Masala Bonds Case: Kerala High Court Reserves Verdict On ED's Appeal Against Stay Of Show Cause Notice To KIIFB

The Kerala High Court on Friday (19 December) reserved judgment in an appeal preferred by the Enforcement Directorate against a Single judge's interim order staying the show cause notice issued against Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act, 1999 (FEMA), relating to the utilisation of funds raised through masala bond.

The Division Bench comprising Justice Sushrut Arvind Dharmadhikari and Justice P V Balakrishnan heard the appeal and reserved it for judgment. 

The Additional Solicitor General of India(ASGI), A R L Sundarersan, appeared online for ED and submitted that the agency has merely issued a preliminary notice under Rule 4 of the FEMA Adjudication Rules, calling upon the respondent to explain why an inquiry should not be initiated. 

Relying on Supreme Court and High Court precedents, it was contended that High Courts should ordinarily refrain from entertaining writ petitions against show cause notices, particularly under financial statutes, unless there is a clear lack of jurisdiction. 

It was further argued that the Single Judge failed to consider the complete statutory framework under FEMA and granted interim relief without addressing the maintainability of the writ petition. 

ED has maintained that the adjudicating authority must be allowed to conduct an inquiry to examine whether the utilisation of funds acquired through masala bonds violated the ECB (External Commercial Borrowings) policy. 

Opposing the appeal, the Advocate General, Gopalakrishna Kurup, appearing for the respondent, KIIFB, contended that the proceedings were initiated without proper application of mind. It was contended that the RBI circulars relied by the ED have been superseded.

The respondent has also submitted that KIIFB, a statutory body, has obtained RBI approval and regularly reported fund utilisation, and there was no complaint from RBI regarding the misuse of funds. 

It was also submitted that continuing adjudication proceedings would jeopardize infrastructure projects already underway and adversely impact investor confidence. 

The division bench has questioned whether the respondent could raise all its objections before the adjudicatory authority itself, noting that the proceedings have not yet crystallised into a finding of violation. 

"What is the problem, if you file a reply .... Now they have not taken a decision to prosecute. They are asking you a show cause why proceedings is not initiated against you." Court asked orally.

The Court also noted that the appeal challenged not only the interim stay but also the maintainability of the writ petition itself. 

After hearing the submissions from both sides, the Court reserved its judgment. 

Background

In the writ petition, 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.

The Single Bench while issuing the interim order has noted that there is prima facie merit in the contention that the infrastructure activities undertaken by KIIFB cannot be termed as real estate activity and the adjudicating authority has no power to initiate proceedings against the petitioner(KIIFB). 

Subsequent to the stay by the Single Judge on the writ petition filed by KIIFB, Chief Minister Pinarayi Vijayan as Chairman of the KIIFB along with its former Vice-Chairman/ex-Finance Minister Dr. T.M. Thomas Issac and Chief Executive Officer K.M. Abraham has preferred a petition to stay the show cause notice. An interim stay was issued in the said writ petition preferred by Chief Minister as well noting that the petitioners in the case were also entitled to similar interim relief as was granted in petition preferred by KIIFB. 

Case Title: The Director v Kerala Infrastructure Investment Fund Board, Represented by Its Chief Executive Officer

Case No: WA 3142/ 2025 in WP(C) 46555/ 2025

Counsel for Appellant: Jaishankar V Nair, ARL Sundaresan (ASGI)

Counsel for Respondents: Gopalakrishna Kurup (AG), V Manu (Spl. GP to AG)