Xiaomi Corp.’s shares sank 5.7% in Hong Kong Tuesday on the first day of trading after Indian authorities seized $726 million from the bank accounts of the Chinese smartphone maker’s Indian subsidiary. Shares pared losses slightly to 4.4% by the day’s end.
In a statement released Saturday, India’s Enforcement Directorate accused the Chinese company’s Indian subsidiary, Xiaomi Technology India, of making “illegal outward remittances,” violating India’s strict rules on foreign exchange.
The agency, which investigates money laundering and foreign exchange crimes, accused the subsidiary of disguising the remittances as royalty payments to three overseas entities, one of which was a Xiaomi company.
Indian authorities alleged that Xiaomi Technology India procures its phones from local manufacturers, and thus “has not availed any service from the three foreign-based entities to whom such amounts have been transferred,” according to the Enforcement Directorate’s statement. The statement further alleges that Xiaomi’s Indian subsidiary conducted the scheme “on the instructions of their Chinese parent group entities.”
Xiaomi India, in a statement released on Twitter on Saturday, said that the company’s payments were a “legitimate commercial arrangement,” covering “in-licensed technologies and IPs used in our Indian version products.” The manufacturer pledged to work “closely with government authorities to clarify any misunderstandings.”
In February, Indian authorities summoned Manu Kumar Jain, Xiaomi India’s former managing director who spearheaded the company’s early growth in India, as part of an investigation into the subsidiary’s payments, according to Reuters. In December, India’s income tax officials raided Xiaomi and other Chinese smartphone manufacturers in a separate investigation on alleged tax evasion.
Xiaomi did not immediately respond to a request for further comment.
A multinational company remits profits when it tries to move income from an overseas subsidiary to the parent company. However, many countries—including India—often treat royalty payments differently from business income meaning that an Indian subsidiary could evade the attention of regulators by disguising profits as royalties.
Xiaomi is not alone in allegedly trying to disguise its profits as royalty payments. The tactic is widely used by multinational companies to minimize their tax burden in India and other countries.
Xiaomi is India’s largest smartphone seller, accounting for 21% of the country’s market share in the fourth quarter of 2021, according to data from smartphone consultancy Counterpoint Research. In fact, Chinese brands dominate the Indian market. The country’s second-largest smartphone seller in the last three months of 2021 was Shenzhen-based manufacturer Realme with a 17% market share, while Guangzhou-based BBK Electronics’ Oppo and Vivo brands captured a combined 22% in the same period.
India has banned over 200 Chinese-owned apps over the past two years, including TikTok and WeChat, after a deadly skirmish on the China-India border. Even apps with a more tenuous connection to China, like games from Singapore-based developer Sea Ltd.—backed by Tencent Holdings—have been caught in the crossfire.