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Explained: What is the ED case against Xiaomi India?

The Enforcement Directorate has seized more than Rs 5,500 crore in assets from Xiaomi India. What is its case against the Indian subsidiary of the Chinese smartphone maker? What has it found? How has the company reacted?

Written by Deeptiman Tiwary , Edited by Explained Desk | New Delhi |
Updated: May 3, 2022 3:57:38 pm
The logo of Xiaomi is seen inside the company's office in Bengaluru. (Reuters Photo: Abhishek N. Chinnappa, File)

The Enforcement Directorate (ED) has seized assets to the tune of over Rs 5,551 crore belonging to Chinese mobile phone manufacturer Xiaomi Technology India Private Limited last week for alleged violations of foreign exchange regulations. Last month it had even questioned the company’s global vice-president Manu Kumar Jain. Xiaomi manufactures the popular mobile phone brand Mi and is the largest seller of mobile phones in India.

What is the case against Xiaomi?

Xiaomi India is being probed by ED for alleged violations of the Foreign Exchange Management Act (FEMA). According to ED, Xiaomi has been remitting large amounts of money abroad to related entities in the name of royalties without actually utilising any services from them.

According to ED, Xiaomi has been doing this for the past seven years and the same is in violation of Section 4 of FEMA.

Section 4 of the Act deals with holding of foreign exchange. It says, “Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.”

What has ED found?

According to ED, Xiaomi started its operations in India in 2014 and started remitting funds abroad beginning 2015.

“The company has remitted foreign currency equivalent to Rs 5551.27 crore to three foreign based entities which include one Xiaomi group entity in the guise of royalty. Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities. The amount remitted to other two US-based unrelated entities were also for the ultimate benefit of the Xiaomi group entities,” the ED said in a statement.

According to ED, Xiaomi India is a trader and distributor of mobile phones in India under the brand name of MI. “Xiaomi India procures the completely manufactured mobile sets and other products from the manufacturers in India. Xiaomi India has not availed any service from the three foreign based entities to whom such amounts have been transferred. Under the cover of various unrelated documentary façade created amongst the group entities, the company remitted this amount in the guise of royalty abroad which constitutes violation of Section 4 of the FEMA. The company also provided misleading information to the banks while remitting the money abroad,” the ED statement said.

What action has the ED taken?

ED sources say the agency has been probing the company for the past few months after it stumbled upon some foreign remittances made by the company in February following which it began a full-fledged probe. This led to more such transactions by the company since 2015.

On April 13, it summoned Xiaomi’s global VP Manu Kumar Jain, who was earlier heading Xiaomi India, for questioning at its Bengaluru office.

Days after the questioning, which lasted for hours, the agency issued orders to seize Rs 5,551.27 crore belonging to Xiaomi Technology India Private Limited lying in its bank accounts. Xiaomi India is a wholly owned subsidiary of the China-based Xiaomi group.

How has the company reacted?

The company has said it is cooperating with the investigations and follows laws of the land.

“As a brand committed to India, all our operations are firmly compliant with local laws and regulations. We have studied the order from government authorities carefully. We believe our royalty payments and statements to the bank are all legit and truthful. These royalty payments that Xiaomi India made were for the in-licensed technologies and IPs used in our Indian version products. It is a legitimate commercial arrangement for Xiaomi India to make such royalty payments. However, we are committed to working closely with government authorities to clarify any misunderstandings,” a Xiaomi spokesperson said.

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