Kerala High Court Stays ED Show Cause Notice Against KIIFB Over Alleged FEMA Violations In Use Of Masala Bond Funds

"Above discussion leads to the prima facie conclusion that the question involved requires detailed consideration. Admit. Jaisankar V. Nair takes notice for the respondent. Respondents to file counter-affidavits, if any. There shall be an interim stay of further proceedings pursuant to Exhibit P2 show cause notice for 3 months." 

The interim order is issued in a petition filed by Kerala Infrastructure Investment Fund Board (KIIFB) challenging enforcement proceedings initiated by the Directorate of Enforcement (ED) under the Foreign Exchange Management Act, 1999 (FEMA), relating to the utilisation of funds raised through Masala Bonds.

KIIFB has sought the quashing of a complaint dated June 27, 2025, filed by the ED before the Adjudicating Authority, as well as a consequential show cause notice proposing adjudication under Section 13 of FEMA.

The impugned complaint alleges that KIIFB violated Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECB) by allegedly using proceeds from Rupee Denominated Bonds, commonly known as Masala Bonds, for land acquisition, which the ED claims is a prohibited end use amounting to real estate activity or purchase of land.

According to the ED, such utilisation contravenes the end-use restrictions contained in the RBI's 2015-16 Master Direction on ECBs and allied circulars.

KIIFB has contended that land acquisition for infrastructure projects cannot be equated with speculative real estate activity or purchase of land for commercial profiteering.

The Board has argued that acquisition of land for infrastructure development is carried out in exercise of the State's power of eminent domain, where compensation is paid to landowners and no commercial transfer of land takes place in favour of KIIFB. Such activity, it contends, squarely falls within the infrastructure sector and is expressly excluded from the definition of real estate activity under the applicable RBI framework.

The petition asserts that the applicable law at the time of issuance and utilisation of the Masala Bonds in March 2019 was the revised ECB Framework introduced by the RBI on January 16, 2019, and the Master Direction dated March 26, 2019, which superseded the earlier 2015-16 Master Direction.

Under the 2019 framework, activities falling under the infrastructure sector, as defined by the Government of India's Harmonised Master List of Infrastructure Sub-Sectors, are expressly excluded from the scope of prohibited real estate activities. KIIFB has pointed out that even the RBI, in earlier court proceedings, had clarified that the 2019 ECB framework governed these bonds.

The petition further states that KIIFB had obtained prior clearance from the RBI for issuance of the Masala Bonds and had submitted monthly ECB-2 returns detailing transaction-wise utilisation of funds. These filings were certified by independent chartered accountants and authorised dealer banks.

KIIFB emphasised that the RBI, as the sectoral regulator, has never raised any objection or alleged any violation of FEMA or ECB guidelines in relation to the Masala Bonds, which were fully redeemed in March 2024.

The Board has also alleged that the ED's actions are vitiated by malafides, pointing to the timing of repeated summons, investigations, and the filing of the complaint coinciding with multiple election cycles in the State, including Assembly, Parliamentary, and local body elections.

It contends that the present proceedings are the culmination of a “fishing and roving enquiry” previously deprecated by the High Court in earlier litigation involving repeated ED summons.

KIIFB has warned that the continuation of adjudication proceedings would have severe consequences for Kerala's infrastructure financing ecosystem. The petition notes that KIIFB has approved projects worth over ₹90,000 crore, with thousands of crores already committed to ongoing works.

According to the Board, the pendency of enforcement proceedings has already made financial institutions hesitant to lend, jeopardising contractor payments, project execution, and the State's overall infrastructure development.

KIIFB has sought quashing of the ED's complaint and the show cause notice, contending that even if the allegations are accepted at face value, no contravention of FEMA or RBI directions is made out.

ED has opposed the plea of KIIFB, stating that it was not maintainable, contending that KIIFB had to approach the appropriate forum under FEMA to challenge the issue of notice.

Case Title: Kerala Infrastructure Investment Fund Board v The Director, Directorate of Enforcement

Case No: WP(C) 46555/ 2025

Counsel for Petitioner: K Gopalakrishna Kurup (AG), V Manu (Spl. GP to AG), C E Unnikrishnan (Spl. GP to AG), S Kanna (Sr. GP), Bijoy Chandran (Sr. GP)

Counsel for Respondent: Jaishankar V Nair (SC - ED)