[Masala Bonds Case] ED Has No Jurisdiction To Probe Misutilization Of Funds, RBI Has Power To Authorize Inspection: KIIFB Tells Kerala High Court

Justice T R Ravi was considering the writ petition filed by KIIFB Challenging the summons issued against them by the ED to Dr Kandathil Mathew Abraham, (Chief Executive Officer, KIIFB) who was also the former Chief Secretary in relation to the masala bonds case. The summons was issued seeking the submission of documents and for taking oral evidence.

The KIIFB has also challenged the jurisdiction of the ED to conduct an investigation into the utilization and misutilization of funds. Pursuant to the Court's directions, the KIIFB officers answered the summons and appeared before the ED.

A separate plea has also been filed by Dr Thomas Issac challenging the second summons issued by the ED in connection with the financial transactions of the KIIFB in relation to the masala bonds case.

Today, Senior Advocate Arvind Datar appearing on behalf of KIIFB submitted that they have given all the documents sought by the ED. The first argument put forth by the KIIFB was that there is two-tier scrutiny with regard to utilization of funds, by the RBI and the authorized dealer which is Axis Bank.

It was stated both RBI and Axis Bank submitted compliance reports every month and there are very less chances for any misutilization of funds. It is stated that amounts given to each and every person is accounted for. It is stated that there is detailed scrutiny by the RBI and Axis Bank as per the statute. It was thus stated that if the ED alleges any misutilization of funds, they have to be specific regarding the misutilization of funds and cannot make general allegations.

Another argument put forth by the KIIFB was that ED has no jurisdiction to conduct an investigation regarding the misutilization of funds. It was stated that RBI has the jurisdiction to appoint an officer of the RBI as an authorized person to inspect as per Section 12 of the FEMA.

Section 12 reads thus:

“(1) The Reserve Bank may, at any time, cause an inspection to be made, by any officer of the Reserve Bank specially authorised in writing by the Reserve Bank in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for the purpose of

(a)verifying the correctness of any statement, information or particulars furnished to the Reserve Bank;

(b) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so;

(c)securing compliance with the provisions of this Act or of any rules, regulations, directions or orders made thereunder.

(2)It shall be the duty of every authorised person, and where such person is a company or a firm, every director, partner or other officer of such company or firm, as the case may be, to produce to any officer making an inspection under sub-section (1), such books, accounts and other documents in his custody or power and to furnish any statement or information relating to the affairs of such person, company or firm as the said officer may require within such time and in such manner as the said officer may direct."

Relying upon Section 12, the KIIFB argued that ED has no jurisdiction to initiate an investigation regarding the misutilization of funds since the statute specifically authorizes the RBI to appoint an authorized person to investigate. It was stated that FEMA specifically authorizes RBI to appoint an authorized person and not ED to carry inspection.

It was thus stated that when a statute specifically grants power to RBI, then ED cannot intervene in it to cause investigation without express provision of law. Thus, the KIIFB submitted that ED lacks jurisdiction to investigate regarding misutilization of funds. Another argument put forth by ED was that RBI is impleaded in this matter and if there is any misutilization of funds, the RBI would have come forward to conduct an investigation.

The hearing will continue next week. 

Case Title: Kerala Infrastructure Investment Fund Board V Director, Dr. T.M. Thomas Isaac V The Deputy Director

Case Number: WP(C) 1377/ 2024, WP(C) 3719/ 2024