The Enforcement Directorate’s adjudicating authority has issued show cause notices to: Kerala Chief Minister Pinarayi Vijayan, Former Finance Minister Thomas Isaac, and Former IAS officer Dr. K. M. Abraham, in connection with alleged FEMA violations linked to the Masala Bonds issued by the Kerala Infrastructure Investment Fund Board (KIIFB).
Background of Masala Bonds:
- The term Masala Bonds was introduced by the International Finance Corporation (IFC) in 2014, when it issued a ₹1,000 crore rupee-denominated bond listed on the London Stock Exchange (LSE) to fund Indian infrastructure projects.
- IFC named them “Masala Bonds” to give the instrument a distinct Indian identity.
KIIFB’s Bond Issuance:
- KIIFB issued ₹2,150 crore worth of rupee-denominated Masala Bonds in 2019.
- These were dual listed on the London Stock Exchange (LSE) and Singapore Exchange (SGX).
- Kerala became the first Indian state to raise funds via Masala Bonds.
- KIIFB obtained RBI approval prior to issuance.
- Proceeds were used for infrastructure projects across the state.
Larger Debate: Off-Budget Borrowing:
- The controversy forms part of a broader discussion on KIIFB’s off-budget borrowings.
- The Central government treats these borrowings as direct liabilities of Kerala, thereby impacting the state’s borrowing limit.
- Kerala has argued they should be categorized as contingent liabilities, but repeated requests have been rejected.
Understanding Masala Bonds:
- These are rupee-denominated bonds issued to overseas investors.
- Though the bond price is in INR, the investor pays in USD equivalent on the transaction date.
- Exchange rate is fixed on T-2 days using the RBI reference rate.
- At coupon payment and maturity:
- Issuer pays the INR amount,
- Authorised Dealer converts it to USD at the prevailing market rate (again fixed on T-2).
- Coupon payments are calculated as a percentage of the INR principal at issuance.
Source: TH, IE & Others
![](https://www.gstimes.in/wp-content/uploads/2024/03/MARCH-2024-GS-TIMES-1ADD.jpg")
