Why Xiaomi is in ‘trouble’ with the Indian government

In the last decade or so, Xiaomi has gone from one of the many Chinese companies trying to gain a foothold in India to one of the biggest brands in the country. Xiaomi is the market leader in smartphones in the country whereas its other devices — TVs, fitness bands — also remain widely popular. However, in the last few months, trouble has been brewing between Xiaomi and the government of India, leading to the Indian Enforcement Directorate (ED) seizing the company’s assets. Here we explain what the issue is:

What made the Enforcement Directorate take action against Xiaomi?

Xiaomi is being accused of breaching the foreign exchange laws in India. In a tweet posted from the ED’s official Twitter account, the agency revealed that “ED has seized Rs.5551.27 Crore of M/s Xiaomi Technology India Private Limited lying in the bank accounts under the provisions of Foreign Exchange Management Act, 1999 in connection with the illegal outward remittances made by the company.”

The ED revealed that it was investigating Xiaomi since December 2021 and found that the company had remitted funds — in the guise of royalty payments — to three foreign-based entities. The ED in a statement, as per Reuters, said that “Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities,” it said. Further, it also revealed that two other US-based “unrelated entities” also received funds that were for the “ultimate benefit of the Xiaomi group entities.” The ED said that Xiaomi has “provided misleading information to the banks while remitting the money abroad.”

The government, as per reports, had been pushing the Chinese companies to use local companies and not their partners from back home. The government of India has been tightening the rules — largely due to cross-border tensions with China — on incoming investments from foreign countries.

What has Xiaomi’s response been?

In an official statement released, Xiaomi denied availing any services from the three foreign-based entities. “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.” The company further said that it is committed to working closely with government authorities to “clarify any misunderstandings.”

The Income Tax department in December 2022 had raided Xiaomi — along with Oppo — offices. A report by The Economic Times had stated that the raids were conducted based on “actionable intelligence inputs” on “several violations” by Xiaomi and others.

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