Kerala HC stays ED action in Masala Bonds case

The Kerala High Court has stayed for three months further proceedings on the show cause notices issued by the Enforcement Directorate (ED) to Chief Minister Pinarayi Vijayan, former Finance Minister Thomas Isaac and Chief Principal Secretary and KIIFB CEO K M Abraham in connection with the Masala Bonds raised by the Kerala Infrastructure Investment Fund Board (KIIFB).

The case relates to KIIFB’s decision in 2019 to raise about ₹2,150 crore through Masala Bonds, a form of overseas borrowing in Indian rupees. Under this system, foreign investors lend money in rupees, while the exchange rate risk is borne by the investor. The funds were raised to finance large infrastructure projects in Kerala, including roads, bridges and public facilities, and were also used for land acquisition. KIIFB, a state-run statutory body set up to mobilise resources for infrastructure development, became the first state-backed entity in the country to tap international markets through Masala Bonds, which were listed on the London Stock Exchange.

The controversy began after the Comptroller and Auditor General (CAG) raised objections, stating that states are not permitted to raise foreign loans without prior approval from the Union government. The CAG argued that even though KIIFB had raised the funds, it amounted to indirect borrowing by the Kerala government and could violate constitutional provisions and the Foreign Exchange Management Act (FEMA). Acting on these findings, the ED initiated proceedings under FEMA, which deals with foreign exchange violations and does not involve criminal charges or money laundering allegations.

In November 2025, the ED issued show cause notices to Vijayan, Isaac and Abraham, seeking explanations on the decision to raise Masala Bond funds and their subsequent use. The Kerala government and KIIFB have maintained that KIIFB is an independent statutory body and that its borrowing does not add to the state’s public debt. They have also asserted that the bonds were raised and utilised in a transparent manner and that no FEMA provisions were violated.

While considering the petitions, Justice V G Arun of the Kerala High Court noted that proceedings arising from the same show cause notice had already been stayed in the case filed by KIIFB. The court held that in view of this, the Chief Minister and the senior officials were also entitled to similar interim relief. Accordingly, it stayed further ED action for three months and listed the matter for further hearing in January, along with KIIFB’s petition.

The High Court’s order has, for the time being, halted the ED’s proceedings, even as the legal dispute continues over whether KIIFB’s overseas borrowing through Masala Bonds required prior central approval and whether it amounted to indirect state borrowing by Kerala.