₹5.5k crore of Xiaomi India seized for violation of foreign exchange law.

Xiaomi, also well-known by its brand name as ‘MI’, is India’s one of the leading mobile phone providers. In fact, it’s so high in the Indian market that about 25% of mobile phones used by Indians are MI phones, that is about one in four Indians had chosen MI as their mobile. Such is the brand name of MI in India. But MI fails to keep its name clean. Recently ED (Enforcement Directorate) seized the bank account of Xiaomi India , a Chinese phone maker, for violation of foreign exchange laws by the company’s Indian arms. They have been accused of remitting foreign currency equivalent to ₹5.5k crores in Indian rupees in the name of loyalty, allegedly violating the same law.
The directorate said “Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities.” They also stated that the amount remitted to other two US-based unrelated entities were also for the ultimate benefit of the Xiaomi group entities.
The agency said: “Xiaomi India is a trader and distributor of mobile phones in India under the brand name of MI. It procures completely manufactured mobile sets and other products from the manufacturers in India. It has not availed any service from the three foreign based entities to whom such amounts have been transferred.” Asserting that remittances began a year after the company launched its operations in India, that is from 2015.It is also stated that through some under cover, unrelated documentation created among the entities to facilitate the remitting of these money as loyalty. Misleading the government with false information and also violating section 4 of Foreign Exchange Management Act (FEMA). Stating that the firm’s operations are compliant with local laws and regulations, a Xiaomi spokesperson said, “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.”

So what exactly is section 4 of Foreign Exchange Management Act (FEMA)? What does it have to do with the current issue with Xiaomi? The law states- —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. In simple words, people staying in India are not supposed to own or transfer capital in any form to any resident or company outside of India. In this case, Xiaomi’s remittances in the name of loyalty are a perfect example of what not to do. Some financial experts in India state that this is a loophole used by many foreign companies to escape foreign exchange taxes. The necessity to remit such currency in a short span is suspicious. The relation of these foreign companies with Xiaomi is still under investigation. Many Chinese based companies including Xiaomi are under raid by income tax companies. The Xiaomi side story is yet to be heard but the higher authorities of Xiaomi India have not come up with any public statement or any social media comments.