Enforcement Directorate (ED) on June 9 issued a show cause notice to the official of Xiaomi and three banks under section 16 of the Foreign Exchange Management Act. An official claims that the ED issued a show-cause notice for a FEMA violation of more than Rs 5,551 crores.
The ED has issued these notices to Xiaomi India CFO Sameer Rao, former MD Manu Jain and three banks, namely CITI Bank, HSBC Bank and Deutsche Bank AG, for alleged foreign exchange violations of more than Rs 5,551 crores. These banks were issued these notices for violating Section 10(4) and 10(5) of FEMA and the regulations of RBI.
These recent show-cause notices were issued as a part of the earlier investigation conducted by ED against the Chinese mobile manufacturer.
Last year, ED seized Rs 5,551.27 crore from the Chinese manufacturer’s Xiaomi Indian arm under FEMA in connection to illegal remittances made by the company. In 2022, the ED said in a press release, “Xiaomi India is a wholly owned subsidiary of China-based Xiaomi group. This amount of Rs 5551.27 Crore lying in the bank accounts of the company has been seized by the ED. ED had initiated an investigation in connection with the illegal remittances made by the company in the month of February this year”.
The company has remitted foreign currency equivalent to Rs 5551.27 crore to three foreign-based entities, which include one Xiaomi group entity in the guise of royalty, said the ED.
“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,” said the ED.
“Xiaomi India has not availed any service from the three foreign-based entities to whom such amounts have been transferred. 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,” said the federal agency.
After that, Xiaomi approached the Karnataka High Court challenging the constitutional validity of section 37 of the Foreign Exchange Management Act. The Chinese manufacturer approached the Court challenging the constitutional validity of section 37 of the FEMA, arguing that the provision is violative of Articles 14 and 20, read with Articles 300A and 301 of the Constitution of India. The impugned provision allows the Government of India’s (GoI) authorised officer to seize a company’s assets in India on suspicion of violation of FEMA.
The GoI’s counsel, Additional Solicitor General (ASG) MB Nargund, argued that proper procedure was followed to pass the attachment order, and the action was scrutinised by a Competent Authority not belonging to ED. The ASG stated the attachment action was scrutinised by an official not below the rank of Joint Secretary from another department.
The ASG argued, “Section 37A has enough safeguards and also provides appeal opportunity. Therefore, how can it be called arbitrary. So many checks and balances are available; thus, it cannot be said to be arbitrary,” while placing reliance on the impugned provision.
The Court upheld the impugned provision’s constitutional validity stating that it does not suffer from arbitrariness. The Court upheld ED’s seizure of assets under the FEMA provision.
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