Rs 466 crore KIIFB masala bond case: Inside ED’s forex violation case against Pinarayi Vijayan, former Kerala minister Thomas Isaac

“It is seen that the issuance of masala bonds and purchase of lands using the proceeds raised through masala bonds were approved by the board which was chaired by Shri Pinarayi Vijayan, Chief Minister of Kerala. Therefore, Shri Pinarayi Vijayan, Chief Minister of Kerala was instrumental in divergence of funds despite the undertaking given to RBI by the CEO of M/s KIIFB and hence… appears to have contravened …RBI direction …to the extent of Rs 466,91,77,730.90,” the show-cause notice read. It also asked Vijayan to appear before the adjudicating authority under the Foreign Exchange Management Act (FEMA).

With regard to Isaac, the notice states that executive committee meetings chaired by him took note of payments made towards land acquisition and resolved to transfer funds directly to district collectors’ accounts for this purpose, indicating his alleged role in diverting the bond proceeds.

High Court stay

The show-cause notice and further proceedings in this regard were stayed by the Kerala HC earlier this week in response to a writ petition filed by KIIFB. Denying any wrongdoing by KIIFB, Vijayan has termed the notice “utterly ridiculous” and said such actions were expected around elections. Assembly polls in the state are due next year.

According to ED, the KIIFB had approached the RBI through its authorised dealer, Axis Bank, seeking approval to raise Rs 2,672.80 crore by issuing rupee-denominated bonds overseas under the External Commercial Borrowing (ECB) framework. Axis Bank and Standard Chartered Bank were appointed as joint lead managers for the proposed issuance on the London Stock Exchange and the Singapore Stock Exchange. The RBI, through a letter dated June 1, 2018, granted a “no objection” under the Foreign Exchange Management Act (FEMA), while stipulating that KIIFB must obtain any additional approvals required under other applicable laws or regulations before undertaking the transactions.

The KIIFB eventually raised Rs 2,150 crore in March 2019. Citing internal worksheets and documents, ED claims that KIIFB spent Rs 466.91 crore from the masala bond proceeds on land acquisition across various projects. Such expenditure, the ED contends, is expressly prohibited under RBI Circular No. 17 dated September 29, 2015 and Master Direction No. 5/2015-16 dated January 1, 2016, which governed the issuance and end-use of rupee-denominated bonds overseas.

Under these guidelines, proceeds from masala bonds cannot be used for real estate activities other than specified categories, investment in capital markets, activities barred under foreign direct investment norms, on-lending for prohibited purposes, or for the purchase of land.

The ED has also pointed out that the RBI’s June 1, 2018 approval letter required KIIFB to obtain specific permissions wherever necessary. Since land purchase using masala bond proceeds was prohibited, the ED argues that KIIFB ought to have sought explicit RBI approval before undertaking such expenditure.

The ED has also accused then KIIFB CEO K M Abraham, citing an undertaking given to the RBI that bond proceeds would not be used for land purchase. It has concluded that there is a prima facie case of contravention of RBI directions under FEMA.

In its writ petition before the HC, the KIIFB has challenged both the ED’s complaint and the show-cause notice as legally unsustainable and vitiated by malice. KIIFB’s core argument is that the ED has misconstrued RBI regulations by equating land acquisition for public infrastructure projects with “purchase of land” or “real estate activity”.

The KIIFB has further argued that the ED relied on outdated regulations, even though the 2015-16 Master Direction and the 2015 circular stood revised and superseded by the January 2019 ECB Framework and the March 2019 Master Direction, which were in force when the bonds were issued and the proceeds were utilised.

Under the revised framework, activities falling within the “infrastructure sector” are expressly excluded from the definition of real estate activities, and land acquisition for such projects is not prohibited. KIIFB has also claimed that all utilisation was transparently reported to the RBI through certified monthly filings, that the RBI has never flagged any violation, and that much of the amount cited by the ED did not originate from masala bond proceeds.