THIRUVANANTHAPURAM: With the Enforcement Directorate’s intervention giving a new dimension to the row over the borrowings of the Kerala Infrastructure Investment Fund Board (KIIFB), the state government is preparing for a tough legal battle ahead.
The government will stick to its stance that the corporate body formed for funding infrastructure projects is not an off-budget borrowing tool, said a highly-placed source privy to extensive consultations between the departments of finance and law.
There are two serious observations on KIIFB in the Comptroller and Auditor General’s (CAG) annual report on the state finances for 2018-19, which is yet to be placed in the public domain.
One, the state is bypassing constitutional provisions by off-budget borrowings through KIIFB. Second, the masala bond borrowing is an external commercial borrowing (ECB) and that states cannot do external borrowings without the central government’s permission.
“The state’s key argument would be that government guarantees cannot be considered as equivalent to actual borrowing. CAG’s findings are trivial legalistic objections unrelated to normal audit practices,” the source said.
On the first point raised by CAG, the state government will argue that it has not done any off-budget borrowing through KIIFB but has only given guarantees.
“These guarantees were well within the 5 per cent ceiling prescribed under the Kerala Ceiling on Government Guarantees Act, 2003. Under the provisions of the KIIFB (Amendment) Act 2016, the corporate body has been earmarked a share from the state’s revenues. Hence, the CAG argument that KIIFB’s borrowing liability will ultimately fall on the state government is not substantiated. KIIFB’s borrowings are fully payable from its escrowed shares of taxes and cess,” the source said.
CAG’s view that government guarantees should be considered actual borrowings by the government could have far-reaching effects on many institutions, including those under the central government like the Food Corporation of India and the National Highways Authority of India.
While FCI’s off-budget borrowing is budgeted at Rs 2.54 lakh crore for 2020-21, KIIFB’s borrowing in 2018-19, the period audited by CAG, was around Rs 3,000 crore, the source said.
“The Centre, which allows FCI to borrow Rs 2 lakh crore off budget on its guarantees, would be equally guilty of bypassing the central FRBM law though not the Constitution. Compare this with KIIFB’s measly Rs 3,000 crore.”
The masala bonds had the approval of the Reserve Bank of India and, hence, CAG’s objection will not stand the legal test, according to the government.
The state has taken the stand that KIIFB should be considered legally as a corporate body outside the government though linked to it.
The state government is set to argue that the RBI has better resources as well as understanding regarding the matter, when compared to CAG.
“Most importantly, despite an extended audit process, no instance of irregularity or corruption was identified by CAG. The report raises trivial legalistic arguments which are against the precedents set by the central government,” the source said.