Karnataka HC declines relief to Xiaomi India over Rs 5,551-cr asset freeze

In a setback for Xiaomi, the Karnataka High Court on Thursday refused to stay FEMA competent authority’s confirmation of the Enforcement Directorate's (ED) order to seize Xiaomi India’s bank assets worth over Rs 5551.27 crore.

The competent authority, formed under the Foreign Exchange Management Act, 1999 (FEMA), confirmed the order of the ED to seize the assets of the smartphone company on September 19.

The competent authority said the company had transferred the mentioned amount in an unauthorised manner and that its actions violate Section 4(dealing with the holding of foreign exchange, etc) of FEMA.

Xiaomi then moved the Karnataka High Court on October 5 and the matter was heard on Thursday by the vacation bench of Justice Sanjay Gowda.

The competent authority in its order last week held that the ED is right in holding a foreign exchange of ₹5,551.27 crore. The ED had passed an order of seizure of the sum against Xiaomi India for illegally remitting foreign exchange outside India under the guise of royalty payments.

Senior Advocate Uday Holla, appearing for Xiaomi, prayed before the court to put a stay on the competent authority’s order. He also asked the court to extend its May 5 order in which the court allowed the company to operate its bank accounts for only day-to-day activities.

Holla said now the company cannot even do this after the competent authority’s order.

Meanwhile, the Centre’s counsel said the company has no ground to challenge the provisions of FEMA. He also said that if the company is aggrieved by the competent authority’s order, it should approach the appellate tribunal under FEMA.

The Centre said the amount of about 5500 crore was supposed to be utilised in the Indian market but it was transferred to Qualcomm for royalty payments.

Qualcomm is an American multinational corporation that owns patents important to the 5G, 4G, and other mobile communications standards.

Xiaomi India said that over 84 per cent of the Rs 5,551.27 crore was the royalty payment made to Qualcomm and without this technology, smartphone manufacturing was not even possible in India.

Hearing the arguments, the court said that it would pass an interim order if the company furnishes a bank guarantee of 5500 crore. The company said it would set up an escrow account to make payments from January from smartphone sales.

The court rejected this contention and expressed that if the company fails to deliver on this promise, it would be unfair to the other party. “The revenue department will be left high and dry,” the court said.

The court was also informed by the centre that the company before had 7000 crore in their bank account and now they only have close to 4000 crore.

"If the charges against Xiaomi are right, as per our view, ED's seizure order is good and the Court’s reluctance in interfering is just and fair, at least for the time being and till the entire facts come out. Further, the seizure did not become an impediment in running the day-to-day activities of the company as the bank accounts were allowed to be operated for day-to-day activities," says Bharat Chugh, former Judge & Advocate Supreme Court of India. 

The matter is likely to be heard again on October 14.