Investigation Against KIIFB At Preliminary Stage; Issuance Of Summons Do Not Violate Right: ED Tells Kerala High Court

The Enforcement Directorate has filed the counter affidavit in relation to its probe against the Kerala Infrastructure Investment Fund Board (KIIFB), with respect to the latter's alleged violations of the Foreign Exchange Management Act (FEMA) by the issuance of "Masala Bonds" in 2019. 

Apart from the KIIFB, Dr. Thomas Issac, who was the Finance Minister during the issuance of Masala Bonds by KIIFB, had also approached the High Court challenging the summons issued to him, contending that the agency was seeking to conduct a "fishing and roving" enquiry against him without revealing what the exact nature of violations are.

 In the Counter filed through the Central Government Counsel, Jaishanker V. Nair, it was averred that the plea moved in the Kerala High Court by KIIFB challenging ED's investigation and terming it a 'smear campaign', was a premature one, considering that the investigation was still at a preliminary stage. It was stated that the petitioners were attempting to evade their duty in cooperating with the investigation by filing the instant petition. It has further been averred by the respondent that the issuance of summons to record evidence in an ongoing investigation was the proper course envisaged under Section 37 of FEMA, and the same could not be termed as being violative of the Fundamental Rights of the petitioner. It was submitted that the instant probe had been initiated on the basis of the complaints that it had received regarding KIIFB's violation of FEMA in issuance of Masala Bonds, and secondly, the observations regarding non-adherence of Constitutional provisions with respect to the Masala Bonds, and KIIFB borrowings in the State Finance Audit Report of the Comptroller and Auditor General (CAG) in March 2019. 

It was submitted that under Section 37 of FEMA, the officers of ED, not below the rank of Assistant Director, were empowered to exercise the power of investigation, the power of summons, search and seizure, and enforcing the attendance of any person for the purposes of investigation. This power was argued by the respondents as being identical to that vested upon Income  Tax Officer under Section 131 of the Income Tax Act. The decision in K.A. Manshoor v. Assistant Director, ED, wherein it had been held by the Madras High Court that under Section 37 of FEMA, a person summoned by ED could not challenge the issuance of summons was also relied upon by the respondent in their counter to strengthen their argument. Additionally, the respondents have also placed reliance upon the decision in V. Datchinamurthy & Anr. v. Assistant Director of Inspection (Intelligence), IT Department & Ors., wherein the Madras HC had held that, "the issuance of summons will in no way affect the fundamental rights of a person as it is only for the preliminary investigation, and for production of documents before the authority for further investigation". 

The ED has therefore submitted that in the instant case, the summons had been issued at the preliminary stage of the investigation for the purposes of production of documents, and recording of oral evidence for further investigation, as per the procedure envisaged in FEMA. It has been averred that the same does not affect the rights of the person in any manner since its only for investigation purposes. 

"As the summons is issued by the legitimate exercise of powers conferred by law, there is not even an iota of unreasonableness, arbitrariness, or non-application of mind in the  present case", it has been averred in the counter. 

Importantly, it was submitted by the ED that the Reserve Bank of India (RBI) had only given its permission to the issuance of Masala Bonds, and that the ED was empowered under Section 37(1) of FEMA to take up for investigation any contravention regarding the same under Section 13 of the Act. 

It was further pointed out that the Chief Executive Officer of KIIFB, KM Abraham, and Joint Fund Manager, Ani Jula Thomas, who are the second and third petitioners respectively, were issued summons by the ED in this regard for production of documents and oral evidence, and that in the absence of the same, the investigation and collection of evidence would have been completely stalled. The ED has further submitted that it is empowered to enquire the same, since the Rupee denominated bonds overseas (Masala Bonds) are subject to compliance of guidelines under External Commercial Borrowings (ECB), and that transactions on account of ECB and Trade Credit are governed by Section 6 (3)(d) of FEMA. In fact, the issuance of summons is also envisaged as being mandatory for collection of evidence as part of any evidence under FEMA. 

The ED has further refuted the submissions made by the petitioner that they had complied with the provisions of KIIFB Act as being immaterial, and contended that such contentions ought to have been made before the investigation agency, if required. Additionally, the ED has also refuted the allegations of the petitioners stating that the former could not investigate into the issuance of Masala Bonds as being baseless, and has placed reliance upon the provisions of Sections 37 and 47 of the FEMA in this regard to strengthen their averments, which clearly stipulates that in case of any violation of the FEMA regulations, the ED would be empowered to investigate the same. 

The respondent has further contended that the petitioners were trying to find shelter under the 'good faith' clause in the KIIFB Act without any legally valid grounds, and was trying to depict the investigation agency as illegal. It was further pointed out that since only a preliminary investigation in this regard is underway, 

"...it is immature to point out at this point of time to state the act of petitioners were done in good faith or intended to be done in good faith". 

The respondent further submitted in this regard that since the investigation was only at its preliminary stage, the agency was not bound to disclose every single aspect of the case to every person who had been summoned. 

"Issuance of summons does not ipso facto indicate that the person to whom it is issued is either guilty or innocent of a contravention under FEMA, 1999, rather it indicates that certain details are required from the person to complete a fair investigation on the contravention of FEMA, if any", it was further averred. 

The ED has also vehemently denied the allegation put forth by the petitioners that its officials had shown "hostile and intemperate treatment" to the 3rd petitioner. It has also been averred that while the petitioners had contended that they had been issued summons over a course of more than a year and a half, in fact, the petitioners themselves had sought frequent adjournments and time for appearance. The respondents have also denied issuing any press release to the media regarding the issuance of its summons to the Petitioners. 

Apart from these, the ED has also submitted that the petitioners were highly non-cooperative with the investigation, despite efforts having been made to accommodate their interests.  

Lastly, the ED has submitted that the Writ Petition that has been filed is premature, for the petitioners do not even have a cause of action at the moment in order to qualify themselves as being 'persons aggrieved', and that under these circumstances, the Writ petition may be disposed of by the Court. 

On Friday, as the Counter had not yet been filed, Senior Advocate Arvind Datar, appearing for the petitioners,  had sough that the matter be taken up on Monday, since the situation was dire and Banks and other organization were not willing to consider the petitioners and all Projects that had been taken up were put to a standstill until the ED issue has been resolved. 

The Court has agreed to take up both matters on 28th September 2022. 

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