Karnataka HC rejects Razorpay directors' plea to quash SFIO case linked to Chinese loan app network

Mumbai: The Karnataka High Court has dismissed a plea by two senior executives of Razorpay Software Ltd. seeking to quash a complaint filed by the Serious Fraud Investigation Office (SFIO), which names them as accused in a case linked to an alleged Chinese-controlled digital lending network.

Justice M Nagaprasanna rejected a plea filed by Harshil Mathur, a whole-time director of payment aggregator Razorpay, and Shashank Kumar, the company's managing director. The two executives are named as accused in a case before the LIX Additional City Civil and Sessions Court in Bengaluru. The High Court pronounced its order on November 4, after reserving the matter.

“This matter pertains to a case from five years ago involving loan apps that operated illegally through multiple payment gateways and banks in India. Razorpay and its directors have no association with these entities. We have full faith in the judicial process and will pursue all appropriate legal remedies. Compliance and good governance remain central to how Razorpay operates, and the company continues to serve its customers and partners with the same commitment," Razorpay said in a statement to ET.


The court said the allegations against the executives involved disputed questions of fact that could be examined only during trial. It said the high court cannot conduct a mini-trial while exercising its jurisdiction to quash criminal proceedings.

Citing Supreme Court judgments, Justice Nagaprasanna observed that at the stage of considering a plea to quash proceedings, the court has to examine whether sufficient material exists to proceed against the accused. If such material is available, the court should not exercise its power to quash.

The court said the petitioners would have to establish their defence in a full-fledged 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,” it said.

The SFIO’s case stems from an investigation into 33 companies, including Mad Elephant Network Technology Pvt. Ltd. (MENTPL), which was allegedly incorporated through Jilian Consultants India Pvt. Ltd. (JCIPL). The latter is accused of creating a network of shell companies with dummy directors allegedly controlled by Chinese entities.

According to the complaint, MENTPL entered 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 alleged to have adopted predatory and coercive recovery practices and generated wrongful gains of Rs 56.63 crore through them.

The allegations against the Razorpay executives relate to deficiencies in merchant onboarding, alleged lapses in know-your-customer (KYC) verification of MENTPL, failure to conduct due diligence and inadequate monitoring of its transactions through Razorpay’s payment aggregation platform. The complaint alleges that the executives failed to discharge their duties as directors with due care, skill and diligence, attracting Section 166 of the Companies Act, 2013.

“The allegations qua the petitioners in the impugned complaint pertain to deficiencies and negligence in merchant onboarding processes, including alleged lapses in know-your-customer (KYC) verification of MENTPL, non-conduct of due diligence and non-monitoring of transactions of MENTPL by Razorpay,” the court document, which ET has reviewed, said. “The impugned complaint further alleges that the petitioners, being directors of Razorpay, failed to exercise their duties as Directors with due and reasonable care, skill and diligence and exercise of independent judgment and, therefore, were liable to be charged under Section 166 of the Act.”

The Centre had ordered an investigation into JCIPL and 32 other companies on September 9, 2022 under Section 212 of the Companies Act. The SFIO submitted its investigation report to the government on July 31, 2024.

Senior advocate Sandesh J Chouta, appearing for the petitioners, argued that Section 212 confined the SFIO’s investigative jurisdiction to the companies specifically named in the government’s order, which did not include Razorpay. He contended that merely providing payment gateway services could not bring Razorpay or its directors within the scope of the investigation.

He argued that negligence in merchant onboarding did not, by itself, constitute a criminal offence, and that criminal law did not recognise vicarious liability in the absence of specific allegations against the directors. Razorpay itself had not been made an accused in the complaint, he pointed out.

The petitioners contended that KYC obligations rested with banks and not payment intermediaries, and questioned why Razorpay had been singled out while other intermediaries were not proceeded against. They also argued that the complaint was barred by limitation under Section 468 of the CrPC, as the offence under Section 166 carried a maximum punishment of one year. Alternatively, they sought fresh consideration of the cognisance order under Section 223(1) of the Bharatiya Nagarik Suraksha Sanhita (BNSS).

Opposing the petition, Additional Solicitor General K Arvind Kamath argued that Section 212(14) empowered the government to initiate prosecution not only against the companies under investigation and their officers, but also against any other person directly or indirectly connected with their affairs.

He told the court that Razorpay had acted as a conduit for approximately Rs 320 crore of MENTPL’s transactions. The underlying lending operation allegedly involved usurious interest, including a 30% upfront deduction at the time of disbursal, and coercive recovery practices. The prosecution of the executives was, therefore, justified under the statutory provisions, he argued.

“The routing of money has taken place through fake companies. Razorpay was precisely a conduit carrying Rs 320 crore of MENTPL’s transactions,” he argued.

It also noted that although Razorpay itself had not been made a party to the proceedings, its role could emerge as the case progressed. Given the nascent stage of the proceedings and the disputed factual issues, the court found no ground to interfere.