Karnataka HC Rejects Razorpay Cofounders’ Plea To Quash SFIO Case

The Karnataka High Court (HC) has rejected a plea by Razorpay cofounders Harshil Mathur and Shashank Kumar seeking to quash a serious fraud investigation office (SFIO) complaint. The complaint pertains to alleged lapses in merchant onboarding and monitoring of transactions linked to a digital lending company accused of predatory recovery practices.

In an order dated November 4, Justice M Nagaprasanna held that the allegations against the cofounders involved disputed questions of fact that could only be examined during trial. The court said there was no reason to interfere with the proceedings at this stage, given the matter was still at a nascent stage.

The SFIO has named Razorpay’s whole-time director Mathur and managing director Kumar as accused in the complaint. The allegations concern deficiencies in merchant onboarding, lapses in know-your-customer (KYC) verification of Mad Elephant Network Technology Pvt Ltd (MENTPL), and inadequate due diligence and monitoring of its transactions.

The SFIO is investigating a network of 33 companies allegedly created through dummy directors by Jilian Consultants India Pvt Ltd (JCIPL), a subsidiary of Fininty Pvt Ltd.

One of the companies under investigation, Mad Elephant Network Technology Pvt Ltd (MENTPL), allegedly operated an illegal digital lending business through its arrangement with NBFC X10 Financial Services Ltd.

MENTPL allegedly employed unethical, predatory and coercive loan recovery practices and generated wrongful gains of ₹56.63 Cr.

Where Does Razorpay Fit Into This?

The agency alleged that Razorpay acted as a payment intermediary for MENTPL. During the proceedings, the Additional Solicitor General of India, representing the SFIO, told the court that Razorpay had acted as a conduit for approximately ₹320 Cr worth of MENTPL’s transactions.

Hence, Razorpay cofounders were accused of failing to exercise due care, skill and diligence and independent judgement as directors, attracting provisions under Section 166 of the Companies Act, 2013.

Against this, Mathur and Kumar argued that the SFIO had exceeded its jurisdiction by prosecuting them when Razorpay was not among the 33 companies named in the Central government’s 2022 investigation order.

They also contended that payment aggregators did not have a statutory obligation to undertake full KYC verification, which they argued was the responsibility of banks. Mathur had told investigators in a statement recorded on August 16, 2023, that RBI guidelines were still evolving and the onus of conducting full KYC did not rest with the executives.

The cofounders further argued that mere negligence in merchant onboarding could not constitute a criminal offence. They also challenged the proceedings on grounds of limitation, absence of mens rea and lack of any direct nexus with MENTPL. They contended that there was no basis for imposing criminal liability on Razorpay’s directors when the company itself had not been made an accused.

Rejecting the argument, the court referred to Section 212(14) of the Companies Act, which allows prosecution of not only the company under investigation and its officers but also any other person directly or indirectly connected with its affairs.

It observed that whether the executives had discharged their fiduciary duties and exercised adequate due diligence, particularly in transactions involving approximately ₹320 Cr, were questions that required examination during trial.

The court also said Razorpay’s role could emerge as the proceedings progress, despite the company not currently being named as an accused in the complaint.

The court also reiterated that it could not conduct a mini-trial while exercising its powers to quash criminal proceedings.

Consequently, the High Court dismissed the writ petition, allowing the proceedings against Mathur and Kumar to continue. 

The court proceedings come as the fintech major prepares to go public. Razorpay has received the final nod from SEBI for its proposed ₹5,000-6,000 Cr IPO, which is expected to value the company at around $5 Bn. 

The company pre-filed for an IPO earlier this year and is said to be eyeing a listing between January and March 2027, with the IPO expected to comprise a fresh issue and an offer-for-sale (OFS). More details on the company’s float would become more apparent when the company files its updated draft red herring prospectus. 

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