Loan app with Chinese links: Karnataka HC says investigation necessary

Refusing to defreeze the accounts and set aside the show-cause notice issued to a Kerala-based loan app company, the High Court of Karnataka has cautioned against such apps owned by Chinese entities and individuals which are used to destabilise India.

In a recent judgment, Justice M Nagaprasanna, while rejecting the petition of Inditrade Fincorp Ltd, registered in Kochi, said, “It is 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 between each other.”

Refusing to stall the investigation against the company, the HC said, “The investigation would be imperative, as any effort of any neighbouring nation to destabilise 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 Assistant Director of Directorate of Enforcement (ED) passed an order on September 2, 2022 freezing the bank account of the company under the Prevention of Money Laundering Act. The company claims to be a Type-II non-deposit taking Non-Banking Financial Company (NBFC) incorporated in 2007.

A search operation was conducted on Cashfree Payments India Private Limited and Razorpay Solutions India Private Limited which are the payment gateways used by Inditrade Fincorp for disbursal and collection of digital micro-loans to borrowers /customers. Following this search operation, the ED ordered a debit freeze of Inditrade Fincorp and issued a show cause notice to it on October 14, 2022.

The company approached the HC against these measures. The counsel for the company submitted that freezing of the bank account of the company was a draconian act and the ED had deviated from procedure and sought the quashing of the proceedings.

The counsel for the ED argued that the company’s account is used by several payment gateways which are money actions with links to Chinese apps and therefore, there is a serious conspiracy that has to be unearthed only by way of investigation.”

The court was also told that challenging the show-cause notice was premature and the company could urge all grounds before the Adjudicating Authority which has issued the show-cause notice.

The HC noted several FIR pending against such companies, “which alleged that such entities were incorporated by appointing dummy directors on behalf of Chinese citizens.”

The HC also rejected the contention of procedural lapse saying, “In the considered view of this Court, there is enough circumstance for the Adjudicating Authority to issue a notice to the petitioner. Unless the said notice is without jurisdiction, entertainment of the petition at this juncture is not warranted at the hands of this court.”

In the judgment, the HC also noted how the loan apps operate.

“A gullible borrower is given a call and is lured into for getting a small loan without any documentation. All that the borrowers are informed is that they should download the loan app and give access to the contents of the smart phone. It is then the trouble crops up when the representatives of such mobile loan apps/ companies begin to haunt the borrower threatening leakage of contents in the smart phone while seeking such repayment.

It is alleged in some cases that repayment is sought 16 to 20 times more than what a borrower has to pay as EMI,” the court said.