The petition filed by 5 MLAs said that the action of ED and its Deputy Director against KIIFB can therefore be considered as a dispute between the Union of India and the State of Kerala.

The petitioners in the case (from left to right) Ramachandran Kadannappally, M Mukesh, KK Shailaja, IB Satheesh and E Chandrasekharan.
news Politics Thursday, August 11, 2022 - 16:12

Five members of the Kerala Legislative Assembly have filed a Public Interest Litigation (PIL) in the Kerala High Court stating that the Enforcement Directorate and Deputy Director of Enforcement are attempting to tarnish the credibility of Kerala Infrastructure and Investment Fund Board (KIIFB). The plea stated that the move against the KIIFB, the fifth respondent in the case, and a body corporate constituted by the Kerala government, would result in adverse economic impact to the entire state of Kerala. Former Finance Minister Thomas Isaac had received summons from the ED with regard to an investigation against KIIFB. The ED has accused him of violating several norms by the Union government to accept foreign funds to raise capital for the entity. Isaac has now moved the Kerala High Court to quash the summons.

The petitioners - KK Shailaja, IB Satheesh and M Mukesh, E Chandrasekharan and Ramachandran Kadannappally - all MLAs belonging to various constituent parties of the ruling Left Democratic Front Government (LDF), submitted that though KIIFB has obtained all the necessary clearances and sanctions from the RBI for raising amounts by issuance of 'Masala bond', ED through its Deputy Director, is constantly interfering and harassing the officers of the KIIFB. Masala bonds are rupee dominated borrowings issued in foreign markets by Indian entities.

Initiation of such frivolous action against a large body corporate like KIIFB will give rise to adverse economic consequences not only to Kerala but also the country in the long run. The petition cited the position claimed by the Supreme Court in the case of Reliance Industries Vs Securities and Exchange Board of India to buttress its argument.

"Initiation of criminal action in commercial transactions should take place with a lot of circumspection and the courts ought to act as the gatekeepers of the same. Initiating frivolous criminal action against large corporations would give rise to adverse economic consequences for the country in the long run", the plea stated, quoting the SC judgement.

Why the petitioners are arguing probe by ED is illegal

1. The functioning of KIIFB is in the best interest of the people of Kerala and the country and attempt by the Deputy Director, ED, is not in the best interest of the Union of India and the state of Kerala.

2. Almost all of the entire funds for the purpose of implementing the projects approved by KIIFB was realised from within the country itself. Only a small portion of the total resources Rs 2150 crore is raised from the source of 'Masala bond'. The authority of ED under Foreign Exchange Management Act (FEMA) is limited to the amount raised from outside the country. The interference by ED on the functioning of KIIFB, shattering the morale of officers and the credibility of the entity is not in the public interest.

3. The funds received by KIIFB through Masala Bonds were permitted by the RBI and in strict accordance with FEMA. Only gateway through which the aforesaid funds is obtained is the RBI. Hence the alleged investigation regarding the raising of funds by KIIFB is illegal and challenging the authority of the RBI. The funds are utilised in accordance with the provisions of the KIIFB Act, 1999. Such utilisation of funds is beyond the scope of enquiry under FEMA and ED has no authority for investigation.

4. Under the guise of investigation, the ED is directing KIIFB to produce entire project reports which have absolutely no connection with the 'masala bond' transaction and also directing its officers to appear before it repeatedly.

5. Similar funds have been raised not only by KIIFB but other private and government institutions like the HDFC. The first Masala Bond was issued by the World Bank backed International Financial Corporation in November 2014, when it raised Rs 1,000 crore for funding infrastructure projects in India. In 2016, HDFC, a private bank, raised Rs 3,000 crore from Masala Bonds, becoming the first company to issue the bond. In 2016, the National Thermal Power Corporation (NTPC) raised Rs 2,000 crore from the market. The National Highway Authority (NHAI) raised Rs 3,000 crore through the route while the Indian Renewable Energy Development Agency (IREDA) raised Rs 1950 crores using Masala Bonds. The ED did not initiate investigations against any of these institutions as is done in the case of KIIFB.

6. KIIFB is a statutory creation of the state government under article 12 of the Constitution of India. The ED is a statutory creation under FEMA by the Union of India. The action of ED and its Deputy Director against KIIFB can therefore be considered as a dispute between the Union of India and the State of Kerala.

7. While there are sufficient safeguards to ensure internal disputes of departments under the Union of India and state governments are settled amicably, there is no effective mechanism to resolve disputes between the Union of India and the States.

8. The judicial pronouncements relating to settling of disputes between the Union Of India and State of Kerala otherwise than under the Article 131 of the Constitution of India points towards the need of an administrative mechanism for resolution of disputes between the states and unions and its organs. Article 131 of the Constitution gives both the Union and state governments a forum to fight on legal issues and not on mere political issues

9. As an Interstate Council as envisaged under Article 263 of Constitution of India is in force, the court should direct the Union of India and the Kerala government to constitute a mechanism for resolving the disputes between them and the statutory organs under them—the KIIFB and the ED.

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