'Illegal Remittances, Threats of Violence': ED's Case Against Xiaomi Explained

Xiaomi said that its transactions are all legit and accused ED of threatening physical violence against executives.

The Enforcement Directorate (ED) froze Xiaomi India's assets.

(Photo: Vibhushita Singh/Altered by the Quint)

Late April, the Enforcement Directorate (ED), responsible for enforcing economic law in India, froze Xiaomi India's assets worth over Rs 5,551 crore ($725 million).

The agency accused the Chinese smartphone maker of illegally transferring funds abroad. Xiaomi, in turn, said that its transactions are all "legit" and that it is cooperating with the investigation.

However, things took an ugly turn when Xiaomi alleged that its top executives faced threats of "physical violence" and coercion during questioning by ED, according to a court filing seen by Reuters.

ED called this claim "untrue and baseless" and the two are duking it out in court as the investigation continues. Here's a breakdown of the case.

What’s the Case All About?

The Enforcement Directorate says that Xiaomi, which set up shop in India in 2014, started sending money abroad illegally in 2015, while providing "misleading information" to banks.

It allegedly remitted Rs 5,551.27 crore in foreign currency to three entities, including a Xiaomi group entity, in the guise of royalty – money paid to the owner of a product or patent being used by a third party.

"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."

Enforcement Directorate, in a statement

According to the agency, Xiaomi's actions constitute a breach of Section 4 of the Foreign Exchange Management Act (FEMA), which places restrictions on who can "acquire, hold, own, possess, or transfer any foreign exchange, foreign security or any immovable property situated outside India.”

What Has ED Done So Far?

The Enforcement Directorate, on 29 April, seized Rs 5,551.27 crore lying in Xiaomi India's bank accounts, under the provisions of FEMA. This came days after the agency summoned the company’s top executives for questioning.

Xiaomi challenged this in the Karnataka High Court, which put a stay on ED's directive on 5 May.

This stay was extended on Thursday, 12 May, and the court clarified that the company was allowed to pay foreign entities, for importing items essential to manufacturing and sales, through bank overdrafts.

It isn't allowed to make royalty payments, for now.

Xiaomi’s Reaction

Xiaomi, in its statement on 30 April, said that all its operations are "firmly compliant with local laws and regulations."

"We have studied the order from government authorities carefully. We believe our royalty payments and statements to the bank are all legit and truthful," it said.

"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."

Xiaomi India

Xiaomi added that it is committed to working closely with government authorities to clarify any misunderstandings.

Allegations of Threats and Coercion

On multiple occasions in April, ED had summoned Xiaomi’s global VP Manu Kumar Jain – former head of Xiaomi India – for questioning at its Bengaluru office. It had also summoned CFO Sameer BS Rao.

Xiaomi, in a court filing on 4 May, alleged that its top executives were coerced and threatened with "physical violence" during questioning, according to Reuters.

ED officials allegedly warned Jain, Rao, and their families of "dire consequences" including arrest, damage to the career prospects, criminal liability, and physical violence if they did not submit statements as desired by the agency.

The executives "were able to resist the pressure for some time" but ultimately buckled under "extreme and hostile abuse and pressure and involuntarily made some statements," the filing reportedly added.

Chinese media called this another example of "regulatory assault" on Chinese companies.

The Enforcement Directorate has rubbished Xiaomi's claims, pointing out that "no complaint was filed by them at any point of time during
recording of statements at various occasions."

"It appears that allegation now made after passage of substantial time is an afterthought. The allegations are baseless and far from the facts."

Enforcement Directorate

The agency added that Xiaomi executives deposed their statements voluntarily and in the "most conducive environment".

"It is reiterated that ED is a professional agency with strong work ethics and there was no coercion or threat to the officers of the company at any point of time," it said.