Kochi, Dec 19 (PTI) The Kerala High Court on Friday reserved judgement on ED's appeal against the stay on further proceedings in connection with its show cause notice to KIIFB in the Masala Bonds case.

A bench of justices Sushrut Arvind Dharmadhikari and P V Balakrishnan, while reserving its decision on the appeal by the Enforcement Directorate (ED), asked the Kerala Infrastructure Investment Fund Board (KIIFB) why it could not just reply to the show cause notice.

"When a statutory authority is there, why should we examine all this. What was the problem in filing a reply and waiting for the decision of the adjudicating authority? They have not said you (KIIFB) have committed an offence. They are asking why proceedings should not be initiated against you," the bench said.

The court also asked the ED how it "pre-decided" and arrived at a penalty amount at the stage of show cause notice when no adjudication has taken place.

The bench was referring to the amount of Rs 466.91 crore mentioned in the show cause notice.

The notice pertains to the alleged contravention of FEMA provisions and the RBI master direction by KIIFB and its authorities, amounting to Rs 466.91 crore.

Additional Solicitor General ARL Sundaresan, appearing for ED, clarified that the show cause notice does not quantify any amount and only asks why proceedings should not be initiated in respect of a complaint that claims that there was a preliminary violation of FEMA provisions to the tune of Rs 467 crore.

The posers from the bench came during the hearing of ED's appeal, filed through advocate Jaishankar V Nair, against a single judge order of December 16 staying for three months all further proceedings pursuant to the show cause notice.

In its appeal, the agency has contended that KIIFB's petition was "premature and not maintainable", as the Foreign Exchange Management Act (FEMA) provides a complete adjudicatory and appellate framework, and "objections regarding jurisdiction, factual disputes, or interpretation of RBI directions must be raised before the Adjudicating Authority".

"However, on a total wrong appreciation of law and facts an interim order was passed by the single judge," the ED claimed in its plea.

The single judge, while issuing the interim order, had observed that according to the RBI's External Commercial Borrowings (ECB) framework, which came into effect from January 16, 2019 and governed the Masala Bonds issued by KIIFB, the definition of real estate activity does not include activities related to infrastructure sector.

However, according to the central probe agency, the acquisition of land for infrastructure projects was a real estate activity and cannot be carried out using Masala Bond funds.

ASG Sundaresan, during the hearing, told the court that the Masala Bond funds can be used for developing infrastructure on land already owned by the state government.

But, it cannot be used to purchase land for developing infrastructure, he contended.

The lawyer for KIIFB on the other hand claimed that it would be an "ordeal" to go before the adjudicating authority.

The Board's lawyer contended that filing a reply to the notice and awaiting the authority decision would adversely impact KIIFB's financial standing in the market.

He also claimed in the court that the lodging of a complaint against KIIFB by ED and the issuance of the show cause notice were done without any application of mind.

The ED had in November issued a Rs 467-crore FEMA contravention show cause notice to Chief Minister Pinarayi Vijayan, former state Finance Minister Thomas Isaac, and the Board's CEO K M Abraham, who is also the CM's chief principal secretary, in the KIIFB Masala Bond case.

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

It had raised Rs 2,150 crore in 2019 through its debut masala bond issue as part of its plan to mobilise Rs 50,000 crore to fund large and critical infrastructure projects in the state. PTI HMP ROH

KIIFB Masala Bond show-cause: appeal challenges FEMA adjudication, penalty pre-determination, and permitted use of proceeds. The dispute concerns a FEMA show cause notice alleging approximately Rs 467 crore in contraventions connected to KIIFB's masala bond issuance. Key issues are whether KIIFB must reply to the notice before seeking judicial relief, whether the enforcement agency pre-determined a penalty at the notice stage, the requirement to raise jurisdictional and factual objections before the Adjudicating Authority under FEMA, and the proper interpretation of the RBI ECB framework regarding use of bond proceeds for land acquisition versus development on state-owned land.