KIIFB has FEMA nod to issue masala bonds, RBI clarifies after ED query

Thiruvananthapuram: Even as Kerala government's own efforts to mobilise funds from the overseas market for infrastructure development have met with censure from the central government auditor, CAG, RBI sources have made it clear that Kerala Infrastructure Investment Fund Board (KIIFB) was given permission under the Foreign Exchange Management Act (FEMA) for issuing masala bonds.

The RBI has also clarified that its permission is not a testimonial about KIIFB's capacity and capability to avail loan. These matters have been made clear in the documents pertaining to FEMA permission, the RBI sources said.

It is pointed out that the responsibility of seeking permission from all other agencies including the central government, if required, is that of the KIIFB and it is for the banks concerned which are handling the loan to ensure that the agency has all the required permission.

RBI's limits

The RBI has however made it clear it is not within its purview to examine whether the mobilization of foreign funds by the state by way of masala bonds was in consonance with the Constitution.

The RBI sources said the central bank does not have the powers or responsibility to examine whether the money received by KIIFB from abroad can be shown as outside budget, whether the borrowing limit permitted to the state is applicable to KIIFB foreign loan, what are the conditions for repayment whether constitutional provisions are applicable.

A major row had erupted in Kerala recently after a report of the Comptroller and Auditor General (CAG) flagged KIIFB's bids to raise overseas funds.

ED queries

RBI came up with a response after the Deputy Director of Enforcement Directorate (ED), Kochi, wrote to it on November 19 seeking details about the masala bond. The ED had demanded information on the details furnished by KIIFB for loan registration, the conditions recommended by RBI for granting permission and details of the loan received by the KIIFB.

The ED had made it clear that its letter was concerning the probe being carried out in connection with foreign loan transactions.

The RBI had granted KIIFB permission for foreign loans on June 1, 2018.

As per the rules existing then, a "Body Corporate" had the permission to take foreign loan complying with the conditions existing then. The permission under FEMA has to be given by the RBI. Consequently, KIIFB which is a 'body corporate' was allowed permission under FEMA as per the rules.

Last year the RBI had made changes in the condition that only those establishments which possess the permission for seeking Foreign Direct Investment (FDI) can avail loan from abroad.

A couple of months ago the Union Finance Ministry too had raised certain questions related to KIIFB with the RBI. The ministry’s action was based on a complaint filed from Kerala.

In its reply the RBI had clarified about the permission given under FEMA, Union Finance Ministry sources said. The ministry had also received details of the application submitted by KIIFB for loan registration from the statistics department and the matters related to the bank handling the loan.

What are 'masala bonds'?

Masala bonds are bonds issued in the international market by denominating them in Indian rupees. Since the bonds are issued in Indian rupees, those raising the money will not be affected by the swings in the exchange rates. It will be the investors who will have to bear the loss.

The International Finance Corporation (IFC) named bonds issued in rupees as 'masala bonds' to evoke India's legacy of spices.

'Masala bonds' are mainly used for investment in infrastructure development in India.