Xiaomi Misled Deutsche Bank Over Royalty Agreement To Remit Money Abroad: ED

In what could give more teeth to the Enforcement Directorate (ED) in its investigation into Xiaomi, it has now emerged that the Chinese smartphone manufacturer allegedly misled its banker Deutsche Bank for years over a non-existent royalty agreement. 

Legal documents filed as part of the probe and accessed by Reuters showed that the agency found suspected irregularities in the way Xiaomi’s India arm transferred royalty payments to US-based Qualcomm for licensed technologies. 

As per the filings, a Deutsche Bank executive told the agency in April that the smartphone major had confirmed the existence of an agreement, required under law, between Xiaomi India and Qualcomm for transfer of royalties. Citing confidentiality, the agreement was never shared with the bank.

The agency caught wind of the matter after Xiaomi India’s then managing director Manu Jain and chief financial officer (CFO) Sameer Rao told the ED that there was no agreement between Qualcomm and Xiaomi India. 

According to the court documents, the duo also admitted that the royalties were remitted based on directions received from the group’s executives based out of China. 

Xiaomi “provided misleading information to the bank. They did not share the agreement with the bank which they referred (to) as the basis of payment…This shows … their intention of remitting the money outside India as per the whims and fancies of the Chinese parent”, said the report filed by ED. 

The Controversy

At the centre of the debate is the INR 5,551.27 Cr worth of funds belonging to Xiaomi India as part of a FEMA investigation. In April this year, the ED raided the offices of Xiaomi India for remitting the amount under the garb of royalty to three companies, including its parent company in China, without availing any services from them.

The agency also alleged that Xiaomi did not procure any services from these three foreign entities, yet the royalties were transferred to these firms on the orders of the parent company. 

The ensuing crackdown saw the ED freezing the amount parked with various bank accounts. One of Xiaomi’s four sanctioned accounts was with Deutsche Bank. As a result, the ED said that the bank was allegedly used to route the money without following local FEMA norms.

Earlier on October 3, Xiaomi issued a clarification that the Indian arm of the company had signed a legal contract with Qualcomm Group to licence intellectual property for manufacturing smartphones.

The court documents also revealed that Indian authorities did not agree with this contention, noting that Xiaomi India only acted as a reseller of smartphones made by contract manufacturers. 

The report also said that the company’s Indian unit had no role to play in the designing of the smartphones and, as such, had nothing to do with royalty payments to Qualcomm. 

Not just Xiaomi, other Chinese smartphone players such as OPPO and Vivo are also under scrutiny in the country. While Vivo India has been accused of remitting INR 62,476 Cr to foreign entities, OPPO India is suspected of tax evasion to the tune of INR 4,389 Cr.

Despite this, Chinese smartphone players continue to lead the Indian smartphone arena. Chinese vendors accounted for 76% of the total shipments in the third quarter (Q3) of the year (CY22), according to data released by analyst firm Canalys.