![[Masala Bonds Case] "Why only Kerala being probed by ED?": KIIFB to Kerala HC](https://i0.wp.com/lawchakra.in/wp-content/uploads/2024/07/image-46.png?fit=447%2C350&ssl=1)
Today, On 4th July, The Kerala Infrastructure Investment Fund Board (KIIFB) approached the Kerala High Court, contending that the Enforcement Directorate (ED) unfairly targeting Kerala in its investigation of the Masala Bonds case. KIIFB argues that other states, which have issued similar bonds, are not facing such scrutiny from the ED.
Kerala: The Kerala Infrastructure Investment Board (KIIFB) informed the Kerala High Court on Thursday that only the Reserve Bank of India (RBI) has the authority to investigate any irregularities related to its issuance of Masala Bonds, not the Enforcement Directorate (ED).
This statement made during a hearing before Justice TR Ravi, where KIIFB challenging the summons issued by the ED to its officials under the Foreign Exchange Management Act (FEMA).
Masala Bonds rupee-denominated bonds issued outside India by Indian entities.
Significantly, KIIFB highlighted that Kerala is being unfairly targeted by the ED, while other states with similar bond issuances have not faced such scrutiny.
On behalf of KIIFB, Senior Advocate Arvind Datar, argued ,
“I had asked a question. Why is it a remarkable coincidence that only the bonds issued by Kerala are being investigated. Every other State has been left alone. Because of the pending ED proceedings, only Kerala State is paying 1.5 percent interest more to banks. 1.5 of Rs. 2000 crore is a big amount,”
In addition to KIIFB, former State Finance Minister Thomas Isaac also contested the summons issued by the Enforcement Directorate (ED).
However, due to time constraints, only the counsel for KIIFB could present arguments during the session.
Senior Advocate Arvind Datar informed the Court that KIIFB is not only seeking to quash the ED summons against its officials but also requesting a writ of prohibition against the central agency’s investigation.
He emphasized that Masala Bonds regulated by the Reserve Bank of India (RBI), and in the case of KIIFB, the authorized dealer was Axis Bank.
Datar argued,
“Whether KIIFB uses or misuses funds is not the concern of the ED. That is the jurisdiction of the RBI,”
He elaborated on the issuance process and the monitoring of fund utilization, noting the existence of a two-tier security system.
He added,
“We have submitted a detailed form of month-wise utilization of funds. My lordship can see from the certificate that all funds have been used and there are no funds parked either in India or abroad,”
It also noted that the utilization of funds has been certified by Axis Bank, not the ED. Addressing the ED’s concerns about potential misutilization of funds, Datar stated,
“Even if there is misutilization, the jurisdiction falls on RBI. As per FEMA, the power is given to RBI, not ED.”
At this point, Justice Ravi remarked that the law allows the RBI to investigate any misutilization under Section 12 of FEMA, stating,
“RBI has chosen not to do it. They are not required to. My question is, is there any other body that can conduct an enquiry?”
In response, Datar explained that the word “may” is used because making it “shall” would imply a mandatory requirement, which isn’t suitable.
However, the Court again inquired whether the RBI’s power under Section 12 was exclusive.
Datar elaborated,
“FEMA is the comprehensive law governing the flow of foreign funds to and from India. That is why the term ‘management’. Section 12 comes into play when the RBI receives reports raising doubts about the utilization. Parliament has stipulated that all scrutiny in foreign exchange matters falls under the RBI’s jurisdiction. The RBI must appoint a special officer by authorization to investigate, in this case, the affairs of KIIFB. If Parliament intended, it could have assigned this power to the ED. It is my humble submission that another body would only have the power if Parliament explicitly granted it,”
The arguments set to continue on Friday.
The case centers on allegations that the issuance of Masala Bonds by KIIFB violated the Foreign Exchange Management Act (FEMA).
KIIFB officials and former State Finance Minister Thomas Isaac initially filed petitions with the High Court in 2022 to contest the summons issued by the Enforcement Directorate (ED) as part of its investigation. In December 2023, the ED informed the High Court of its decision to withdraw the summons. At that time, the Court clarified that the ED could continue its investigation into the case.
However, in January of this year, the ED issued new summons to Isaac and KIIFB officials, prompting them to file a fresh round of petitions challenging the new summons.
The primary argument presented by both Isaac and the KIIFB officials is that the summons do not specify the transactions under investigation.
Finding merit in this argument, the Court previously asked Additional Solicitor General (ASG) ARL Sundaresan, representing the ED, to provide at least one example of a specific transaction that was suspect.
On April 9, after reviewing the material submitted by the ED, the Court decided not to require Isaac or KIIFB officials to appear before the ED immediately.
Justice Ravi noted that it would be inappropriate to compel Isaac to appear before the ED at that time because he was campaigning for the Lok Sabha Elections scheduled for later that month.
The ED challenged this decision before a division bench, but by the time it was considered, the elections concluded, rendering the matter moot.
Central Government Counsel Jaishankar V Nair represented the ED.
Isaac represented by Senior Advocate Jaideep Gupta, along with advocates N Raghuraj, Nandagopal S Kurup, Sayuja, Vivek Menon, and Rance R.
KIIFB represented by Senior Advocate Arvind Datar and Kerala Advocate General Gopalakrishna Kurup K.
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