The Enforcement Directorate (ED) has issued a show-cause notice to Kerala Chief Minister Pinarayi Vijayan over alleged violations of FEMA provisions in the masala bond case.
Back in 2019, the first Pinarayi government, through its flagship infrastructure financing arm, the Kerala Infrastructure Investment Fund Board (KIIFB), issued masala bonds—rupee-denominated offshore bonds presented as a strategic move to fund large-scale infrastructure projects without adding direct pressure to the state’s borrowing limits. The bonds were listed on the London Stock Exchange’s International Securities Market, and ₹2,150 crore was raised at a fixed coupon rate of 9.723%. This formed part of a broader plan to mobilise ₹50,000 crore for infrastructure.
The proceeds were earmarked for "critical infrastructure" to accelerate Kerala’s development after the 2018 floods. However, since 2021, the Enforcement Directorate has been probing whether the funds were deployed in compliance with the Foreign Exchange Management Act (FEMA) and RBI guidelines. The ED began examining the bond’s compliance after initial complaints and regulatory reviews.
In addition to the Chief Minister, show-cause notices have also been issued to former Finance Minister (and KIIFB Vice Chairman) T.M. Thomas Isaac, KIIFB CEO K.M. Abraham, and KIIFB itself. Although sources say the notice dates back to November 12, Isaac told The Week that he received it only four days ago.
Last year, the ED had summoned Isaac for interrogation over alleged rule violations. He skipped two summons and challenged the ED’s actions in the Kerala High Court. According to the latest show-cause notice, ED suspects that funds raised through the masala bonds—amounting to ₹466.91 crore—were used for purchasing land, which it says is specifically prohibited and in contravention of RBI guidelines. A complaint under FEMA was filed on June 27, and after taking cognizance, the recent show-cause notices were issued. The notices do not require personal appearance but must be replied to.
The CPI(M) maintains that any alleged violation is purely technical and that the ED notice is politically motivated, especially with Kerala’s local body polls scheduled for December 9 and 11. CPI(M) state secretary M.V. Govindan said the notice against the Chief Minister is rooted in BJP politics, adding that such actions surface during every election. He remarked that they had even wondered why a notice hadn’t come earlier, and argued that the notice is a challenge not merely to the Chief Minister but to Kerala itself.
Isaac told The Week that no direct land purchases violating FEMA or RBI directives had occurred. He said only "acquisitions" for specific projects were made. “The special nature of acquisition is that it can be used only for the purpose for which it is acquired. If you purchase land, you can use it as you like. Purchased land can be resold, and there is scope for speculation. That is not the case with acquisition,” he said.
The Congress has responded cautiously. Former Opposition Leader and senior Congress leader Ramesh Chennithala reiterated his allegations of large-scale corruption in the entire deal. He argued that the bond’s high 9.723% interest rate—higher than domestic borrowing options—had inflicted a significant burden on Kerala’s already strained finances. He also repeated his earlier claim that the lead investor in Kerala’s masala bonds, Canada-based CDPQ, is closely linked to SNC-Lavalin, the Canadian firm implicated in the 1990s power project bribery case in Kerala when CM Vijayan was Power Minister. Earlier, the Congress had also raised allegations of "reverse hawala" in connection with the case. Chennithala further contends that the entire episode violates Article 293(1) of the Constitution, which allows states to raise internal debt to finance their expenditures but restricts them to domestic borrowing. Article 291(1) does not permit foreign loans without central government consent.
Interestingly, Opposition Leaders V.D. Satheesan and Chennithala also connect the timing of the ED notice to the polls, though they do not endorse the CPI(M)’s narrative. Satheesan said the notice has emerged now as a coercive tool used by the BJP on the CPI(M), compelling it to help the BJP against the Congress in the elections. He added that the CPI(M) often succumbs to BJP pressure.