The adjudicating authority of the Enforcement Directorate has served show cause notices to Kerala Chief Minister Pinarayi Vijayan, former state Finance Minister Thomas Isaac and ex-IAS officer Dr K M Abraham in connection with alleged Foreign Exchange Management Act (FEMA) violations pertaining to the Masala Bond issued by the Kerala Infrastructure Investment Fund Board (KIIFB).
With the ED action coming just a week ahead of the local body polls, the issue has snowballed into a political controversy.
What is Masala Bond?
The KIIFB, a government entity established for mobilising funds for infrastructure projects, issued rupee denominated bonds, or Masala Bonds, worth Rs 2,150 crore that were dual listed on the London Stock Exchange (LSE) and the Singapore Exchange Ltd in 2019.
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Kerala was the first state to tap into the market for Masala Bonds, which are debt papers sold overseas by an Indian entity that are denominated in rupees, to raise development funds. The proceeds from the bond issue were later used for infrastructure projects. The secured fixed-rate bond has a five-year tenure with a 9.723% coupon. The KIIFB had obtained permission from the Reserve Bank of India (RBI) for the issuance of Masala Bonds.
What is the case?
Vijayan is the KIIFB chairperson, while CPI(M) leader Isaac was its vice-chairperson in 2019 when the bonds were issued. Former Chief Secretary Abraham has been its CEO since 2016. They were part of the decision-making process with regard to utilising the money generated from the bonds.
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While Vijayan and the CPI(M) are yet to make an official statement, Thomas has termed the move “politically motivated” while Abraham has denied any wrongdoing.
The Comptroller and Auditor General (CAG), in its audit report on state finances in 2019, made observations on non-adherence to Constitutional provisions with respect to the Masala Bonds and KIIFB borrowings. Relying on the report, the ED registered a case against the KIIFB for FEMA violations in connection with the Masala Bonds in March 2021, just ahead of the Assembly polls.
The KIIFB then moved the Kerala High Court challenging the summons issued to its functionaries, including the CEO, saying that the ED had no jurisdiction to look into alleged FEMA violations. It argued that the RBI is the only government agency authorised to look into that aspect.
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In 2023, the ED withdrew the summons issued to officials of the KIIFB and its former vice-chairman Thomas Isaac in connection with its probe into alleged violations in financial dealings of the body.
The ED is investigating the end use of the funds generated by the KIIFB through the issuance of the bonds after the RBI told the court that the central agency had the “investigating power” to prove the utilisation of funds. The ED has alleged that the KIIFB used Rs 466 crore to “purchase land”.
What does the KIIFB say?
The KIIFB maintains that the proceeds from the Masala Bonds has not been used for any activity that violates FEMA provisions or RBI guidelines related to external commercial borrowing (EBC).
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It claims that the Rs 466 crore was used to acquire land and not “purchase” it as alleged by the ED. It also said that, in accordance with the ECB guidelines, the KIIFB has also not invested the money in real estate.
What is the Congress, BJP stand?
With local body polls set to be held next week and the Assembly elections next year, the Opposition has found a line of attack against the ruling Left Democratic Front government.
While terming the ED’s move to issue notices as “fraudulent”, the Congress has called for the matter to be investigated. “The latest notice is a part of the undercurrents between the CPI(M) and BJP. The ED will send a notice during election time. After the election, there won’t be any follow-up. This is a tactic by the BJP to help the CPI(M). The Congress will go to any extent to bring out the truth and expose the corruption,” senior Congress leader Ramesh Chennithala said on Tuesday.
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State BJP president Rajeev Chandrasekhar questioned Vijayan’s move to borrow money at a higher interest rate from abroad through Masala Bonds despite low-interest options being available within the country.
In a Facebook post on Tuesday, Chandrasekhar alleged Rs 21 crore was paid as commission to an intermediary and questioned required permissions under the FEMA were sought. “The CPI(M) will try to trivialise this issue as well, just like they did the loss of gold from Sabarimala, but it will not be permitted,” he said.