The Karnataka High Court recently refused to quash a Serious Fraud Investigation Office (SFIO) case against two directors of Razorpay, in a case involving allegations that the payment gateway facilitated the operation of a digital lending network that was controlled by Chinese entities [Harshil Mathur & Anr v Union of India].
The case involves allegations that Razorpay failed to carry out diligent Know Your Customer (KYC) procedures before onboarding Chinese-controlled digital loan apps as merchants on its platform.
By a November 4 order, Justice M Nagaprasanna dismissed a plea by Razorpay's Director Harshil Mathur and its Managing Director Shashank Kumar (petitioners) to quash the case against them.
The Court noted that case involved disputed questions of facts. It reiterated that the High Court cannot conduct a minitrial on such disputed allegations. The Court concluded that it is up to the petitioners to prove during a trial that they had not breached any of their fiduciary duties as directors of Razorpay.
"Whether such fiduciary duty is complied with by the petitioners or whether due-diligence is done by the petitioners or otherwise is a disputed question of fact, which can only be considered at the stage of trial ... It is for the petitioners to come out clean in a full-blown trial. I do not find any warrant of interference at this juncture," the Court said.
The case at hand stemmed from a confidential report submitted by the Registrar of Companies, which allegedly uncovered a network of shell companies with dummy directors.
An investigation was conducted by the SFIO under Section 212 of the Companies Act, 2013, and an investigation report was placed before the Central government on July 31, 2024. This formed the basis of the complaint.
The investigation reportedly pointed to a network of shell companies created by a company known as Jillian Consultants India Private Limited (JCIPL). One of the companies it created, Mad Elephant Network Technology Private Limited (MENTPL) is alleged to be controlled by Chinese entities.
As per the complaint, MENTPL entered into an arrangement with a non-banking financial company (NBFC), X10 Financial Services Limited, for lending operations through digital platforms and mobile applications. MENTPL allegedly employed unethical, predatory, and coercive methods to recover money and was accused of generating wrongful gains of ₹56.63 crores.
Razorpay's directors were arrayed as co-accused in this case on allegations that Razorpay facilitated these transactions without conducting due diligence measures and proper KYC. Razorpay was also accused of not properly monitoring the transactions of MENTPL.
Razorpay's directors were accused of failing to exercise their duties as director under Section 166 of the Companies Act, 2013.
Whole Time Director Harshil Mathur and its Managing Director Shashank Kumar were named accused numbers 8 and 9 in the case, which is presently pending trial before a court in Bengaluru.
They challenged this before the High Court. Their petition questioned the implication of Razorpay's directors in the matter and the SFIO's jurisdiction to conduct a probe against them.
Senior Advocate Sandesh Chouta, appearing for Razorpay's directors, contended that SFIO had to confine its investigations to JCIPL and its shell companies.
He further asserted that KYC duties fell on banks, not intermediaries like Razorpay. He also raised concerns about Razorpay being singled out, as other similarly placed payment intermediaries were not named in the case.
Even if Razorpay had been negligent in conducting the KYC, Razorpay's directors cannot be held vicariously liable in a criminal case, he added.
Among other arguments, it was also contended that the case against the directors was barred by limitation as the complaint was filed three years ago.
Additional Solicitor General (ASG) Arvind Kamath, representing the Union of India, opposed the plea. He highlighted that Razorpay is said to have acted as a conduit that carried out MENTPL's transactions, which involved the movement of ₹320 crores via fake companies. These allegations warranted a trial, he said.
After considering the rival submissions, the Court dismissed the plea by Razorpay's directors.
Advocate Abhishek Kumar also appeared for the petitioners.
Central Government Counsel Anuparna Bordoloi also appeared for the Union of India along with the ASG.
[Read Order]