Kerala’s state investment arm has approached the High Court in Kochi seeking to quash a show-cause notice issued by the Enforcement Directorate (ED) over the use of funds raised through its Masala Bond issued in 2019. The petition, which raises wider questions about financing models for public infrastructure, was heard in detail on Thursday, with the court reserving its order for 16 December.
The Kerala Infrastructure Investment Fund Board (KIIFB) contends that the ED’s allegations are based on an incorrect interpretation of the Reserve Bank of India’s regulations that governed external commercial borrowings at the time. The agency had issued a notice on 20 November alleging that proceeds from the offshore rupee-denominated bond amounting to ₹2,150 crore were diverted to acquire land, an activity the ED claims is restricted under the Foreign Exchange Management Act (FEMA). According to the ED’s position, the RBI’s 2016 master direction and a 2015 circular prohibit the deployment of such borrowings for real estate transactions or land purchases. The Masala Bond, floated on the London Stock Exchange, carried an interest rate of 9.72% and was widely promoted as a pioneering tool for state-led infrastructure finance in India.
However, KIIFB has argued that public-sector land acquisition undertaken for roads, public buildings or mobility corridors cannot be equated with speculative real estate activity. A senior state official familiar with the matter said the land acquired remains with the government and is used solely for public infrastructure, making the process part of legitimate state functions rather than commercial land dealings. The petition further cites RBI’s revised ECB framework of January and March 2019, which explicitly removed restrictions on using such borrowings for land acquisition in the infrastructure sector. The state’s advocate general submitted that the ED’s notice, if left unchallenged, could cast uncertainty over infrastructure financing models across India, especially as states increasingly rely on pooled funds, municipal bonds and structured borrowings to modernise urban systems. Urban economists note that predictable financing of land acquisition is critical for large mobility, housing and flood-resilience projects sectors central to building sustainable and equitable cities.
Appearing for the Union government, the additional solicitor general argued that KIIFB’s petition was premature, as a show-cause notice does not automatically trigger adjudication. The proper course, he maintained, would be to present a full response before the adjudicating authority rather than seeking judicial intervention at this stage. The matter carries implications for states experimenting with innovative capital-raising mechanisms for climate-resilient and socially inclusive urban projects. A final order next week may offer clarity on how India balances regulatory compliance with the need for long-term, low-cost financing to support sustainable development.
