A CAG report on Kerala finances, tabled in the state assembly on Monday, severely criticised the state-owned KIIFB's external borrowings through "Masala Bonds", saying these were not in accordance with the Constitutional provisions and lacked legislative approval. It was presented along with an observation note by the LDF government claiming that procedures had been flouted in preparation and submission of the report by the Comptroller and Auditor General.
The opposition Congress-led UDF objected to the note by Finance Minister T M Thomas Isaac, terming it unprecedented. Union Minister V Muraleedharan, in a tweet, said the CAG report was "a tight slap on the corrupt regime" of Chief Minister Pinarayi Vijayan.
The report also said the approval given by RBI to the Kerala Infrastructure Investment Fund Board (KIIFB) to issue the Masala Bonds is questionable because its permission allowed the government to route its own foreign borrowings through the state-owned institution. "If this model were to be followed by other states as well, then the external liabilities of the country would increase substantially, without the central government even knowing that such liabilities are being created," it said.
Masala bonds are specialised debt instruments issued outside India but denominated in Indian Rupees, rather than the local currency. The report was tabled in the assembly months after Isaac had courted a controversy by releasing some portions of it to the media while alleging that a political conspiracy had been hatched to 'choke' Kerala's development projects.
The CAG said the off-budget borrowings through KIIFB, which mobilises funds for infrastructure development from outside the state revenue, were not in accordance with Article 293(1) of the Constitution related to borrowings by states and bypassed the set limits. "These borrowings are not taken into the disclosure statements in the budget documents or in the accounts and hence such borrowings do not have legislative approval," the CAG said in the State Finances Audit Report for the year ending March 2019.
KIIFB had borrowed or raised funds amounting to Rs 3,106 crore from financial institutions till 2018-19 by issue of the bonds which were to be repaid from the petroleum cess and part of motor vehicle tax set apart by the state government. "This included an amount of Rs 2,150 crore raised through Masala Bonds in foreign countries. Since KIIFB has no source of income, the borrowings by KIIFB for which the state government stood as guarantor, may ultimately turn out to be a direct liability of the state government," the report said.
The observation note tabled by Isaac alleged "there were grave violations of procedure" on the part of the CAG "in the manner of preparation and submission" of the report. Opposition members raised objections to the circulation of the note by the Finance Minister.
V D Satheeshan of Congress said there was no relevance to the statement. While tabling the CAG report, placing the minister's observation note was unprecedented, he said. Speaker P Sreeramakrishnan said the Finance Minister's observation was submitted with the approval of the Governor but the same can be examined by the Public Accounts Committee.
Isaac said the CAG's comments have "incalculable potential to hurt" the state's interestsgravely and "cause detriment to the development vision" that the Left Democratic Front government had drawn up for the people of the state. He maintained he did not intend to dwell on the merits of the CAG report, but the mode and manner in which it had been prepared was "ultra vires of the regulations" of the body itself.
"…before including any comments or observations in an audit report, the state government has to be given an opportunity to offer its comments or explanation… the draft audit report can be modified based on the reply from the government or the reply can be rejected," he said. Isaac registered his protest against certain observations in the report, saying they were not communicated to the government and that the CAG made changes in the draft and had not followed its own procedure in submitting the report.
Muraleedharan said: "#CAG report tabled in Kerala Assembly, on the KIIFB stated that @CMOKerala used it against the Constitution of the country by flouting norms. Govt run by @VijayanPinarayi has deliberately entered into the domain of Union Govt. This was precisely the reason why his cronies have been opposing #CAG audit of #KIIFB," he tweeted. He also said it was a "shame that the Vijayan government broke all rules to serve its interests and provide a cover for those aiming to destabilise the country by way of "shady dealings through apparatuses like KIIFB." After Isaac kicked up the controversy in November, the opposition had moved a complaint against him before the Privileges and Ethics Committee for making public the details of the CAG report before it was tabled in the assembly.
The Minister had on December 29 last appeared appeared before the committee and later told media persons that he had not committed any breach of privilege of the assembly. He had also earlier said the state government would not allow the CAG to destroy the KIIFB.