KIIFB Was Given No-Objection Letter Under FEMA To Issue Masala Bonds : RBI Informs Kerala High Court

The Reserve Bank of India has informed the Kerala High Court that it had issued "no objection" to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act (FEMA) for raising funds by issuing rupee-denominated bonds (masala bonds) abroad.

The RBI stated this in an affidavit filed in response to a petition filed by KIIFB challenging the summonses issued by the Enforcement Directorate to its officers over alleged FEMA violations in the issuance of masala bonds in 2019. Former Finance Minister of Kerala Dr.Thomas Issac has also filed a separate petition challenging the ED summons issued to him in relation to the masala bonds issue.

The RBI has stated that it had given 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. However, 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, the RBI clarified.

RBI has submitted that the External Commercial Borrowings (ECB) transactions are in the nature of capital account transactions, and are governed under Section 6 of FEMA. ECB by way of issuance of Rupee Denominated Bonds ('RDB' also referred to as Masala Bonds) overseas by eligible borrowers was permitted by the RBI vide its Circular dated September 29, 2015. 

The RBI further informed the Court that KIIFB has submitted Form ECB-2 (a monthly return required to be submitted by an ECB borrower in prescribed format giving the details of withdrawal, utilization, repayment, conversion, and so on) for all the months till date.  On receipt of the form ECB, RBI allotted a Loan Registration Number (LRN) for the proposed issuance of rupee-denominated bonds.

RBI has however contradicted 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.

In October 2022, the Kerala High Court had stayed further summons to Thomas Issac and KIIFB officials. While refusing to interdict the ED investigation, the High Court observed that there was no justification for the petitioners being repeatedly summoned by the officers of the Enforcement Directorate. 

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