In a significant legal development, a division bench of the Kerala High Court has issued an interim stay on a previous single bench order, allowing the Enforcement Directorate (ED) to proceed with its inquiry into the Kerala Infrastructure Investment Fund Board (KIIFB). The stay will remain in effect until January 5.
Court's Interim Order and Legal Challenge
The bench comprising Justices Sushrut Arvind Dharmadhikari and P V Balakrishnan passed this interim order on Friday. This decision came in response to an appeal filed by the ED, challenging the earlier ruling by a single judge. The single bench had halted for three months all proceedings stemming from a show cause notice issued by the ED to KIIFB, alleging violations of the Foreign Exchange Management Act (FEMA) concerning the issuance of Masala Bonds.
The ED's special director had served the notice to KIIFB and its officials, demanding explanations and summoning them for adjudication proceedings. The central allegation is that funds raised through Masala Bonds were used to acquire land for infrastructure projects. The ED contends this violates the Reserve Bank of India's (RBI) master directions and circulars, which explicitly prohibit the use of such funds for real estate activities, including land purchase.
Contention from Both Sides
Appearing for the ED, Assistant Solicitor General A R L Sundaresan argued that the single judge's order to stay the notice was premature. He emphasized that the adjudicating authority had not yet determined if a full inquiry was warranted. The show cause notice, he submitted, was merely an initial step to provide KIIFB an opportunity to explain why proceedings should not be initiated against it. The ED also challenged the maintainability of KIIFB's original petition, stating that FEMA itself provides a comprehensive mechanism for adjudication and appeal.
Countering these arguments, Advocate General K Gopalakrishna Kurup, representing KIIFB, defended the board's position. He asserted that the ED's notice failed to disclose any specific offence or clear violation of RBI regulations. He pointed out a crucial fact: the RBI, as the primary regulator under FEMA, has not indicated that KIIFB's use of Masala Bond proceeds is non-compliant with its guidelines or contravenes any provisions of FEMA.
Implications for KIIFB and Kerala's Development
The advocate general further argued that the infrastructure activities undertaken by KIIFB cannot be classified as real estate transactions. He warned that the proposed adjudication proceedings would place KIIFB in a vulnerable position. This, he stressed, could adversely affect an institution critical for funding the state's development projects and potentially harm its financial ratings.
The single bench had initially found prima facie merit in KIIFB's contention regarding the nature of its work and the authority of the adjudicating body. However, with the division bench's interim stay, the legal landscape has shifted. The ED can now continue its preliminary proceedings based on the show cause notice until the next hearing on January 5. This case highlights the ongoing tension between investigative agencies and state-funded development bodies, with significant implications for infrastructure financing in Kerala.
