Last week, the Enforcement Directorate had seized Rs 5551.27 crore ($725 million) from the local bank accounts of the Chinese smartphones company, Xiaomi.

Unfolding the Xiaomi Scam

• Xiaomi faces charges of having made illegal remittances to foreign entities by passing them off as royalty payments.
• It is a charge that Xiaomi has been continuously facing in India.
• The ‘royalty and licence fee’ paid by Xiaomi India were not being added to the transaction value of the goods imported by the company and its contract manufacturers.
• By not adding “royalty and licence fee” into the transaction value, Xiaomi was evading Customs duty.

What is the recent probe?

• The Enforcement Directorate has seized the bank account assets from Xiaomi Technology India, under the provisions of Foreign Exchange Management Act (FEMA.
• The company had remitted over Rs 5500 crore to foreign-based entities, including one Xiaomi group entity, in the guise of royalty payments.
• Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities.

Xiaomi’s response

• Xiaomi, for its part, said that it is committed to working closely with government authorities to clarify any misunderstandings.
• It argued that the royalty payments and statements to the bank are all legit and truthful and were made 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.
• But it is a typical corporate response, something on the lines that Xiaomi did on the previous occasion too.

How has China responded?

• China firmly support its companies in protecting their lawful rights and interests.
• It urged India to provide a fair, just and non-discriminatory business environment for Chinese companies making investment and operating in the country.
• It is visible that China has made a dovish statement as they usually do.
• Xiaomi now has alleged its top executives faced threats of “physical violence” and coercion during questioning by ED.

Indian govt on strong wicket

• Indian governmental authorities have made it clear that the Chinese companies were not being targeted.
• And financial misdemeanours had indeed been committed by these companies.
• The government has also explained the various cases in details and what it has seized so far.
• But the Chinese companies seem to be playing the victim card.

Back2Basics: Directorate of Enforcement (ED)

• ED is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime (esp Money Laundering) in India.
• It is part of the Department of Revenue of the Ministry of Finance.
• It is composed of officers from the Indian Revenue Service, Indian Police Service and the Indian Administrative Service as well as promoted officers from its own cadre.
• The total strength of the department is less than 2000 officers out of which around 70% of officials came from deputation from other organizations while ED has its own cadre, too.
• The prime objective of the Enforcement Directorate is the enforcement of two key Acts namely:

1. Foreign Exchange Management Act 1999 (FEMA) and
2. Prevention of Money Laundering Act 2002 (PMLA)

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now