The Kerala High Court’s recent ruling marks a significant turn in the legal dispute revolving around the issuance of masala bonds by the Kerala Infrastructure Investment Fund Board (KIIFB) and the subsequent investigation conducted by the Enforcement Directorate (ED). This case is primarily centered on alleged violations under the Foreign Exchange Management Act (FEMA) in relation to KIIFB’s issuance of rupee-denominated bonds (known as masala bonds) abroad, followed by the ED’s issuance of summons to KIIFB and former Finance Minister Dr.T.M. Thomas Issac.

Both KIIFB and Dr. Issac challenged the ED’s summons separately, raising objections regarding the nature and scope of the ED’s investigation. In response, Justice Devan Ramachandran of the Kerala High Court took into consideration the ED’s expressed willingness, presented by Additional Solicitor General of India, A.R.L. Sundaresan, to issue fresh summons. Despite the objections raised by the petitioners’ counsel regarding the seemingly indefinite and ambiguous nature of the ED’s investigation, the Court, upon preliminary assessment, decided to allow the ED to issue new summons, with the stipulation that these actions would be subject to further judicial review and orders during the ongoing legal proceedings.

Dr. Issac’s plea contended that the ED’s investigation lacked specificity and transparency, characterizing it as a ‘fishing and roving’ inquiry without providing clear details about the alleged violations. Meanwhile, KIIFB alleged that the investigation was politically motivated, orchestrated to undermine the State Government. They argued that the issuance of Masala Bonds had obtained necessary approval from the Reserve Bank of India (RBI) for developmental activities in Kerala, thereby challenging the ED’s jurisdiction in this matter.

In response to these contentions, the RBI submitted an affidavit to the Court, confirming that it had granted a ‘no objection’ to KIIFB in 2018 for issuing masala bonds to non-residents overseas. This approval was granted after a comprehensive assessment through its Authorized Dealer, Axis Bank. However, the RBI clarified that its permission pertained exclusively to FEMA, without implying approval from other regulatory authorities or governments under different regulations. Additionally, the RBI highlighted that investigative powers concerning FEMA violations related to the issuance of masala bonds lay with the ED, as specified under Section 37(1) of FEMA, and not with the RBI.

Previously, in October 2022, the High Court had temporarily restrained the ED from issuing further summons against KIIFB and Dr. Issac for a limited period. The case, with the title *Kerala Infrastructure Investment Fund Board (KIIFB) v. Director, Directorate of Enforcement,* identified by Case Numbers WP© 26228/ 2022 and WP© 25774/ 2022, is marked by the intricate interplay between regulatory authority, jurisdictional boundaries, and the nature of investigations in financial matters. The Court’s decision holds significant implications as it navigates through these complexities, impacting the trajectory of this ongoing legal dispute.

In conclusion, the Kerala High Court’s recent ruling represents a critical juncture in the legal battle surrounding the issuance of masala bonds by KIIFB and the ensuing investigation by the ED. The Court’s decision to allow the ED to Issue fresh summons, subject to further judicial scrutiny, underscores the complexity of jurisdictional boundaries and regulatory authority in financial matters, and its ramifications could profoundly influence the direction of this ongoing legal imbroglio.

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