FOREIGN EXCHANGE MANAGEMENT ACT (FEMA): FOREIGN BORROWINGS
Earlier since April 2021, the provisions of the act of foreign exchange management,1999 became a subject of discussion when the Enforcement Directorate (ED) declared to initiate an inquiry at preliminary stage for the purpose of examining the overseas borrowings by one Kerala Infrastructure Investment Fund Board (KIIFB) on the note of allegations that it violated the restriction imposed by the provisions of aforementioned act. Following which the provisions so highlighted became an issue to interpret again in the wake of factual position and dealings of the act. But before falling back to the enactment to know what KIIFB and its scope of workplace responsibility is also important, which can be observed as follows;
WHAT IS KIIFB?
The Kerala infrastructure investment fund was constituted by Government of Kerala as a Body Corporate financial institution in the Indian state of Kerala to mobilize funds for infrastructure development from outside the state revenue.
Which was established with the main objective of providing investment for projects in the State of Kerala in sectors like Transport, Water Sanitation, Energy, Social & Commercial Infrastructure, IT and Telecommunication etc. KIIFB assists the Government and its agencies in the various aspects pertaining to Infrastructure Development and acts as the nodal agency for scrutinizing, approving and funding major infrastructure projects including PPP projects.
Five years ago from now, back in 2016, the key role of KIIFB was swapped by the government from being a handling entity of the investment bonds to an entity mobilising the resources for developmental projects with a scope of budget.
While highlighting the issue of mandatory prior consent of the Central Government, which is expressly necessary before perusal the active steps of a State government in raising loans, The Comptroller and Auditor General (CAG) of India observably discussed in regards with the KIIFB raising approximately Rs. 2,150 crore from the international market without any prior consent or information of the Government of India (2019) in a way illegally expanding the scope of its jurisdictional activities.
Allegedly, KIIFB was also accused to have issued the Masala bonds beyond its legal limits in raising money from foreign markets, which was in clear violation of the Article 293 (1) of the Constitution, which says;
Article 293 (1): Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the Legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed.
STAND OF GOVERNMENT OF KERALA AND CAG Goverment of Kerala and CAG both stated completely contrary views to each other. Partly elements of the reports to clear the point of contradiction can be observed as;CAG has pointed out that the KIIFB has no self generated source of income, the borrowings by the KIIFB for which the State stood as guarantor, may ultimately turn out to be a direct liability of the State government. Further mentioning that Creating such liabilities, without disclosing them in the Budget raises questions both of transparency, and of inter-generational equity.
While ,Government of Kerala took a contrary view with Finance minister T.M. Thomas Isaac has termed the observations of the Comptroller and Auditor General (CAG) on Kerala infrastructure investment fund board (KIIFB) as irrational as CAG’s observations over the KIIFB’s borrowings through masala bond defeated the very purpose and intent of entry 37 in the 7th Schedule of the Constitution, which puts foreign loans under the Union list, are totally illogical and a misinterpretation. Isaac said that as per Article 246 of the Constitution, the lists are made for classifying the subjects between Centre and states and conferring powers for framing laws. It is on the basis of this that Centre had framed the Foreign exchange management act (FEMA).
WHAT ARE MASALA BONDS?Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency. Masala is an Indian word and it means spices. The term was used by the International Finance Corporation to evoke the culture and cuisine of India.ISSUANCE ELIGIBILITY: RBIReserve Bank of India declared that- Any corporate body or Indian bank is eligible to issue these bonds overseas.
These can be issued and subscribed by a resident of such country that is a member of the financial action task force (FATF) and whose securities market regulator is a member of the International Organisation of Securities Commission (IOSCO) ,which is International securities standard regulatory authority. It can also be subscribed by multilateral and regional financial institutions where India is a member country.
The proceedings of investigation and inquiry against KIIFB hold the potential to decrease the revenue scope affecting the future extended loans which can be fetched by KIIFB through the International Finance Corporation (IFC), [Apart of the World Bank group].
The ongoing investigation can paralyze the activities of the organisation which were partly initiated impacting the revenue and leading it to huge losses. As per the RBI guidelines, the money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
Adding on to which it can also not be used as an investing machinery in capital markets or for land purchase or cumulatively for the implementation of any of the above activities cannot also be transferred on-lending to other entities.
The controversy of this non-cooperation is affecting the economy and society at par. Whereas, such authorities are impeded with the faith of Individuals, the decisive factors with whatsoever the outcome will be, must be in line with the law and interest of nation. The roles of RBI, CAG, KIIFB and other entities must be self regulated for the reason being such clashes negatively impact and build a distorted image in the society against such authorities.
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