The Enforcement Directorate (ED) has issued a ₹466 crore show-cause notice under the Foreign Exchange Management Act (FEMA) to Kerala Chief Minister Pinarayi Vijayan, former Finance Minister Thomas Isaac, and KIIFB CEO K.M. Abraham for alleged violations in the ₹2,150 crore masala bond issued by the Kerala Infrastructure Investment Fund Board (KIIFB) in 2019.
The ED alleges misuse of funds raised through the bond, primarily questioning the end-use of approximately ₹2,000 crore meant for infrastructure development and alleging non-compliance with FEMA and Reserve Bank of India (RBI) regulations.
The investigation, which began in 2021 and culminated in a filing before the adjudicating authority in September 2025, accuses the officials of procedural lapses such as land purchases violating foreign exchange norms.
Pinarayi Vijayan and Isaac have denied wrongdoing, describing the ED notice as politically motivated ahead of upcoming local elections, while officials maintain it is a lawful consequence of their probe.
KIIFB’s Masala Bonds and Alleged Violations
KIIFB, a Kerala government agency focused on funding large infrastructure projects under a ₹50,000 crore plan, issued the ₹2,150 crore masala bond in March 2019, listing it on the London Stock Exchange’s International Securities Market by May 2019.
This was the first sub-sovereign entity in India to raise capital through masala bonds offshore, tapping international investors with a fixed five-year tenure and a 9.723% coupon rate. KIIFB’s CEO, K.M. Abraham, has affirmed that the bond funds are being maintained in an escrow account to ensure timely repayment by March 2025, despite financial pressures on the state.
The ED’s probe revolves around allegations that around ₹2,000 crore of these funds were not utilized strictly according to regulatory requirements specifically, claims that the money was used for land acquisition, which is restricted under RBI norms for external commercial borrowings, a charge denied by Isaac and others.
Thomas Isaac emphasized that the bond proceeds were never used for land purchases outside the norms and called the investigation an “election stunt” and “total nonsense.”
Background and Progress of the ED Investigation
The ED initiated its probe into the KIIFB masala bond issuance in 2021 after the Comptroller and Auditor General of India (CAG) raised concerns about fund deployment and financial management. The agency summoned Thomas Isaac multiple times to gather documents and evidence.
Their inquiry identified possible FEMA violations tied to the end-use of funds, particularly focusing on whether the bonds, categorized as foreign exchange instruments, complied with RBI land acquisition regulations.
While KIIFB has disbursed over ₹27,000 crore across infrastructure projects including industrial parks and green initiatives the ED’s case scrutinizes around ₹2,000 crore for alleged misappropriations during the bond implementation phase.
The probing agency filed its findings before an adjudicating authority in late 2025, issuing the show-cause notice that allows a 30-day window for a formal response. Political leaders from the Communist Party of India (Marxist) and allied groups have alleged the move is politically timed to undermine the Kerala government ahead of local body elections.
The Logical Indian’s Perspective
Transparent regulatory oversight is essential to ensuring public funds dedicated to infrastructure are used responsibly and in adherence to legal frameworks. However, when such legal processes coincide with election cycles and become tools in political battles, they risk deepening public mistrust and societal divisions.
The Kerala masala bond case underscores the need for balanced, evidence-based investigations divorced from partisan motives to uphold democratic values of fairness, accountability, and harmony. As Kerala continues its ambitious development journey, fostering open dialogue and empathetic governance that respects legal boundaries will be vital for inclusive progress.
