Explained | What is Kerala Masala Bond case which has brought Pinarayi Vijayan under ED lens

A notice, issued on November 12, to him pertains to the alleged contravention of FEMA provisions and the RBI master direction by the Kerala Infrastructure Investment Fund Board (KIIFB) and its authorities, amounting to Rs 466.91 crore.

The Enforcement Directorate has issued a Rs 467-crore FEMA contravention show-cause notice to Kerala Chief Minister Pinarayi Vijayan, former finance minister Thomas Issac, and the CM's chief principal secretary K M Abraham in the KIIFB Masala Bond case.

The notice, issued on November 12, pertains to the alleged contravention of FEMA provisions and the RBI master direction by the Kerala Infrastructure Investment Fund Board (KIIFB) and its authorities, amounting to Rs 466.91 crore.

What is KIIFB?

The KIIFB is the primary agency of the Kerala government for financing large and critical infrastructure projects.

The body corporate floated a 'Masala Bond' at the London and Singapore stock exchanges to raise funds through rupee-denominated bonds to the tune of Rs 2,672.8 crore under ECB (external commercial borrowing) in 2019. The move by the Kerala government came after the devastating floods that hit the state in 2018 to create infrastructure.

What is 'masala bond'?

Masala Bonds are bonds issued outside India but denominated in Indian rupees. The term 'masala', meaning spices, is used to give it a local flavour. Used to connect international capital markets with the Indian economy, the term was first used by International Finance Corporation (IFC).

What is the Kerala 'Masala Bond' case about?

The issue pertains to violation of the Foreign Exchange Management Act (FEMA) and the directions of the Reserve Bank of India (RBI).

According to ED officials, a part of the funds — to the tune of Rs 466.91 crore — was used for purchasing land which was "specifically prohibited", and this was in contravention of the master direction and circular issued by the RBI.

The ED filed the FEMA complaint in this case on June 27 this year.

A show-cause notice, under FEMA, is issued, and the contravention quantified in it is akin to a penalty.

The ED probe went into the end-use of Rs 2,000 crore raised by KIIFB through masala bonds, and its compliance with the FEMA norms.

Who are named in the ED notice?

Apart from Kerala CM Pinarayi Vijayan, Thomas Issac (Finance Minister in the 2016-2021 CPI(M)-led Left Democratic Front government) and the CM's chief principal secretary K M Abraham have been named in the ED notice.

What is the govt stance on the issue?

The state has denied any wrongdoing in this case. In July 2024, the current Finance Minister, K N Balagopal, informed the Kerala Legislative Assembly that KIIFB had repaid the amount in full in March 2024.

KIIFB CEO K M Abraham on Monday said the board has not violated any provision of FEMA or any other law.

The allegations in the Enforcement Directorate's show cause notice are based on false figures, misrepresentation of facts, and a flawed understanding of applicable regulations, he said in a Facebook post.

"As CEO, I wish to state categorically and unequivocally that KIIFB has not violated any provision of FEMA or any other law. The deployment of Masala Bond proceeds has been lawful, proper, and in service of Kerala's infrastructure development," Abraham said.

Isaac, party state secretary M V Govindan and senior leader and minister V Sivankutty have vehemently criticised the ED notice.

Govindan alleged that the notice issued by the ED was part of their "political game" and that the people of Kerala would understand it clearly.

As elections are round the corner in the state, the ED is campaigning for the ruling BJP at the Centre, Isaac alleged while talking to told reporters in Pathanamthitta.

(With PTI inputs)