FEMA authority slaps show-cause notices on Xiaomi, 3 foreign banks

The competent authority appointed under the Foreign Exchange Management Act (FEMA) has slapped show-cause notices on Xiaomi Technology India, its senior officials, and three foreign banks for alleged violations of forex rules.

The move follows the authority confirming a seizure order of Rs 5,551.27 crore, passed by the Enforcement Directorate (ED) against the Chinese phone maker in April last year under FEMA provisions, alleging that the company had been remitting money illegally to foreign entities under the guise of royalties.

The FEMA authority heard the case and decided in favour of the agency’s order seizing the smartphone maker’ assets and accordingly issued show-cause notices under various sections of forex laws, an official source said. 

Those who have been served show-cause notices include the company, its Director and Chief Financial Officer Sameer B Rao, and former managing director Manu Kumar Jain.

The three foreign banks that received notices are CITI Bank, HSBC Bank, and Deutsche Bank AG for contravening Section 10(4) and 10(5) of FEMA, the ED said on Friday.

The banks got show-cause notices following directions by the Reserve Bank of India for supposedly allowing remittances without conducting due diligence or obtaining any underlying technical collaboration agreement from the company, the federal agency said.

According to the ED, the company started operations in India in 2014 and began remitting money in 2015. It has remitted money to three foreign entities, including one of its group units.

The authority held the ED was right in holding that foreign exchange equivalent to Rs 5,551.27 crore had been moved out of India by Xiaomi India in contravention of Section 4 of FEMA and the amount was liable to be seized.

The authority observed that the payment of royalty was nothing but a tool in transferring foreign exchange out of India.  

This was done under cover of an unrelated documentary façade created among group entities, the ED stated.