The Karnataka High Court has declined to quash criminal proceedings against Razorpay Director Harshil Mathur and Managing Director Shashank Kumar in a Serious Fraud Investigation Office (SFIO) case involving alleged links to a network of Chinese-controlled digital lending applications.
Justice M Nagaprasanna dismissed their petition on November 4, holding that the allegations concerning KYC compliance, financial due diligence and directors’ responsibilities involve disputed questions of fact that must be examined during a full-fledged trial.
The Court refused to conduct a preliminary assessment of the evidence or determine at this stage whether the two executives had fulfilled their statutory and fiduciary obligations.
“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,” the Court observed.
It added that the directors would have to establish their defence during the trial and found no justification for interfering with the proceedings at this stage.
How Razorpay became part of the investigation
The case originated from a confidential report submitted by the Registrar of Companies, which allegedly exposed a network of shell companies operating through dummy directors.
Following the report, the SFIO launched an investigation under Section 212 of the Companies Act, 2013. Its findings were submitted to the Central Government on July 31, 2024, and subsequently formed the basis of the criminal complaint.
The investigation allegedly uncovered a network of companies established by Jillian Consultants India Private Limited (JCIPL). Among the entities linked to this network was Mad Elephant Network Technology Private Limited (MENTPL), which investigators alleged was controlled by Chinese interests.
According to the complaint, MENTPL had entered into an arrangement with non-banking financial company X10 Financial Services Limited to facilitate lending through digital platforms and mobile applications.
The lending network allegedly employed predatory and coercive recovery practices against borrowers. Investigators also alleged that the operations generated wrongful gains amounting to ₹56.63 crore.
Alleged failure to verify digital lending platforms
The SFIO’s case against Razorpay centres on its alleged role in facilitating financial transactions connected with MENTPL.
The complaint alleges that Razorpay onboarded the entity as a merchant without carrying out adequate Know Your Customer (KYC) checks and other necessary due diligence. It also accuses the payment gateway of failing to properly monitor transactions processed through its platform.
The investigators consequently named Mathur and Kumar as accused numbers 8 and 9, alleging that they failed to discharge their responsibilities as company directors under Section 166 of the Companies Act, 2013.
The proceedings are currently pending before a Bengaluru court.
Razorpay directors challenge SFIO’s action
Mathur and Kumar approached the High Court questioning both their implication in the case and the SFIO’s authority to investigate allegations against them.
Senior Advocate Sandesh Chouta, representing the directors, argued that the investigation should have remained confined to JCIPL and the network of shell companies allegedly created by it.
He contended that the primary responsibility for conducting KYC verification rested with banks rather than payment intermediaries such as Razorpay.
The defence also questioned why Razorpay had been singled out when other payment intermediaries operating in comparable circumstances had not been included in the criminal proceedings.
Another key argument was that even if the company had been negligent in carrying out KYC procedures, its directors could not automatically be held criminally responsible for the alleged lapses.
The petitioners also raised a limitation objection, arguing that the proceedings against them were barred by the applicable time limit.
Centre says transactions worth ₹320 crore require scrutiny
Opposing the petition, Additional Solicitor General Arvind Kamath, appearing for the Union of India, argued that the allegations went beyond routine compliance failures.
He submitted that Razorpay had allegedly functioned as a financial conduit for transactions linked to MENTPL, with approximately ₹320 crore moving through the network using fake companies.
According to the Centre, the nature and scale of the alleged transactions warranted a detailed examination during trial rather than termination of the proceedings at the preliminary stage.
After considering the competing submissions, Justice Nagaprasanna declined to interfere with the SFIO case.
The Court held that questions concerning the directors’ compliance with their fiduciary responsibilities and the adequacy of due diligence could not be conclusively decided without examining the evidence.
With the High Court refusing to quash the proceedings, Mathur and Kumar will have to contest the allegations before the trial court.
The ruling does not establish guilt against either director; it allows the prosecution to proceed so that the disputed allegations can be tested through a full trial.
Senior Advocate Sandesh Chouta and advocate Abhishek Kumar appeared for the petitioners. Additional Solicitor General Arvind Kamath, assisted by Central Government Counsel Anuparna Bordoloi, represented the Union of India.