The Adjudicating Authority issued a show cause notice to Xiaomi India and three banks under FEMA. The notice was filed based on a complaint filed by the Enforcement Directorate (ED).
Xiaomi India’s CFO, Sameer Rao and former Managing Director Manu Kumar Jain were also included in the notice for a violation to the tune of INR 5,551 crores. Separate notices were also issued to the financial institutions mentioned in the complaint, Citibank, Deutsche Bank AG and HSBC Bank.
The notice came after a year-long investigation into Xiaomi’s foreign payments. The company had been making illegal foreign remittances worth INR 5,551 crores from their Indian office to their parent group organization. The notice was issued due to noncompliance with section 16 of the Foreign Exchange Management Act or FEMA stated ED.
Upon the conclusion of the investigation, the company could end up paying an amount three times the stated amount.
ED seizes money
The ED seized the company accounts stating transfers of INR 5,551 crores from Xiaomi technology back in April of 2022. The company has reportedly falsified its bank accounts. It was sending remittances abroad under the facade of sending royalty.
The Chinese giant who entered the Indian market in 2014 started the remittances the year after. The authority reported that royalty was merely a means to transfer money, under a false guise, in the form of foreign exchange out of India. It had violated the provisions under Section 27A of the FEMA.
The connection between the foreign remittances and the royalty was made by ED in the previous year. Xiaomi and the three banks mentioned in the notice were sending royalties even though they had not used any of its services. Investigations were launched in February 2022. ED was looking into the company’s foreign financing, accounts and ownership and issued a seizure order.
Xiaomi’s continuing troubles
On top of ED’s investigations, Xiaomi’s troubles also involved another competent authority, the Income Tax Department. An investigation by the department found that Xiaomi India was merely a distributing company. It was purchasing assembled mobile phones from dealers across India at an inflated price and making a small profit to evade taxes. The IT department’s investigation revealed the company to be falsifying documents and sending money in the name of royalties.
Xiaomi authorities have been denying any wrongdoing all along the investigation. As the ED challenged the INR 5,551 crores foreign remittance amount, the Indian Tax official also froze the company’s funds on allegations of tax evasion. The company had filed a lawsuit to challenge the decisions of the IT department and ED at the High Court in Karnataka.
In December 2021, the court subsequently lifted the IT department’s ban on Xiaomi’s company fixed deposits. The court after hearing the company’s arguments also provided relief by issuing a stay order on ED’s seizure order and granted permission to the company to use the ED seized bank accounts for day-to-day payments in May 2022.