KIIFB was given No-Objection Certificate under FEMA to issue Masala Bonds: RBI tells Kerala High Court

The Reserve Bank of India (RBI) has told the Kerala High Court that it had issued a Non-Objection Certificate (NOC) to the Kerala Infrastructure Investment Fund Board (KIIFB) under the Foreign Exchange Management Act (FEMA) for raising funds by issuing masala bonds (rupee- denominated bonds) abroad..An affidavit stating the same was filed by the RBI it in response to a plea that was moved by the KIIFB challenging the repeated issuance of summons to its officers in connection with a probe by the Enforcement Directorate (ED) into the alleged FEMA violation in the KIIFB's issuance of the rupee-denominated Masala Bonds in 2019..The RBI submitted that it had given an NOC to KIIFB on June 1, 2018 to issue masala bonds to non-residents.The NOC was given after examining the application filed by KIIBF through Axis Bank, its authorized dealer, it was submitted.The RBI clarified that the issuance of NOC was only from the FEMA angle, and should not be construed to convey the approval by some other statutory authority or the government under any other laws or regulations.The affidavit further stated that the External Commercial Borrowings (ECB) transactions are in the nature of capital account transactions which is governed under Section 6 of FEMA. It further stated that the RBI through its circular dated September 29, 2016, had permitted the issuance of masala bonds overseas by the ECB. Moreover, KIIBF has submitted monthly returns for all months till date and thus, it allotted a loan registration number for the proposed issuance of masala bonds, the RBI said in its affidavit. However, the RBI opposed KIIFB’s argument that the jurisdiction to investigate FEMA violations is with the RBI and not with ED. As per Section 37(1) of FEMA, the investigation power lay with the ED and not with the RBI, the affidavit said..Even though the KIIFB moved its petition in mid- 2022, the RBI had not appeared before the Court which had irked the High Court.Since August, 2022, the Court has been considering KIIFB's plea along with another one moved by the Former Finance Minister of Kerala, Dr. Thomas Issac challenging the ED summons issued to him and his family members in connection with the probe.The petitioners have contended that the probe is nothing but a fishing expedition and that the ED hasn't mentioned what contravention of FEMA it was probing in the summons.The KIIFB, in particular, argued that the probe is adversely affecting its ability to raise funds which are necessary for infrastructure projects in the State.In its counter affidavit, however, the ED argued that the investigation is at a preliminary stage and that the issuance of summons is perfectly legitimate as per the FEMA Act.It was also stated that the probe was initiated on the basis of complaints regarding FEMA violations in the issuance of masala bonds by the KIIFB..On October 10, 2022, the court ordered that no further summons be issued by the ED to Dr. Isaac and two officials of the Kerala Infrastructure Investment Fund Board, for two months. This interim order was subsequently extended.