Why only Kerala being probed by ED? KIIFB to Kerala High Court in Masala Bonds case

The Kerala Infrastructure Investment Board (KIIFB) on Thursday told the Kerala High Court that only the Reserve Bank of India (RBI) can investigate any irregularities in the Masala Bonds issued by it and not the Enforcement Directorate (ED)..The KIIFB made the submission before Justice TR Ravi during the hearing of its petition challenging the summons issued by ED against its officials under the Foreign Exchange Management Act (FEMA).Masala bonds are rupee-denominated bonds issued outside India by Indian entities.Pertinently, the KIIFB told the Court today that Kerala was being singled out by ED while other States which had issued similar bonds were not being investigated. "I had asked a question. Why is it a remarkable coincidence that only the bonds issued by Kerala are being investigated. Every other State has been left alone. Because of the pending ED proceedings, only Kerala State is paying 1.5 percent interest more to banks. 1.5 of ₹2000 crore is a big amount," Senior Advocate Arvind Datar submitted on behalf of KIIFB. .Besides KIIFB, former State Finance Minister Thomas Isaac too has challenged the summons issued to him by the ED. However, only KIIFB's counsel could make the arguments today due to paucity of time.Datar informed the Court that KIIFB was not only seeking quashing of the ED summons against its officials but also a writ of prohibition against the central agency's probe.He submitted that masala bonds are subject to monitoring by the RBI and in KIIFB's case, the authorised dealer was the Axis Bank."Whether KIIFB uses or misuses funds is not the concern of the ED. That is the jurisdiction of the RBI," the senior counsel contended. .Datar explained the process of issuing the funds and the monitoring of its utilisation, adding that there exists a 2-tier security system."We have submitted a detailed form of month wise utilisation of funds... My lordship can see from the certificate that all funds have been used and there are no funds parked either in India or abroad," he added.It was further submitted utilisation of funds has been certified by Axis Bank but the ED. On the investigating agency's apprehension of misutilisation of funds, Datar said,"Even if there is misutilisation, the jurisdiction falls on RBI. As per FEMA also the power is given to RBI, not ED.".Justice Ravi at this stage remarked that the law says the RBI 'may' investigate any misutilisation under Section 12 of FEMA."RBI has chosen not to do it. They are not required to. My question is, is there any other body that can conduct an enquiry?," the judge asked.In response, Datar said the word "may" has been used because using the word "shall" would not be appropriate as that would make it mandatory. However, the Court again asked whether RBI's power under Section 12 was exclusive."FEMA is the omnibus law for how foreign funds come and go from India. That is why the term "management". Section 12 comes in when reports come in to RBI raising doubts about the utilisation. Parliament has noted that in the case of foreign exchange, all scrutiny falls under RBI. RBI has to appoint a special officer by authorisation to investigate, in this case the affairs of KIIFB. If parliament wanted to, it could have said ED has the power. It is my humble submission that another body will have the power only if parliament expressly allows it," Datar said..The arguments will continue on Friday.The case involves allegations that the FEMA was violated in the issuance of Masala Bonds by KIIFB.KIIFB officials and Isaac first filed petitions before the High Court in 2022 challenging the ED summons issued to them in connection with the central agency's probe.However, in December 2023, the ED informed the High Court that it had decided to withdraw the summons.At the time, the Court had clarified that the ED was free to continue its probe in the case.However, the ED issued fresh summons to Isaac and KIIFB officials in January this year following which Isaac and KIIFB filed this fresh round of petitions challenging the same.The primary ground raised by both Isaac and the KIIFB officials is that the summons issued to them contain no mention of what transactions are being investigated..Finding the same to be true, the Court had, in an earlier hearing, orally asked Additional Solicitor General (ASG) ARL Sundaresan, who appeared for the ED, to submit at least one example of a specific transaction which is suspect.On April 9, the Court went through the material supplied by the ED but decided against directing Isaac or KIIFB officials to immediately appear before the ED. Justice Ravi had also observed that it would be improper to force Isaac to appear before the ED at the time because he was standing for the Lok Sabha Elections which were due to take place later that month. The ED challenged this order before a division bench but by the time it was considered, the elections were over and the matter was rendered infructuous. .Central Government Counsel Jaishankar V Nair appeared for the ED. Isaac was represented by Senior Advocate Jaideep Gupta and advocates N Raghuraj, Nandagopal S Kurup, Sayuja, Vivek Menon and Rance R. KIIFB was represented by Senior Advocate Arvind Datar and Kerala Advocate General Gopalakrishna Kurup K.