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India says Xiaomi misled Deutsche Bank over ‘illegal’ royalty payments

Xiaomi has teamed up with India’s financial crime fighting agency, the Enforcement Directorate, as it has frozen $670 million of the company’s banking assets.

Indian investigators have alleged that the Indian unit of Chinese smartphone maker Xiaomi Corp has for years misled its banker Deutsche Bank AG by claiming it had an agreement for the payment of royalties when it did not, according to legal documents.

Xiaomi has teamed up with India’s financial crime fighting agency, the Enforcement Directorate, since it frozen $670 million of the company’s banking assets, according to an investigation that the smartphone vendor made “illegal remittances” to the US chip company. Qualcomm and others in the “disguise” of royalty.

Xiaomi has denied wrongdoing and approached an Indian court arguing that its payments were legitimate and that the asset freeze – later confirmed by an appeals body – had “effectively halted its activities in a key market”. The court rejected any waiver in October and the case will be heard on November 7.

Documents in Xiaomi’s Oct. 3 lawsuit shed new light on the investigation’s findings, showing that federal agents found suspected irregularities in the way the Indian unit transferred royalties to Qualcomm for licensed technologies such as patents.

According to the court documents, which contain the findings of the enforcement agency, a director of Deutsche Bank India confirmed to federal agents in April that Indian law required the drafting of a legal agreement between Xiaomi India and Qualcomm to make royalty payments, and the smartphone company. the bank was informed that such an agreement existed.

Xiaomi India has not shared the agreement with the bank due to confidentiality reasons, Deutsche told investigators, according to the documents.

However, during the investigation, the India CFO of Xiaomi, Sameer Rao, and the CEO at the time, Manu Kumar Jain, admitted that there was no agreement between Qualcomm and Xiaomi India, and the royalties were transferred based on instructions received from the executives. of the group in China, the Indian agency said, the documents show.

Xiaomi “provided misleading information to the bank. They did not share the agreement with the bank they named as the payment basis,” the agency noted in its review.

“This shows… their intention to transfer the money outside of India according to the whims and fantasies of the Chinese parent,” it added.

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 “under the license with Qualcomm, Xiaomi India pays royalties on all devices sold in India”. Neither answered questions related to royalty agreements.

Rao, Jain and the Enforcement Directorate did not respond.

Xiaomi, India’s largest smartphone player with a 21% market share, said it is sticking to its “stance on the legality of royalty payments,” citing an Oct. 2 statement by Reuters.

That statement said that Xiaomi India was an affiliate and one of the companies of the Xiaomi Group, which has entered into a legal agreement with Qualcomm. It was “legitimate” for the Indian unit to pay the US company, the statement said.

Indian authorities disagree, saying that Xiaomi India is only acting 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, according to court documents.

Many Chinese companies are struggling to do business in India due to political tensions following a border dispute in 2020. India has raised security concerns by banning more than 300 Chinese apps and tightening investment standards for Chinese companies.

In the Xiaomi investigation, the company claimed that Rao and Jain were threatened with “physical violence” during interrogation by the Indian agency, Reuters reported in May. The agency called the allegations “false and baseless”.

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