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

  • Xiaomi, an Indian agency clash over royalty payments
  • India froze $670 million in Xiaomi bank assets
  • Xiaomi said India’s freeze on operations had “virtually stopped”

NEW DELHI (Reuters) – Indian investigators have alleged that the India unit of India’s Xiaomi Corp (1810.HK) misled its bank Deutsche Bank AG (DBKGn.DE) for years by claiming it had an agreement to pay royalties when legal documents emerged.

Xiaomi has shut down India’s Financial Crimes Control Agency, Enforcement Directorate, since it froze $670 million in the company’s bank assets, saying an investigation found the smartphone vendor made “illegal transfers” to US chip maker Qualcomm (QCOM.O) and others in ” Star’ royalties.

Xiaomi denies wrongdoing and has taken to an Indian court, saying its payments were legitimate and that the asset freeze – later confirmed by an appeal authority – had “effectively halted” its operations in a key market. The court in October denied any damages, and the case will be heard 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 its Indian unit made transfers as royalties to Qualcomm for licensed technologies such as patents.

According to court documents, which included the enforcement agency’s findings, an executive at 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 disclosed to the bank the existence of such an agreement.

Deutsche told investigators that, according to the documents, Xiaomi India did not share the agreement with the bank for confidentiality reasons.

However, during the investigation, Xiaomi’s Chief Financial Officer in India, Sameer B.S. Rao, and its managing director at the time, Manu Kumar Jain, admitted that there was no agreement between Qualcomm and Xiaomi India, and the royalties were transferred based on directions from the group executives and showed The documents are in China, the Indian agency reported.

In its assessment, the agency noted that Xiaomi “provided misleading information to the bank. They did not share the agreement with the bank they cited as the basis for payment.”

“This shows … their intent to transfer money out of India according to the whims and fantasies of the Chinese father,” she added.

A Deutsche Bank spokesman declined to comment. According to court documents, one of Xiaomi’s four bank accounts frozen in India is in Deutsche.

Qualcomm, in a statement, said that under the “license with Qualcomm, Xiaomi India pays royalties on all devices sold in India”. Both did not answer questions about equity agreements.

Rao, Jain, and the Enforcement Directorate did not respond.

Xiaomi, India’s largest smartphone maker with a market share of 21%, said it continues to stand by its “position on the legality of royalty payments,” referring to Reuters’ October 2 statement.

In this statement, it said that Xiaomi India was a subsidiary and one of the companies of the Xiaomi Group, which has entered into a legal agreement with Qualcomm. The statement added that it was “legitimate” for the India unit to pay the US company.

The Indian authorities do not agree with this and say that Xiaomi India acts only as a distributor of smartphones made by contract manufacturers. Since the Indian unit has no role in designing the phones, it has “nothing to do” with Qualcomm’s equity payments, as valued by the agency, according to court documents.

Many Chinese companies have struggled to do business in India due to political tensions following the border clash in 2020. India has cited security concerns in banning more than 300 Chinese apps and has tightened investment criteria for Chinese companies.

In the Xiaomi investigation, the company alleged that Rao and Jin faced threats of “physical violence” during interrogation by the Indian agency, Reuters reported in May. The agency described the allegations as “incorrect and baseless”.

Additional reporting by Aditya Kalra and Moncef Vengatel in New Delhi; Additional reporting by Nemet Dixit. Edited by Muralikumar Anantharaman

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