In a significant legal development, Kerala Chief Minister Pinarayi Vijayan, along with former state finance minister T M Thomas Isaac, has approached the High Court to challenge notices issued by the Enforcement Directorate (ED). The notices propose adjudication proceedings under the Foreign Exchange Management Act (FEMA) concerning the issuance of Masala Bonds by the Kerala Infrastructure Investment Fund Board (KIIFB).
Legal Challenge Against Enforcement Directorate
The petition, filed by Vijayan in his capacity as KIIFB chairman, along with former vice-chairman Isaac and KIIFB CEO K M Abraham, is scheduled for consideration by Justice V G Arun on Thursday. The ED's show-cause notices were issued by its special director, alleging violations of Reserve Bank of India (RBI) regulations in the use of funds raised through external commercial borrowings (ECB) via Masala Bonds.
The central agency's action stems from a complaint filed by its Kochi zonal assistant director on June 27. The ED alleges that proceeds from the bonds were used to purchase land for infrastructure projects, contravening an RBI master direction dated January 1, 2016, and a circular from September 29, 2015. These regulations explicitly prohibit the use of such funds for real estate activities and land purchase.
KIIFB's Defense and Key Arguments
In their petition, the KIIFB officials have categorically denied all allegations. Their core argument hinges on the distinction between land acquisition for public infrastructure and commercial real estate activity. They contend that the acquisition of land for infrastructure development, exercised through the government's power of eminent domain with compensation paid to landowners, cannot be construed as real estate activity under the RBI's definitions.
The petitioners asserted that no transfer of land is effected in favour of KIIFB itself, and such acquisition is not a speculative activity undertaken for commercial profiteering. They further maintained that all projects funded through Masala Bonds proceeds are in full compliance with RBI circulars, and related transactions were reported to the central bank on a monthly basis. Notably, they pointed out that the RBI has, to date, not indicated any non-compliance with its guidelines or a contravention of FEMA provisions.
Based on these arguments, the petitioners have sought the quashing of the ED's show-cause notices.
ED Files Counter-Appeal in High Court
In a parallel move, the Enforcement Directorate filed an appeal before the High Court on Wednesday, challenging a single bench order that had stayed further proceedings on its notice to KIIFB. The single bench had passed an interim order on Tuesday, staying the proceedings for three months based on a petition filed by KIIFB.
In its appeal, the ED has contended that KIIFB's petition is premature and not maintainable. The agency argues that FEMA itself provides a comprehensive adjudicatory and appellate mechanism, and objections regarding jurisdiction, disputed facts, or interpretation of RBI directions should first be raised before the adjudicating authority appointed under the act. This sets the stage for a continued legal tussle over the interpretation of financial regulations governing infrastructure funding in Kerala.
