Xiaomi gets HC relief, can use ED-seized accounts for now

In the Enforcement Directorate (ED) probe, the Karnataka High Court granted Xiaomi India, a wholly-owned subsidiary of the China-based Xiaomi Group, temporary relief.

Xiaomi’s accounts holding funds worth INR 5,551.27 Cr were seized under an ED order dated April 29, 2022, for violating the requirements of the Foreign Exchange Management Act (FEMA), 1999.

According to ET, special judge Hemant Chandanagoudar stated in the decision that the interim order will allow the petitioner company (Xiaomi India) to run its confiscated bank accounts for day-to-day operations.

The next hearing in the matter is slated for May 12.

In court, Xiaomi claimed that the technological royalties paid to three firms outside India would not breach FEMA because the income-tax department had approved it as a deduction and a value-added activity.

Xiaomi further stated that the seizure order under Section 37A of FEMA could not have been issued in the absence of any charge involving foreign exchange held by it in a foreign nation (India).

Shedding light on alleged technology royalty cash payments to three entities in other countries, Xioami told the court that over the past six years, technology royalty payments were made through authorized dealers.

After examining the business for unlawful remittances, the ED confiscated Xiaomi’s accounts in April of this year.

In a statement, the ED stated “, “The smartphone company (Xiaomi) remitted foreign currency equivalent to INR 5551.27 Cr to three foreign-based entities which include one Xiaomi group entity in the guise of royalty.”

The funds sent to ‘other two unconnected US-based entities were also for the ‘ultimate advantage of the Xiaomi group entities,’ it stated.

Prior to this, Xiaomi’s Global VP, Manu Kumar Jain, was summoned to appear before the ED in connection with the company’s probe.

The ED requested that Jain submit records pertaining to Xiaomi’s holdings, source of funding, vendor contracts, and payments made to Indian management and sent abroad.

According to the legislation, FEMA actions are civil in nature, and the eventual punishment can be at least three times the amount violated.

Despite the controversy, Xiaomi remains one of the leading smartphone brands in the Indian smartphone market. According to Canalys, Xiaomi has a 21% market share in the smartphone market in the first quarter of 2022.

During that quarter, Xiaomi took the lead with 8 million unit shipments, followed by Samsung, which had an 18 percent market share with 6.9 million shipments.