Xiaomi India misled Deutsche Bank with ‘illegal’ royalty payments, says ED
Indian investigators allege that the Indian arm of Chinese smartphone maker Xiaomi misled its banker Deutsche Bank AG for years by claiming there was an agreement for royalty payments when there was none, according to legal documents.
Xiaomi, the company’s banking arm, says an investigation has revealed the smartphone vendor made “illegal transfers” to US chipmaker Qualcomm and other parties “under the guise” of royalties.
Xiaomi denies wrongdoing and went to an Indian court, arguing that its payments were legitimate and that the asset freeze — later upheld by an appeals court — had “effectively halted” its operations in a key market. The court in October rejected any compensation and the case is scheduled to be heard again on November 7.
Documents in Xiaomi’s October 3 court filing shed new light on the investigation’s findings, showing that federal agents found suspected irregularities in the way the company’s Indian arm transferred royalties to Qualcomm for licensed technologies, such as patents.
According to the court documents, which detail the enforcement agency’s findings, a Deutsche Bank India executive confirmed to federal agents in April that Indian law requires a legal agreement between Xiaomi India and Qualcomm to make royalty payments. The smartphone maker notified the bank that such an agreement existed.
Xiaomi India did not share the agreement with the bank for confidentiality reasons, Deutsche told investigators, the documents said.
However, during the investigation, Sameer BS Rao, CFO of Xiaomi India, and Manu Kumar Jain, then managing director, admitted that there was no agreement between Qualcomm and Xiaomi India and that the royalties were transferred based on instructions from the group’s executives in China, the Indian agency said, according to the documents.
Xiaomi “provided misleading information to the bank. They did not share the agreement with the bank, which they indicated as the basis of payment,” the agency noted in its assessment.
“This shows that they plan to send the money outside India, as per the whims and wishes of the Chinese parent company,” the report said.
A Deutsche Bank spokesman declined to comment. One of Xiaomi’s four frozen bank accounts in India is with Deutsche, according to court documents.
Qualcomm said in a statement that under “the license with Qualcomm, Xiaomi India pays royalties on all devices sold in India.” Both did not answer questions regarding royalty agreements.
Rao, Jain and the Enforcement Directorate did not respond.
Xiaomi, India’s largest smartphone maker with a 21 percent market share, said it stands by its “position on the legality of royalty payments,” citing an October 2 statement seen by Reuters.
The statement said Xiaomi India was a subsidiary and one of the companies of the Xiaomi Group, which entered into a legal agreement with Qualcomm. It was “legitimate” for the Indian unit to pay the US company, the statement added.
Indian authorities disagree, saying Xiaomi India acts only as a reseller of smartphones made by contract manufacturers. Since the Indian unit has no role in designing phones, it had “nothing to do” with royalty payments to Qualcomm, the agency ruled, according to court documents.
Many Chinese companies have struggled to do business in India amid political tensions following a border clash in 2020. India has banned more than 300 Chinese apps over security concerns and tightened investment standards for Chinese companies.
In the Xiaomi investigation, the company alleged that Rao and Jain faced threats of “physical violence” during questioning by the Indian agency, Reuters reported in May. The agency called the allegations “false and baseless.”
© Thomson Reuters 2022
