The Karnataka High Court recently called for investigations into mobile loan apps run by Chinese companies [M/S Inditrade Fincorp Ltd v. Union of India].
Single-judge Justice M Nagaprasanna said that investigation was essential to ensure the security of India and the safety of its citizens and authorities cannot turn a blind eye to attempts by neighbouring nations to destabilize India.
The Court, therefore, refused to interfere with an Enforcement Directorate (ED) probe into the workings of one such company.
“The investigation would be imperative, as any effort of any neighbouring nation to destabilize this country, either economically or otherwise, by any method which would touch upon the security of the nation and safety of its citizens, cannot be turned a blind eye to, and in certain cases, certainly in the case of the petitioner, investigation cannot be stalled on this specious plea of procedural aberration as alleged by the petitioner,” the Court said.
Describing the modus operandi of such companies, the Court noted that Indian smartphone users are lured into getting small loans from through these apps without documentation.
They are asked to download the app and grant the companies access to the contents of their smartphones. Trouble crops up when the representatives of the companies threaten to leak the contents of the borrowers’ phones while seeking repayment of the loan. In some cases, repayment is sought at a rate as high as 16-20 times the EMI, the Court recorded.
“It is again in public domain that several borrowers have committed suicide unable to bear the harassments of the representatives of such loan apps. The office bearers of several of these companies which control and operate such mobile loan apps are said to be entities of China or individuals from China sitting as Directors of such mobile loan apps. Therefore, it becomes necessary for an investigation, in the least to be conducted of any such company, who would operate such loan apps and has transactions with each other,” the judge noted.
The Court was hearing a plea filed by a company called Inditrade Fincorp challenging an order passed by the ED freezing its accounts.
The petitioner company claimed to be a non-banking financial company (NBFC) which disbursed digital micro-loans under the regulation of the Reserve Bank of India (RBI).
The ED had frozen the company’s accounts after conducting searches at Cashfree Payments and Razorpay Solutions, two of the payment gateways through which the petitioner-company operated.
Before the High Court, the company contended that the search and seizure conducted by the ED, as well as the show cause notice issued by the Adjudicating Authority, were contrary to law. It was also submitted that there was no Chinese citizen involved in the company.
The ED, on the other hand, alleged that the petitioner had links to Chinese apps, and was part of a “serious conspiracy” that could be unearthed only through investigation.
The Court noted that as many as 15 first information reports (FIRs) were registered by the Cyber Crime Police Station at Bengaluru against several companies for their involvement in harassment and extortion of members of the public who had availed loans through mobile apps. Based on these registered cases, the ED conducted raids at the offices of Razorpay and other payment gateways, and found the names of 111 entities, of which the petitioner was one.
It was found that such entities are operating in India through dummy contractors appointed on behalf of Chinese directors. Based on such information, a show cause notice was issued to the petitioner.
After going through Section 17 of the Prevention of Money Laundering Act, which grants the ED powers of search and seizure, the Court found that there was no procedural infirmity in the case.
“The projection of procedural aberration by the petitioner would not entitle entertainment of the petition, as there is link in the money trail against the petitioner…this is enough circumstance for the Adjudicating Authority to issue a notice to the petitioner.”
It thus dismissed the challenge to the show cause notice as well as the freezing order
Advocate Avi Singh appeared for the petitioner-company, while advocates KN Krishna Rao and Madhukar Deshpande represented the Central government and the ED respectively.