Kerala HC Reserves Judgment on ED Appeal in KIIFB Masala Bonds FEMA Case

The Kerala High Court on Friday reserved its verdict on an appeal filed by the Enforcement Directorate (ED) in connection with the KIIFB masala bond case. The appeal challenges an interim order passed by a single judge bench that had stayed a show cause notice issued to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act (FEMA).

The matter was heard by a division bench comprising Justice Sushrut Arvind Dharmadhikari and Justice P.V. Balakrishnan. The ED questioned both the interim relief granted earlier and the maintainability of the writ petition filed by KIIFB. The agency argued that the single judge’s bench had intervened prematurely without fully examining the statutory framework of FEMA.

Appearing for the ED, Additional Solicitor General A.R.L. Sundaresan submitted that the notice issued was only a preliminary one under the FEMA Adjudication Rules. He argued that courts generally should not interfere at the show cause stage, especially in financial matters, unless there is a clear lack of jurisdiction. According to the ED, the adjudicating authority must be allowed to determine whether the masala bond funds violated External Commercial Borrowings norms.

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Opposing the appeal, Advocate General Gopalakrishna Kurup, representing KIIFB, contended that the proceedings were initiated without proper application of mind. He said KIIFB had obtained necessary approvals from the Reserve Bank of India and regularly reported fund utilisation. Kurup also argued that continuation of the proceedings could disrupt infrastructure projects and dent investor confidence.

The division bench observed that the ED had not yet arrived at any finding of violation and had merely sought an explanation from KIIFB. The appeal stems from a writ petition seeking to quash the ED’s complaint alleging misuse of masala bond funds for land acquisition. The single judge had earlier found prima facie merit in KIIFB’s stand, extending interim relief to senior state officials linked to the board.

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