ED's Prolonged Chase After Former Kerala Finance Minister Thomas Isaac

Although the Enforcement Directorate (ED) has not made any breakthroughs in the case, they continue to serve summonses to Dr. Thomas Isaac. The latest summons requested his appearance for interrogation on 12th March. Since the writ petition filed by Dr. Isaac is under consideration by the High Court, he replied to the ED stating that they must wait until the next hearing of the case in the High Court. 

The Enforcement Directorate's "untiring efforts" to bring Dr. Issac into the interrogation room began with the first summons in July 2022. The case revolves around allegations that the Kerala Infrastructure Investment Fund Board (KIIFB) violated the provisions of the Foreign Exchange Management Regulation Act (FEMA) by issuing Masala bonds (Rupee-denominated bonds). 

KIIFB is a statutory body established in 1999 under the Kerala Infrastructure Investment Fund Act as the principal funding arm of the state government.By the amendments introduced by the previous LDF government in 2016, KIIFB was enabled to mobilise funds for infrastructure development projects using financial instruments approved by Securities & Exchange Board of India (SEBI) and Reserve Bank of India (RBI). According to the KIIFB website, the board has so far approved funding for projects worth ?60,102 crore, covering all vital sectors like healthcare, education, transportation, information technology, sanitation and energy among others. 

The Enforcement Directorate's case is grounded on the findings of the Comptroller and Auditor General of India (CAG), which asserts that the Kerala Infrastructure Investment Fund Board (KIIFB) raised funds from the international market through the issuance of Masala bonds without the consent of the Central government. In its 2021 report, the CAG stated that the external borrowing undertaken by KIIFB was unconstitutional because Entry 37 of List 1 of the Seventh Schedule under Article 246 of the Constitution only authorizes the Union government to raise foreign loans. However, constitutional experts contend that this interpretation of Article 246 is flawed, as the power vested with the Union Government pertains not to raising foreign loans but to legislating on foreign borrowing. Nevertheless, this report was not endorsed by the Legislative Assembly. 

Dr Thomas Isaac who challenged the summons in the High Court argued that KIIFB had the approval of the RBI for issuing Masala bonds. Section 6 of the FEMA empowers RBI to prohibit, restrict or regulate foreign borrowings. Under Section 6(3) (d) of FEMA, RBI is entrusted with the powers to regulate “any borrowing or lending in foreign exchange in whatever form or by whatever name called’. By invoking these powers, the RBI issued a circular on the issuing of rupee-denominated bonds overseas (Masala bonds). According to this circular, any corporate or body corporate is eligible to issue such bonds. Section 4(2) of the Kerala Infrastructure Investment Fund Act – the statute under which KIIFB is formed – defines KIIFB as a body corporate which mobilised ?2,150 crore by issuing Masala bonds in March 2019. 

Notably, the Kerala Infrastructure Investment Fund Board (KIIFB) is not the first entity of its kind to issue rupee-denominated bonds to raise foreign funds. The National Highways Authority of India (NHAI), another statutory body, had previously mobilized ?5,000 crore by issuing Masala bonds with the approval of the Reserve Bank of India (RBI). Consequently, the central question posed to the court was how the Masala bonds issued by KIIFB were deemed illegal while those issued by NHAI were considered legal. In response, the High Court of Kerala directed the Enforcement Directorate (ED) to provide details of any similar cases pursued against other body corporates for issuing Masala bonds. 

ED could not file anything of this sort. 

It was apparently clear that ED had not done sufficient homework before going after Dr Isaac for ‘violating FEMA provisions’ by issuing Masala bonds. Even the Union Government had on record approved that Masala bonds were completely legal. While answering a question on the legal validity of Masala bonds in the Lok Sabha on March 22, 2021, Anurag Singh Thakur, Minister of State in the Ministry of Finance said that the RBI had given ‘no objection’ from the angle of FEMA for raising rupee-denominated bonds. 

However, ED did not stop there. 

In August 2022, the Enforcement Directorate (ED) issued another notice to Dr. Issac, demanding his presence at their office in Kochi along with an extensive list of documents. The list included details of all bank accounts operated by Isaac and his family members over the past decade, information regarding all movable and immovable properties owned by him and his family members both in India and abroad, copies of Income Tax Returns (ITR) filed over the past 10 years, and specifics of all foreign visits undertaken during the same period, along with their purposes and income acquired. Additionally, the ED instructed Isaac to provide details of all companies of which he served as director, along with financial statements spanning the last 10 years. 

Dr. Isaac contested these demands in court once more, asserting that he had not served as a director for any company since stepping down, except for his ex-officio capacity roles at KIIFB and CIAL (Cochin International Airport Ltd) as the Finance Minister. Furthermore, he maintained that if any violations of the Foreign Exchange Management Act (FEMA) had occurred, the Reserve Bank of India (RBI) should also be summoned. In response, the High Court of Kerala issued a notice to the RBI, seeking clarification. The RBI informed the court that all actions undertaken by KIIFB had received their approval, and KIIFB consistently submitted monthly reports to the RBI without fail. However, the RBI did not endorse KIIFB's assertion that the authority to investigate violations of the Foreign Exchange Management Act (FEMA) rested solely with the RBI and not with the Enforcement Directorate (ED). According to the affidavit submitted by RBI, under Section 37(1) of FEMA, the investigative authority lies with the ED and not with the RBI. 

KIIFB officials also approached the High Court alleging that the ED was harassing them by continuously serving notices for personal appearance despite providing all necessary documents and appearing multiple times.  

Dr Isaac also argued that demanding for his personal bank account details and ITRs of the last ten years do not make any sense as it had been nothing but the infringement of his privacy. Though ED had kicked off the investigation over months, they could not make any breakthrough in the case, he argued. In October 2022, the High Court imposed a stay on further proceedings by ED and expressed doubts over the ‘very premise of the case itself’. The court agreed to the grievances raised by the petitioners (both Dr Isaac and KIIFB). The Court held that CAG report cannot be the basis of such an inquiry as the report had been rejected by the State Legislative Assembly. The High Court had also expressed displeasure over ED’s inability to file the details of the similar cases taken against the issuing of Masala bonds by any other entity. It was pointed out by Isaac in the High Court that National Thermal Power Corporation Ltd and Indian Renewable Energy Development Agency Ltd have also issued Masala Bonds and no investigation/inquiry is being conducted with respect to the issuance of Bonds by those entities.  

In November 2023, the Kerala High Court granted permission to issue fresh summons to Dr Isaac and KIIFB. This time ED rolled back from the earlier demand for submitting the bank account details and ITRs of Dr Thomas Isaac but wanted the right to summon him for asking the details of a few things that had been under investigation. Though Dr Thomas Isaac challenged every move by ED, the Kerala High Court later maintained the position that it would be better to cooperate with the investigation. 

Summons were issued to Dr Isaac and KIIFB in February this year. This time, the High Court refused to intervene. Justice Devan Ramachandran gave an order instructing Dr Isaac and KIIFB to cooperate with the ED. As reported by Live Law, this is what the single bench had said orally “I can make one suggestion, I am making this suggestion based on the Apex Court judgments. If you want you can co-operate with the summons once which I will be watching. There will be no arrest, no intimidation, there will be no interrogation. It will be only for the purpose for their (ED) purpose of getting facts. And only once, just once. And, then I will take it forward.”  

The writ petition filed by Dr Thomas Isaac is posted for hearing to 26th of this month. Despite sending summons several times, ED could not bring Dr Thomas Issac to their interrogation room till day.