Kerala High Court Gives ED Nod To Issue Fresh Summons To KIIFB, Former Minister Dr. Thomas Issac In 'Masala Bonds' Case

The Kerala High Court on Friday granted permission to the Enforcement Directorate (ED) to issue fresh summons to Kerala Infrastructure Investment Fund Board (KIIFB), and former Minister, Dr. T.M. Thomas Issac, in relation to the masala bonds case. 

ED had issued summons to KIIFB, and the then Finance Minister, Dr. Issac, alleging violations of provisions under the Foreign Exchange Management Act (FEMA) for raising funds by issuing rupee-denominated bonds (masala bonds) abroad. 

KIIFB and Dr. Issac thus filed separate petitions before the High Court challenging the issuance of the same.

Justice Devan Ramachandran yesterday took note of the submission of the Additional Solicitor General of India (ASGI) A.R.L.Sundaresan, instructed by Standing Counsel for ED Jaishankar V.Nair, that ED was willing to issue fresh summons to the petitioners and other persons who were within the scope of investigation. 

The counsel for the petitioners however, argued that investigation was being conducted by the ED in a seemingly ad infinitum manner which was causing serious prejudice to the petitioners, and sought the Court's intevention in the same. 

In the face of the contrary arguments, the Court was of the prima facie opinion that the suggestion of the ASGI ought to be acceded to, since any such summons would also be subjected to further review by the Court in the proceedings. 

"I, therefore, clarify that the pendency of these writ petitions will not stand in the way of the ED issuing fresh summons to any person, including the petitioners, and to continue investigation; however, subject to further orders from this Court," the Court observed. 

Dr. Issac had claimed in his plea that the agency was seeking to conduct a 'fishing and roving' enquiry against him without revealing what the exact nature of violations are, to which the High Court had earlier asked why ED was asking Issac to produce documents relating to the assets at the first instance itself and added that he had the right to privacy.

KIIFB on its part, alleged that the the investigation into its affairs was intended as a "smear campaign perpetuated by vested political interests, to discredit the State Government machinery". It averred in its plea that the Masala Bonds had been issued with the necessary permission of the Reserve Bank of India for raising funds for undertaking development activities in Kerala, and added that the ED did not have jurisdiction to investigate into the issue of Masala Bonds. According to KIIFB, it was only the RBI which could inquire into any FEMA violations with respect to the issuance of rupee denominated bonds.

RBI, in its affidavit before the Court, attested to the fact that it had issued 'no objection' to KIIFB on June 1, 2018 to issue masala bonds to non-residents overseas, after examining the application filed by KIIFB through its Authorized Dealer, Axis Bank. It however clarified that the issuance of NOC was only from the FEMA angle, and was not to be construed to convey the approval by any other statutory authority or the Government under any other laws or regulations. Additionally, RBI also countered KIIFB's argument that the jurisdiction to investigate FEMA violations is with the RBI and not with the ED. In terms of Section 37(1) of FEMA, the investigative power lies with the ED and not with the RBI, the affidavit stated.

The Court had, in October 2022, stayed further issuance of summons against KIIFB and Dr. Issac for a period of two months. 

The matter has now been posted for further consideration on December 1, 2023. 

Case Title: Kerala Infrastructure Investment Fund Board (KIIFB) v. Director, Directorate of Enforcement and connected matter

Case Number: WP(C) 26228/ 2022 and WP(C) 25774/ 2022

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