Denying any wrongdoing, Xiaomi has claimed compliance with Indian laws.
The Enforcement Directorate (ED) announced Friday that it has issued show-cause notices to Xiaomi Technology India Private Limited, the Indian arm of the Chinese mobile phone manufacturer Xiaomi, as well as two senior executives and three foreign banks over alleged foreign exchange law violations exceeding Rs 5,551 crore.
The show-cause notices, served to the company's Chief Financial Officer Sameer B Rao, former Managing Director Manu Kumar Jain, and the financial institutions Citibank, HSBC Bank, and Deutsche Bank AG, come in response to allegations of non-compliance with section 16 of the Foreign Exchange Management Act (FEMA), according to a statement released by the ED.
A show-cause notice, issued upon the conclusion of a FEMA investigation, could lead to penalties that amount to three times the total contravention amount, once the case is settled.
The ED's report states that these notices were not only served to Xiaomi Technology India Private Limited and its executives Jain and Rao, but also to the three aforementioned banks. These banks are suspected of contravening sections 10(4) and 10(5) of the FEMA and directives issued by the Reserve Bank of India (RBI) by allowing foreign outward remittances in the name of royalty payments without conducting due diligence or obtaining any underlying technical collaboration agreement from the company.
Previously, the ED seized funds worth Rs 5,551.27 crore from Xiaomi Technology India Private Limited's bank accounts under the FEMA, citing unauthorized remittance of this amount abroad under the pretence of royalty payments.
The agency's competent authority, appointed under section 37A of FEMA, confirmed the seizure order, stating that the ED was justified in concluding that the foreign exchange equivalent to Rs 5,551.27 crore was transferred out of India by Xiaomi India in an unauthorized manner. The agency added that this amount is held outside India on behalf of the group entity, contravening section 4 of FEMA, 1999 and is liable to be seized as per section 37A of FEMA.
The authority also noted that the payment of royalty was merely a mechanism for transferring foreign exchange out of India and constituted a "blatant" violation of FEMA provisions.
The ED's investigation, initiated last year, revealed that the company had remitted foreign currency equivalent to Rs 5,551.27 crore to three foreign-based entities, including a Xiaomi group entity, under the guise of royalty payments.
The ED stated that "under the cover of various unrelated documentary facade created amongst the group entities, the company remitted this amount in the guise of royalty abroad, which constitutes a violation of section 4 of the FEMA."