ED Notice to Pinarayi Vijayan Reignites Political Battle Over KIIFB Masala Bonds, As Local Polls Near

The Enforcement Directorate’s (ED) decision to issue notices to Kerala Chief Minister Pinarayi Vijayan in the KIIFB masala bond investigation marks a significant escalation in a long-running conflict between the LDF government and central agencies over the state’s financing model. The timing—coming months before the 2026 Assembly election and during the local body election — has amplified the controversy.

The Enforcement Directorate probe relates to the end-use of the Rs 2,000 crore raised by KIIFB through masala bonds and its compliance with FEMA norms. According to reports, the notice cites violations of the Foreign Exchange Management Act and RBI regulations. Former Finance Minister Dr Thomas Issac and KIIFB Chief Executive Officer K M Abraham also received notices.

At the core of the ED’s case is the alleged diversion of funds raised through KIIFB’s Rs 2,150-crore masala bond listed on the London Stock Exchange in 2019. The agency’s report, submitted after a three-year probe, reportedly concludes that part of the funds was used for land purchase—something RBI regulations prohibit under offshore borrowing norms. Kerala strongly disputes this finding, insisting that any land involved was acquired, not purchased, and hence does not fall afoul of FEMA or RBI rules. Former Finance Minister Thomas Issac calls the notice as politically motivated during the election time.

But the ED notice is only the latest chapter in a broader institutional battle. KIIFB, revived in 2016 as the LDF's flagship infrastructure funding arm, was conceived to bypass Kerala’s severe fiscal constraints and mobilise long-term capital for roads, schools, and public utilities. Critics, including the Comptroller and Auditor General (CAG), argue that KIIFB’s borrowings amount to off-budget liabilities that escape legislative scrutiny. Supporters counter that innovative financing is essential for a revenue-starved state grappling with high social-sector commitments and shrinking central transfers.

The Centre’s subsequent move to classify KIIFB’s loans as part of Kerala’s direct debt sharply curtailed the state’s borrowing limits, turning the issue into a flashpoint in Centre–State fiscal relations. The Kerala government has approached the Supreme Court against the Centre government's interference in the State’s finances. The issue is now before the constitutional bench.

For the LDF, the ED notices reinforce a narrative of politically motivated interference. Issac notes that similar notices surfaced before the 2020 local body polls, the 2021 Assembly election, and the 2024 Parliament election—each time generating noise but little investigative movement. The High Court’s earlier criticism of the agency for issuing summonses during the election campaign further fuels this argument.

The agency has financed hundreds of projects across sectors, making it both a symbol of the LDF’s development claims and a target for the opposition, which alleges fiscal adventurism.

The ED’s move now sets the stage for a legal and political contest over the fundamentals of Kerala’s fiscal architecture—how states can borrow, how innovation in public financing is regulated, and how central investigative agencies operate within highly polarised political environments. The adjudicating authority’s decision on the FEMA violation will carry implications that go beyond a single bond issue and could influence how states across India structure their off-budget financing in the future.

The opposition has quickly seized on the ED notice to sharpen its long-standing criticism of the KIIFB model. Both the Congress and the BJP have framed the development as vindication of their allegation that the LDF government’s flagship financing arm operates outside established fiscal norms. With just a week left for the local body elections, the masala bond issue has once again returned to the centre of Kerala’s political battlefield, giving the opposition fresh ammunition to question the transparency, legality and sustainability of KIIFB’s borrowings.

For the UDF, the controversy reinforces its charge that the LDF has pushed Kerala into a debt trap through opaque off-budget financing. The BJP, meanwhile, has used the ED action to reiterate its narrative that KIIFB’s structure is inherently violative of central regulation. The revived focus on KIIFB at the peak of an election cycle deepens the political stakes. For the ruling LDF, the agency is central to its development credentials; for the opposition, it is emblematic of fiscal mismanagement. And also for the Congress, still grappling with the fallout from the sexual assault case against its MLA Rahul Mankootathil, the party sees the ED notice as an opportunity to shift the public conversation and regain control of the campaign narrative.