, but the long-term effects on infrastructure financing models could be far more significant.