Kochi: The Kerala High Court has granted an interim stay on the Enforcement Directorate’s (ED) show-cause notice against the Kerala Infrastructure Investment Fund Board (KIIFB) in connection with the utilisation of funds raised through Masala Bonds. Justice V J Arun ordered a stay of further proceedings for three months.

The interim relief was granted on a petition filed by KIIFB challenging the enforcement action initiated under the Foreign Exchange Management Act (FEMA), 1999. The Board has sought the quashing of a complaint filed by the ED on June 27, 2025, before the adjudicating authority, along with the consequential show-cause notice proposing proceedings under Section 13 of FEMA.

The ED has alleged that KIIFB violated Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECB) by using proceeds from Rupee-Denominated Bonds, popularly known as Masala Bonds, for land acquisition. According to the agency, such use amounted to prohibited “real estate activity” under the RBI’s 2015–16 Master Direction on ECBs and related circulars.

KIIFB has countered that land acquisition for infrastructure projects cannot be equated with speculative real estate activity or commercial purchase of land. It argued that the acquisition was carried out in exercise of the State’s power of eminent domain, involving compensation to landowners without any commercial transfer of land in favour of the Board.

The Board maintained that the applicable legal framework was the revised ECB regime introduced by the RBI on January 16, 2019, along with the Master Direction dated March 26, 2019, which superseded the earlier 2015–16 guidelines. Under the 2019 framework, infrastructure activities — as defined in the Government of India’s Harmonised Master List of Infrastructure Sub-Sectors — are expressly excluded from prohibited real estate activity.

KIIFB further pointed out that the RBI had granted prior approval for the issuance of the Masala Bonds in March 2019 and that it had regularly filed ECB-2 returns detailing the utilisation of funds. These filings were certified by authorised dealer banks and independent chartered accountants. The bonds were fully redeemed in March 2024, and the RBI has never flagged any violation of FEMA or ECB norms, the petition said.

Alleging malafides, KIIFB contended that the ED’s actions — including repeated summons, investigations and the filing of the complaint — coincided with multiple election cycles in Kerala. It described the proceedings as the culmination of a “fishing and roving enquiry” earlier deprecated by the High Court.

The Board also warned that continued adjudication would adversely affect Kerala’s infrastructure financing, noting that KIIFB has approved projects worth over ₹90,000 crore. It said the ongoing enforcement action had already made lenders wary, threatening project execution, contractor payments and the State’s broader development plans.

Opposing the plea, the ED argued that the petition was not maintainable and that KIIFB should challenge the show-cause notice before the appropriate forum under FEMA.
(With LiveLaw inputs)