In a significant legal development, the Kerala High Court has granted a three-month stay on any further proceedings related to a show-cause notice issued by the Enforcement Directorate (ED) against the Kerala Infrastructure Investment Fund Board (KIIFB). The notice pertained to the issuance of Masala Bonds and alleged violations of the Foreign Exchange Management Act (FEMA).
Court's Interim Order and Key Observations
Justice V G Arun passed this interim order on Tuesday while admitting a petition filed by KIIFB. The petition challenged the show-cause notice issued by the ED's special director on November 20. The central allegation from the ED was that KIIFB utilized proceeds from External Commercial Borrowings (ECB), raised via Masala Bonds, for land acquisition for infrastructure projects. The ED claimed this violated the Reserve Bank of India's master direction dated January 1, 2016, and a circular from September 29, 2015, which prohibit the use of such funds for real estate activities, including land purchase.
The High Court's order made several crucial prima facie observations. It noted that the ED's complaint, filed by its Kochi zonal assistant director on June 27, contained no allegation that KIIFB used the funds for infrastructure activities outside those listed in the Ministry of Finance's notification for the sector.
Questioning the ED's Stance on Land Acquisition
The court found initial merit in KIIFB's argument that its infrastructure activities could not be classified as 'real estate activity.' It also observed that the alleged violation of the 2015 circular was doubtful. The court reasoned that this circular governed the ECB policy for overseas rupee-denominated bonds and had lost relevance after the introduction of a revised policy.
Furthermore, Justice Arun made a critical distinction regarding land purchase. The order stated that the compulsory acquisition of land by the state for public purposes cannot be equated with the land purchase mentioned in the RBI's negative list. The submission that the acquired lands were not transferred to KIIFB but were directly utilized for public infrastructure development was also deemed significant by the court.
Legal Hurdles and Next Steps
During earlier hearings, the ED had questioned the maintainability of KIIFB's petition, arguing that the board should have first approached the appropriate adjudicating authority. The High Court rejected this contention, stating the petition required detailed consideration. The court has directed the ED to file a counter-affidavit, if any.
On Tuesday, Additional Solicitor General A R L Sundaresan, representing the ED, submitted that if KIIFB filed a reply to the notice, the directorate would consider it but would not pass a final order until the court disposed of the petition. The court has adjourned the matter to January 20 for further proceedings.
This interim stay provides temporary relief to KIIFB, a key financing vehicle for Kerala's major infrastructure projects, as it contests the ED's interpretation of FEMA regulations concerning the use of funds from Masala Bonds.
