Kerala High Court: In the KIIFB Masala Bond case has reserved its decision on the ED appeal
Kerala High Court: In an appeal filed by the Enforcement Directorate (ED) against a single judge bench’s interim order that stayed a show cause notice sent to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act (FEMA) regarding the use of funds raised through masala bonds, the Kerala High Court on Friday reserved its decision.
A division bench consisting of Justices Sushrut Arvind Dharmadhikari and P.V. Balakrishnan heard the appeal.
The ED questioned the maintainability of the writ suit filed by the KIIFB and the interim relief granted by the bench of a single judge.
In his appearance on behalf of the ED, Additional Solicitor General A.R.L. Sundaresan argued that the agency had just sent a preliminary notice in accordance with Rule 4 of the FEMA Adjudication Rules, requesting that the KIIFB provide an explanation for why adjudication procedures should not be started.
He made the case, citing Supreme Court and High Court rulings, that unless there is an obvious lack of jurisdiction, courts should often avoid from becoming involved at the show cause notice stage, especially when it comes to financial legislation.
The ED argued that the bench of a single judge had awarded temporary relief without considering the issue of maintainability or the whole FEMA legislative framework.
It argued that in order to ascertain if the use of money acquired via masala bonds violated the External Commercial Borrowings (ECB) regulation, the adjudicating body must be permitted to carry out an investigation.
Advocate General Gopalakrishna Kurup, speaking on behalf of the KIIFB, opposed the appeal, claiming that the procedures were started without the appropriate application of mind.
He claimed that the KIIFB, a statutory entity, had received RBI clearance and routinely reported the use of funds, and that the RBI circulars that the ED relied upon had been replaced.
He said that the RBI has not filed any complaints claiming financial mismanagement.
The respondent also argued that continuing the adjudication process would endanger current infrastructure projects and negatively impact investor confidence.
The division bench noted during the hearing that no breach had yet been found and inquired as to whether the KIIFB might present all of its complaints to the adjudicating body directly.
Orally, the court noted that the ED had not made a decision to prosecute and had just asked for an explanation as to why legal action should not be taken.
The appeal stems from a writ petition that the KIIFB submitted on June 27, 2025, in an attempt to have a complaint filed by the ED dismissed, and the ensuing show cause notice that proposed adjudication under Section 13 of FEMA.
By utilizing the money from masala bonds to buy land, the ED has accused the KIIFB of breaking RBI regulations and engaging in illegal real estate transactions.
The KIIFB’s argument that its infrastructure operations could not be categorized as real estate business had prima facie validity, according to the bench of a single judge, which granted an interim stay.
Later, KIIFB CEO K.M. Abraham, former Finance Minister T.M. Thomas Isaac, and Chief Minister Pinarayi Vijayan, in his role as KIIFB Chairman, also received comparable temporary respite.