Kerala High Court Halts ED Action Against KIIFB in Masala Bonds Case

The Kerala High Court on Tuesday granted an interim stay on further proceedings initiated by the Enforcement Directorate (ED) against the Kerala Infrastructure Investment Fund Board (KIIFB) regarding the utilisation of funds raised through Masala Bonds. Justice V.G. Arun admitted the KIIFB’s writ petition and observed that the issues raised required detailed scrutiny, staying the ED’s show-cause notice for three months. The ED has been directed to file its counter-affidavit.

The petition challenges enforcement proceedings initiated under the Foreign Exchange Management Act (FEMA), 1999, and seeks the quashing of a June 27, 2025 complaint filed by the ED before the Adjudicating Authority. A consequential show-cause notice proposing adjudication under Section 13 of FEMA was also under contention. The ED alleged that KIIFB violated Reserve Bank of India (RBI) guidelines by using Masala Bond proceeds for land acquisition, categorising it as prohibited real estate activity.

KIIFB countered the claim, arguing that land acquisitions were strictly for infrastructure projects and involved compensating landowners under the state’s power of eminent domain, without any commercial transfer for profit. The board maintained that such activities are explicitly excluded from the definition of real estate activity under the RBI’s regulatory framework, and fall squarely within permissible infrastructure sector usage.

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The KIIFB further clarified that at the time of the bond issuance in March 2019, the revised ECB framework introduced by the RBI in January 2019 applied, along with the Master Direction of March 26, 2019. Prior RBI approval had been obtained, and regular ECB-2 returns were submitted and certified by authorised dealer banks and chartered accountants. The bonds were fully redeemed in March 2024, and no objections were raised by the RBI.

Alleging malafide intent, KIIFB claimed the ED action coincided with multiple election cycles, amounting to a “fishing and roving enquiry.” It warned that continuing proceedings could disrupt Kerala’s infrastructure financing, with projects worth over ₹90,000 crore already approved. Meanwhile, the ED argued that KIIFB should have approached the appropriate FEMA forum to contest the notice.

The interim stay provides temporary relief to KIIFB, allowing the state to continue its critical infrastructure projects while the High Court examines the legal and regulatory nuances of Masala Bond utilisation. The case is expected to set an important precedent regarding state infrastructure financing through foreign-currency bonds.

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