Karnataka HC Denies Relief To Xiaomi On Seizure Of INR 5551.27 Cr

The Karnataka High Court has denied interim relief to Xiaomi India by upholding the confirmation of the seizure of INR 5551.27 Cr by the Competent Authority appointed under the Foreign Exchange Management Act, 1999 (FEMA). The Court, during a hearing on Thursday (October 6), denied the interim relief plea.

A vacation bench of Justice NS Sanjay Gowda refused interim relief sought by Xiaomi.

The development comes as the Karnataka High Court had stayed the Enforcement Directorate’s (ED) seizure order issued on April 29 and allowed the company to operate its bank accounts for day-to-day operations.

For Xiaomi, senior advocate Udaya Holla made the appearance before the bench, praying for the continuation of the interim order.

The Competent Authority appointed under FEMA confirmed the seizure order on September 30, following which the Chinese mobile manufacturer moved the Karnataka High Court.

Appearing before the court on behalf of the government, Deputy Solicitor General M B Nargund informed the court that Xiaomi, being a foreign company, has no locus standi to challenge the constitutional validity of the statute. 

Nargund added that he would file an affidavit to demonstrate that Xiaomi has misused the interim orders passed previously by the court. Following this, the bench asked Xiaomi India to provide a bank guarantee of INR 5,500 Cr for an interim order to stay the seizure of its funds.

Incidentally, Nargund also informed the court that Xiaomi has INR 3,956 Cr in its bank accounts, reducing from over INR 7,000 Cr earlier.

Justice Gowda suggested that the seizure would continue to the extent of the amount in the bank and that Xiaomi should provide a bank guarantee for the remaining amount for the court to pass an interim order.

However, Holla submitted that the company would open an escrow account and submit the amount it receives from sales from January. The bench countered the submission by arguing that if the Chinese phone maker does not comply with the undertaking, the revenue department would be ‘left high and dry’.

The bench added, “It is my desire that you survive but at the same time their interest should be safeguarded. The suggestion you are giving does not really appeal to me.”

The bench instructed Holla and Xiaomi to come up with a better solution, or better, give a bank guarantee to safeguard the revenue department. The court directed the respondents to file their objections to the petition and relist the matter for further hearing on October 14.

Xiaomi has maintained that the royalties it remitted to foreign companies are legitimate. The smartphone maker said that all royalty payments made by it were related to its sales, adding that this was also confirmed by third-party provider Qualcomm.

Xiaomi’s Case: A Timeline Of Events

April 29: ED ordered the seizure of INR 5,551.27 Cr from Xiaomi India, alleging that it had made remittances to foreign companies under the guise of royalties for services it never received from these companies

May 5: The Karnataka High Court stayed ED’s seizure order on Xiaomi’s petition, allowing it to continue to operate bank accounts for day-to-day activities

July 31: ED submitted before the high court that the Chinese company had approached the high court prematurely to challenge the order. The court directed the Competent Authority under FEMA to issue a notice to the petitioner and pass the appropriate order within 60 days

September 30: The Competent Authority under FEMA confirmed the seizure, making it India’s largest-ever seizure

October 6: The Karnataka High Court denied interim relief to Xiaomi on the matter, asking it to submit a bank guarantee worth INR 5,500 Cr for the court to pass an interim order.