What is the Kerala masala bond probe | Explained

THE STORY SO FAR:

Once again, the battle over the ‘Masala Bond’ issued by the Kerala Infrastructure Investment Fund Board (KIIFB)— the Kerala government’s principal funding arm for large infrastructure projects— is hotting up on the southern State’s political scene. 

In the latest instance, the issue has grabbed headlines with the Enforcement Directorate (ED) issuing show-cause notices to Chief Minister Pinarayi Vijayan, former Finance Minister T.M. Thomas Isaac and KIIFB chief executive officer K.M. Abraham citing violation of the Foreign Exchange Management Act (FEMA) and the directions of the Reserve Bank of India (RBI).

With the 2025 local body polls just days away, the issue is expected to gather political steam.

According to the ED, it issued the notices on November 12, 2025, during the adjudication proceedings related to the alleged violation of FEMA and the RBI directions by “KIIFB and its authorities amounting to ₹466.91 crore.” The specific charge is that this amount, which forms a part of the funds raised through the masala bond, was used to purchase land, an action that was “specifically prohibited.”

What is masala bond?

In a nutshell, a masala bond is an instrument for raising rupee-denominated resources internationally. The name itself is meant to give a local flavour— ‘masala’ literally meaning ‘blend of spices’— to the debt instrument. For funding infrastructure projects, KIIFB had raised ₹2,150 crore through the bond issued in March 2019 when Mr. Isaac was Finance Minister in the 2016-2021 CPI(M)-led Left Democratic Front (LDF) government. The bonds were listed in the London Stock Exchange and the Singapore Stock Exchange. In July 2024, the current Finance Minister, K.N. Balagopal informed the Kerala Legislative Assembly that KIIFB had repaid the amount in full in March 2024.

ED probe and the controversy

The ED probe has centred around the alleged contravention of FEMA regulations and RBI directions and the end-use of the funds raised through the bonds. The Comptroller and Auditor General (CAG), in its State Finances Audit Report for the year ending March 2019, had observed that the RBI nod for the masala bond was questionable and “appear to be in violation of the Constitution and encroachment on the powers of the Centre.”

The row over masala bonds is part of a broader debate over ‘off-budget’ borrowings by KIIFB and its consequences for the State’s overall borrowing limit. The KIIFB borrowings have been a matter of contention with the Centre treating them as direct liabilities of the State, much to the dismay of the Kerala government. Repeated requests that they be treated as contingent liabilities have not produced any result.

After Dr. Isaac had moved the High Court following an ED summons in 2023, the Court had asked the ED whether it had verifiable information for continuing its investigation. The Court had also orally observed that the agency was entitled to conduct a proper inquiry, but it could not conduct a roving inquiry.

What is the political angle involved?

While the Opposition Congress-led United Democratic Front (UDF) has alleged corruption in the floating of the bonds, the LDF government has consistently maintained that the ED probe is motivated by the political agenda of the BJP government. 

Dr. Isaac has repeatedly stated that all transactions were in accordance with RBI guidelines on External Commercial Borrowings (ECB) and conducted with RBI approval. On occasion, KIIFB too has maintained that it issued the masala bond “under the approval route and in consonance with all the regulations in this regard.” Over the years, the LDF government has drawn flak from the Opposition Congress-led United Democratic Front (UDF) for the interest rate of 9.723% which the latter described as exorbitant. The government has countered the charge stating that it was the best rate available at the time. The rate in the internal bond market had stood at 10.15%. The rate for the Andhra Pradesh Capital Region Development Authority’s own masala bond had stood at 10.72% then, according to the government.

The CPI(M) also accuses the ED of reviving the controversy ahead of elections in Kerala. Both Dr. Isaac and CPI(M) State secretary M.V. Govindan have gone on record stating that it has been true for the 2020 local body elections, the 2021 Assembly elections and the 2023 Lok Sabha polls.

What next?

The show-cause notices issued to the Chief Minister, Dr. Isaac and Mr. Abraham do not require them to appear in person. Dr. Isaac has stated that a response to the notice would be finalised after the Chief Minister, who is abroad, returns.