Why in news?
The Enforcement Directorate (ED) has issued show‑cause notices to the Kerala Chief Minister and officials of the Kerala Infrastructure Investment Fund Board (KIIFB) over alleged violations of foreign exchange regulations in the issue and utilisation of a masala bond in 2019. The agency suspects that funds raised abroad may have been diverted for unauthorised uses. The state government denies wrongdoing and claims the bond proceeds were deployed transparently for infrastructure projects. The controversy has sparked debate about the regulation of rupee‑denominated bonds issued overseas.
Background: What are masala bonds?
Masala bonds are rupee‑denominated bonds issued outside India by Indian entities to raise capital. Instead of borrowing in foreign currency, the issuer raises funds in rupees, and investors bear the currency risk. The concept was pioneered in 2014 by the International Finance Corporation, which issued the first masala bond in London to fund infrastructure projects in India. The Reserve Bank of India allows Indian companies, banks, public sector undertakings, municipalities and infrastructure investment trusts to issue such bonds. For issues up to US$50 million, the minimum maturity is three years; larger issues must mature after at least five years. Proceeds can be used for infrastructure, affordable housing, renewable energy and other approved purposes.
Features and regulatory conditions
- Currency risk on investors: Since principal and interest are repaid in rupees, investors shoulder any depreciation or appreciation of the Indian currency. This makes the bonds attractive to foreign investors seeking exposure to the Indian rupee.
- Eligible issuers: Companies incorporated in India, banks, non‑banking financial companies, state‑owned infrastructure boards and real estate investment trusts can issue masala bonds after complying with guidelines under the Foreign Exchange Management Act (FEMA).
- End‑use restrictions: Funds cannot be used for speculative activities, real estate (other than affordable housing), capital markets or the purchase of land. They should be invested in infrastructure or productive sectors.
- Maturities and listing: Masala bonds are listed on international exchanges such as London and Singapore, improving liquidity. Retail investors may benefit from tax concessions in certain jurisdictions.
The Kerala masala bond controversy
- Bond issue: In 2019, KIIFB raised approximately ₹2,150 crore by issuing a masala bond listed on the London Stock Exchange. It was one of the first sub‑sovereign issues from India, aimed at financing roads, bridges and other infrastructure.
- ED’s allegations: The ED claims that KIIFB violated FEMA and Reserve Bank guidelines in the way funds were transferred and spent, suggesting money may have been diverted for unauthorised purposes. Notices were sent to Chief Minister Pinarayi Vijayan, former finance minister T.M. Thomas Isaac and board officials.
- State’s response: The Kerala government argues that the bond programme was vetted by regulators and that all expenditures are publicly documented. It alleges the ED’s action is politically motivated ahead of local elections.
- Regulatory implications: The case has reignited debate over oversight of masala bonds. While the instrument provides a valuable financing avenue, strict compliance with end‑use restrictions and transparent reporting are essential to maintain investor confidence.
Significance
Masala bonds allow Indian issuers to tap global savings without taking on foreign currency risk. They also deepen the international market for the rupee, promoting its wider use. For sub‑sovereign entities like KIIFB, these bonds offer access to long‑term funds for infrastructure. The ongoing controversy underscores the need for robust regulatory frameworks, transparent disclosures and prudent management to ensure such instruments serve the public interest without misuse.
Source: Outlook India report
