The Kerala High Court on Friday reserved its verdict on an appeal filed by the Enforcement Directorate (ED) against a Single Judge’s interim order staying a show cause notice issued to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act, 1999 (FEMA), in connection with the utilisation of funds raised through masala bonds.

A Division Bench comprising Justice Sushrut Arvind Dharmadhikari and Justice P V Balakrishnan heard the appeal and reserved it for judgment.

Appearing online for the ED, Additional Solicitor General of India A R L Sundaresan submitted that the agency had only issued a preliminary notice under Rule 4 of the FEMA Adjudication Rules, calling upon KIIFB to explain why an inquiry should not be initiated.

Relying on Supreme Court and High Court precedents, the ASGI argued that writ petitions against show cause notices, particularly under financial statutes, should ordinarily not be entertained unless there is a clear lack of jurisdiction. He further contended that the Single Judge had failed to consider the complete statutory framework under FEMA and granted interim relief without addressing the maintainability of the writ petition.

The ED maintained that the adjudicating authority must be allowed to conduct an inquiry to examine whether the utilisation of funds raised through masala bonds violated the External Commercial Borrowings (ECB) policy.

Opposing the appeal, Advocate General Gopalakrishna Kurup, appearing for KIIFB, submitted that the proceedings were initiated without proper application of mind and that the Reserve Bank of India (RBI) circulars relied upon by the ED had since been superseded.

The respondent further contended that KIIFB, a statutory body, had obtained RBI approval for the borrowings and had regularly reported fund utilisation, with no objection raised by the RBI regarding misuse of funds. It was also argued that continuation of the adjudication proceedings would jeopardise infrastructure projects already underway and adversely affect investor confidence.

During the hearing, the Division Bench questioned whether KIIFB could raise all its objections before the adjudicating authority itself, noting that the proceedings had not yet culminated in a finding of violation.

“What is the problem, if you file a reply .... Now they have not taken a decision to prosecute. They are asking you a show cause why proceedings is not initiated against you,” the court orally observed.

The court also noted that the appeal challenged not only the interim stay but also the maintainability of the writ petition itself. After hearing submissions from both sides, the Bench reserved its judgment.

Background
In its writ petition, KIIFB sought the quashing of a complaint dated June 27, 2025, filed by the ED before the adjudicating authority, along with the consequential show cause notice proposing adjudication under Section 13 of FEMA.

The complaint alleged that KIIFB had violated RBI guidelines governing External Commercial Borrowings by using proceeds from Rupee Denominated Bonds, commonly known as masala bonds, for land acquisition—an end use the ED claims is prohibited and amounts to real estate activity or purchase of land.

While granting interim relief, the Single Judge observed that there was prima facie merit in KIIFB’s contention that the infrastructure activities undertaken by it could not be categorised as real estate activity, and that the adjudicating authority lacked the power to initiate proceedings against the statutory body.

Following the interim stay granted to KIIFB, Chief Minister Pinarayi Vijayan, in his capacity as Chairman of KIIFB, along with former Vice-Chairman and ex-Finance Minister T M Thomas Isaac and Chief Executive Officer K M Abraham, also approached the High Court seeking a stay of the show cause notice. The court granted interim relief in their petition as well, observing that they were entitled to the same protection already extended to KIIFB.
(With LiveLaw inputs)