Kerala HC stays ED show-cause notice against KIIFB over alleged FEMA violations

The Kerala High Court on Tuesday stayed a show-cause notice issued by the Enforcement Directorate (ED) to the Kerala Infrastructure Investment Fund Board( KIIFB) relating to the utilisation of funds raised through Masala Bonds.

A single bench of Justice V G Arun passed the interim order staying the notice and all proposed proceedings for a period of three months in a petition moved by KIIFB, a corporate body constituted by the Kerala government in 1999 to provide funds for infrastructure projects across the state, challenging proceedings initiated by the Directorate of Enforcement (ED) under the Foreign Exchange Management Act, 1999 (FEMA), relating to the utilisation of funds raised through Masala Bonds.

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“Above discussion leads to the prima facie conclusion that the question involved requires detailed consideration. Admit. Jaisankar V Nair takes notice for the respondent. Respondents to file counter-affidavits, if any. There shall be an interim stay of further proceedings pursuant to Exhibit P2 show cause notice for 3 months.”

The KIIFB has sought the quashing of a complaint dated June 27, 2025, filed by the ED before the Adjudicating Authority, as well as a consequential show cause notice proposing adjudication under Section 13 of FEMA.

The impugned complaint alleges that KIIFB violated Reserve Bank of India (RBI) guidelines governing External Commercial Borrowings (ECB) by allegedly using proceeds from Rupee Denominated Bonds, commonly known as Masala Bonds, for land acquisition, which the ED claims is a prohibited end use amounting to real estate activity or purchase of land.

According to the ED, such utilisation contravenes the end-use restrictions contained in the RBI’s 2015-16 Master Direction on ECBs and allied circulars.

The KIIFB has contended that land acquisition for infrastructure projects cannot be equated with speculative real estate activity or purchase of land for commercial profiteering. The Board has argued that acquisition of land for infrastructure development is carried out in exercise of the State’s power of eminent domain, where compensation is paid to landowners and no commercial transfer of land takes place in favour of KIIFB. Such activity, it contends, squarely falls within the infrastructure sector and is expressly excluded from the definition of real estate activity under the applicable RBI framework.