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Explained: Ex-Kerala FM Isaac summoned by ED over masala bonds

The ED has served notices to Isaac and officials of the Kerala Infrastructure Investment Fund Board for allegedly violating Foreign Exchange Management Act norms by raising Rs 2,150 crore through masala bonds.

August 30, 2022 / 12:33 PM IST
Representative image

Representative image

The Directorate of Enforcement (ED) has summoned senior CPM leader Thomas Isaac in connection with its investigation into the issue of masala bonds by a Kerala development institution when he was the state’s finance minister. We examine the development and understand what masala bonds are.

What are masala bonds?

Masala bonds are rupee-denominated securities that Indian companies and institutions issue overseas to borrow money from foreign investors. The first masala bond was issued by the World Bank-backed International Finance Corporation in November 2014.

HDFC, YES Bank, NTPC, Indiabulls Housing Finance and IRFC are among Indian companies that have raised funds through masala bonds, where the risks associated with currency changes are borne by the investors.

Why is Isaac in the ED’s crosshairs?


Earlier this month, the ED registered a case against Kerala Infrastructure Investment Fund Board (KIIFB) and served notices to the board’s officials and Isaac for allegedly violating guidelines of the Foreign Exchange Management Act (FEMA).

KIIFB had raised Rs 2,150 crore through masala bonds listed on the London Stock Exchange in 2019, when Isaac was vice chairman of KIIFB.

What is KIIFB?

KIIFB was formed in November 1999 as the state government agency to channelise funding for critical and large public infrastructure projects. In 2016, the Pinarayi Vijayan government in the state converted the agency into an entity that could mobilise resources for development projects beyond the budget. Isaac made this announcement in his 2016-17 budget.

What is the ED’s contention?

According to the ED, state governments do not have the right to issue masala bonds without the Union government’s permission. The ED wants to question Isaac about his role in KIIFB’s fundraising. In a petition before the high court, Isaac said the ED sought details of his and his family’s assets, both movable and immovable, income tax returns and details of financial transactions.

What is Isaac’s argument?

Isaac said the summons does not reveal the nature of violation of FEMA provisions or what the investigation is about.

Are there any limitations on the use of proceeds from masala bonds?

Funds raised through masala bonds can be used only in certain fields. The proceeds cannot be used for real estate activities other than development of integrated townships or affordable housing projects. The money raised cannot be invested in the capital markets, used to purchase land or to lend to other entities for the activities stated above.

What is the maturity period for masala bonds?

The minimum original maturity period for the equivalent of up to $50 million in Indian rupees raised per financial year is three years and for funds above the equivalent of $50 million, it is five years.
Dipti Sharma Associate Sub-editor, CNBC-TV18
first published: Aug 30, 2022 12:33 pm
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