In July 2022, former finance minister T M Thomas Isaac was reportedly served a notice by the Enforcement Directorate (ED) summoning him for questioning on the 'masala bonds' floated by the Kerala Infrastructure Investment Fund Board (KIIFB). When the media approached him then, Isaac had feigned ignorance of any such summons. But he had also this to say: "Even if they serve me the notice, I will not appear before them as I have more important things to do."
Subsequently, the ED issued more summons and Isaac kept ignoring them. In between, he went to court challenging these summons.
Now, one-and-a-half years later (on December 14), the ED submitted before the High Court that it was withdrawing the summons. Isaac posted a triumphant note on Facebook on December 14. "The ED has unconditionally withdrawn its summons against me and they have fled without leaving a trace," the former finance minister said.
Why was the ED after Isaac and KIIFB?
The summons were issued for violations under the Foreign Exchange Management Act (FEMA), 1999. The ED argued that Section 37 of the FEMA (search and seizure powers) arms it with enough ammunition to issue summons when violations are suspected or brought to its notice.
In Isaac's and KIIFB's case, the ED, without any evidence or even a complaint to think along those lines, was probing whether the money mobilised from 'masala bonds' had gone into real estate and other activities mentioned in the negative list of the External Commercial Borrowing (ECB) framework drawn up by the RBI.
Funds secured through ECB mechanisms like ‘masala bonds’ could not be invested in activities catalogued in the negative list. Besides real estate, the other prohibited activities in the negative list include investment in the capital market, equity investment and repayment of rupee loans.
The ED was also empowered by successive reports of the Comptroller and Auditor General (CAG) that termed 'masala bonds' as unconstitutional. It noted that the Constitution bestowed the power to raise foreign loans only on the Union Government, not on states. The CAG report had further termed the KIIFB borrowings as off-budget ones that bypassed the scrutiny of the legislature and would impact revenue and fiscal deficits.
What was Isaac/KIIFB counter?
The CAG report was considered by the Kerala Assembly on January 22, 2021, and the part dealing with 'masala bonds' was rejected. It is for the legislature to decide whether to accept or reject a CAG report. The High Court concurred, saying that observations in a CAG report cannot be grounds for an inquiry.
Most importantly, the KIIFB argued that it had RBI's permission to go for 'masala bonds'. The RBI, too, testified in favour. The KIIFB's monthly reports to the RBI on 'masala bonds' were also examined by the court. "No objection or suspicion has been raised by the RBI," the court noted.
Isaac and KIIFB also highlighted the selective harassment of the ED. The court had wanted to know whether the ED was probing any other entity in the country for floating 'masala bonds'. The petitioners had argued in court that central government entities like the National Highways Authority of India, National Thermal Power Corporation Ltd, and Indian Renewable Energy Development Agency had also issued 'masala bonds' and yet they were not put through any probe by the ED. The central agency had no counter to this.
What did ED demand from Isaac?
Details of all the bank accounts maintained by him and his family members in India and abroad, details of his foreign visits during the last 10 years along with purpose and income earned during these travels, details of foreign inward remittance sent by Isaac or companies/firms in which he is a director or partner during the last ten years along with bank accounts.
A senior woman official of the KIIFB also submitted that she was asked to present her IT returns and bank accounts without giving any reason why her privacy should be encroached upon.
What did the High Court say?
As it turned out, the ED had no answer for the one crucial poser the court constantly threw at the agency: What is the purpose of the summons?
The court found that the ED was trying to create a complaint against Isaac and the KIIFB rather than investigating a complaint. "It cannot be a roving enquiry for the purpose of establishment of the cause of a complaint, nor can an entity like the ED continue investigation solely for the purpose of establishing a complaint. Investigation into a complaint and establishment of a complaint through an enquiry are two different aspects," the High Court said on December 14.
Is this the end of the ED probe against Isaac?
No. The High Court has not prohibited the ED from conducting any further investigation into Isaac's or KIIFB's activities. The ED can but just that it has to provide valid reasons.
"As long as the investigation is done based on a complaint or on the basis of valid or verifiable cause, certainly, it would be impossible for any court to prohibit them from doing so, as long as they act within the parameters of the law," the court said.
What are 'masala bonds'?
These are rupee-denominated bonds issued by Indian entities to source funds from a foreign market for infrastructure development. It is denominated in rupees but settled in US dollars. Since interest rates in developed markets are lower, borrowers can obtain funds at lower interest rates compared to prevailing rates in India. As for those issuing the bond, the currency risk is borne by investors.
KIIFB borrowed Rs 2,150 crore by floating 'masala bonds' on the London Stock Exchange. The amount to be repaid is Rs 3,195.23 crore.
