Karnataka HC declines to quash SFIO proceedings against Razorpay directors

The Karnataka High Court has rejected a plea by Razorpay directors Harshil Mathur and Shashank Kumar seeking to quash criminal proceedings initiated by the Serious Fraud Investigation Office (SFIO) in a case linked to an alleged Chinese-controlled digital lending network.

In an order dated November 4, Justice M Nagaprasanna said the allegations against the two directors, including alleged lapses in merchant onboarding, know-your-customer (KYC) verification and transaction monitoring, involved disputed questions of fact that would have to be examined during trial.

Mathur, Razorpay's whole-time director, and Kumar, its managing director, have been named as accused Nos. 8 and 9 in a complaint pending before a Bengaluru court. The allegations against them arise from an SFIO investigation into a network of 33 companies, including Mad Elephant Network Technology Pvt Ltd (MENTPL).

The investigation followed a report by the Registrar of Companies that allegedly uncovered a network of shell companies with dummy directors created by Jilian Consultants India Pvt Ltd (JCIPL), a wholly owned subsidiary of Fininty Pvt Ltd. The Central government ordered an SFIO investigation into JCIPL and 32 other companies on September 9, 2022. The agency submitted its investigation report to the government on July 31, 2024.

According to the complaint, MENTPL was incorporated through JCIPL in November 2019, allegedly using dummy directors controlled by Chinese entities. The company subsequently entered into an arrangement with non-banking financial company X10 Financial Services Ltd to provide services for lending operations through digital platforms and mobile applications.

MENTPL is accused of employing predatory and coercive loan recovery practices, generating alleged wrongful gains of Rs 56.63 crore.

The allegations against the Razorpay directors concern the payment aggregator's onboarding and monitoring of MENTPL as a merchant. The complaint alleges lapses in KYC verification, inadequate due diligence and failure to monitor MENTPL's transactions through Razorpay's platform.

During the proceedings, Additional Solicitor General K. Arvind Kamath, appearing for the Centre, told the court that Razorpay had acted as a conduit for around Rs 320 crore in transactions involving MENTPL. He argued that the scope of the SFIO's powers under Section 212 of the Companies Act extended to persons and entities directly or indirectly connected with the affairs of companies under investigation, including those through which funds were routed.

The directors, however, argued that Razorpay was not among the 33 companies named in the government's investigation order and that the SFIO could not extend its investigation to the payment aggregator merely because it had provided payment gateway services to MENTPL.

They also contended that payment intermediaries such as Razorpay did not have a statutory obligation to conduct full KYC verification, which they argued rested with banks. They further maintained that negligence in merchant onboarding did not, by itself, constitute a criminal offence and that the directors could not be held criminally liable in the absence of specific allegations against them.

The petitioners also challenged the proceedings on grounds of limitation and the absence of a direct connection between them and MENTPL. Razorpay itself has not been named as an accused in the complaint.

The High Court declined to examine these arguments at this stage. It said whether the directors had discharged their fiduciary duties and exercised adequate due diligence were disputed questions of fact that could only be considered during trial. The court also noted that Razorpay's role could emerge as the proceedings progressed, even though the company had not been made a party to the complaint.

Referring to Supreme Court judgments on the limited scope of a High Court's powers to quash criminal proceedings, Justice Nagaprasanna said the court could not conduct a mini-trial or adjudicate disputed facts at this stage. The petition was accordingly rejected.

Meanwhile, Razorpay has received approval for its proposed initial public offering (IPO) from the Securities and Exchange Board of India (SEBI), The Economic Times reported earlier this month.