Chinese smartphone manufacturer Xiaomi Corp. said it is “disappointed” by the Indian government’s decision to freeze Rs 5,551.27 crore ($682 million) of its assets over its apparent violation of India’s foreign regulations act. The seizure amount is the highest in the country to date.
Back in April, India’s Enforcement Directorate (ED) seized the Chinese company’s assets for violating the country’s Foreign Exchange Management Act (FEMA), with the ED alleging that Xiaomi was involved in remitting large sums of money to foreign entities under the guise of royalties, without actually receiving any services from them. FEMA authorities held on September 30 that the ED was justified in its decision.
In a press statement, the company said that it is “disappointed with the decision, as none of the factual legal contentions” it raised had been addressed. It asserted that its royalty payments, as well as statements to banks, were “all legitimate and truthful.”
The company clarified that Xiaomi India is an affiliate of the Xiaomi Group companies, which had entered into a legal agreement with the United States’ (US) Qualcomm Group “to license IP for manufacturing smartphones.” “Of the entire INR 5551.27 Crore Xiaomi India paid to foreign entities, more than 84% were royalty payments made to Qualcomm Group (USA), a third-party US listed company, towards the in-licensed technologies, including Standard Essential Patents (SEPs) and IPs used in our Indian version of smartphones. These technologies and SEPs are used across the entire global smartphone industry,” it clarified.
— Xiaomi India (@XiaomiIndia) October 2, 2022
It further stated that Xiaomi and Qualcomm both believed that it was “a legitimate commercial arrangement for Xiaomi India to pay Qualcomm royalty,” as “without these technologies, [its] smartphones would not have worked in India.” It also said that Qualcomm had confirmed that “all royalty payments made by Xiaomi India were only related to sales done by Xiaomi India, and not for any other countries or regions.”
In addition, the company clarified that all its royalty payments were made via banking channels that have been approved by the Reserve Bank of India and insisted that they were “legitimate commercial arrangements.” It also denied owning or holding assets outside India, on the basis of which it argued that Section 4 of FEMA did apply to the situation.
It thus concluded that it would “continue to use all means to protect the reputation and interests” of the company and its stakeholders, and would “remain committed to working with various authorities to resolve the issue.”
Xiaomi’s statement comes after FEMA’s Competent Authority noted in a press release issued on September 30 that the ED was “right in holding foreign exchange,” as it had been “transferred out of India… in an unauthorised manner.” “Payment of royalty is nothing but a tool to transferring the foreign exchange out of India and the same is in blatant violation of provisions of FEMA,” it stated.
Breaking:
— ETtech (@ETtech) September 30, 2022
ED confirms seizure of Rs 5551.27 crore against Xiaomi Technology India Private Limited under the provisions of FEMA#Breaking #Xiaomi
The ED noted that Xiaomi India had remitted the funds 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,” it asserted.
The ED also claimed that Xiaomi India had “not availed any service” from the three foreign entities. “Under the cover of various unrelated documentary façade created amongst the group entities, the company remitted this amount in guise of royalty abroad which constitute violation of Section 4 of the FEMA. The Company also provided misleading information to the banks while remitting the money abroad,” the ED said.
The Indian government’s move against Xiaomi forms part of a wider pushback against Chinese companies.
In early August, it was reported that India is planning to restrict the sale of Chinese smartphones priced below 12,000 rupees ($150) to boost its domestic industry. The move would result in Chinese companies like Xiaomi and Realme losing their huge market share.
Furthermore, in February, income tax officials raided the offices of Chinese tech giant Huawei in Gurugram and Bengaluru. Likewise, in January, Xiaomi was made to pay an additional $87.8 million in unpaid import taxes. The Income Tax department has conducted raids against several other Chinese companies in the past year, including Oppo and OnePlus.
The Competent Authority appointed under FEMA has confirmed the seizure order of Rs. 5551.27 Crore dated 29.04.2022 passed by the ED against Xiaomi Technology India Private Limited under the provisions of FEMA.
— ED (@dir_ed) September 30, 2022
India has also banned over 320 Chinese apps, including TikTok, Free Fire, Tencent Driver, Nice Video Baidu, PUBG Mobile, WeChat, and Viva Video Editor, since June 2020, citing national security concerns. New Delhi accused these applications of collecting “sensitive user data” that was being misused and transmitted to servers “located in a hostile country.”
In a similar vein, in 2021, New Delhi levied antidumping duties on five Chinese products, including certain aluminium goods and chemicals, for five years to help protect local manufacturers from cheap Chinese imports. India has historically levied a majority of anti-dumping cases against imports from China.
These crackdowns on Chinese companies have escalated since deadly clashes between Indian and Chinese border forces in the Galwan Valley in June 2020, when 20 Indian soldiers were killed.
In response, the Chinese Chamber of Commerce in India and the India China Mobile Phone Enterprise Association have urged the Indian government to create an “open, fair, and non-discriminatory business environment.” They have noted that China has over 200 manufacturers and 500 trading companies in India who have generated over $3 billion in investment and created upwards of 500,000 local jobs. Keeping this in mind, they argue that “these practices are not conducive to India’s initiative on investment promotion and international economic and trade cooperation.”