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FEMA violation: Karnataka High Court says it cannot interfere with proceedings unless Xiaomi furnishes bank guarantee for ₹5,551 crore

Company has questioned competent authority’s order of confirming Enforcement Directorate’s order of seizure

October 06, 2022 10:36 pm | Updated 10:36 pm IST - Bengaluru

The High Court of Karnataka on Thursday said it cannot grant an interim order in favour of M/s Xiaomi Technology India Pvt Ltd unless the company furnishes a bank guarantee for ₹5,551.27 crore in the proceedings initiated against it for allegedly transferring the said amount outside India in violation of the Foreign Exchange Management Act (FEMA).

Justice N.S. Sanjay Gowda made these observations orally while hearing a petition filed by Xiaomi. The company has challenged the September 29, 2022, order passed by the competent authority under FEMA confirming the seizure order of ₹5,551.27 crore issued by the Enforcement Directorate (ED) on April 29.

Company’s contention

The company contended that the competent authority had not applied its mind in confirming the ED’s action of seizure of ₹5,551.27 crore while claiming that the competent authority had not given an opportunity to examine the representatives of a foreign multinational bank.

Senior advocate Udaya Holla, appearing for the company, argued that the petition is maintainable as the company has also questioned the constitutional validity of Section 37-A of the FEMA apart from challenging competent authority’s order.

Amount withdrawn

However, Additional Solicitor General of India M.B. Nargund, who represented the ED along with advocate Madhukar Deshpande, contended that the company had allegedly withdrawn a substantial amount out of the seized amounts by misrepresenting the High Court’s order passed in the earlier petition.

Only around ₹3,900 crore is available in the company’s account as of October 4 as against the seized amount of ₹5,551.27 crore, the ASG pointed out while contending that the company has to approach the appellate authority against the order of the competent authority.

When the court suggested that it will consider granting an interim order if the company furnishes bank guarantee for ₹5,551 core, the senior advocate said company will deposit the amount from its sales from January 2023, as the company needs money to supply mobile handsets for festival sales.

However, the court said the company has to furnish the bank guarantee if it wants to operate bank accounts as the court has to protect the interests of both the company and the government while asking what if the company says that revenue from the sales was not as expected.

There has to be an equitable way to protect the interest of both the sides, the court said while adjourning hearing till next as agreed by both the parties.

Second round

This is the second round of legal battle by Xiaomi against the ED’s action. It had filed a petition earlier soon after the ED seized the amounts and the court in May had permitted it to operate the bank accounts only to meet the expenses for its day-to-day activities and to take overdraft from the seized bank accounts to make payments to foreign entities, excluding payment of royalty.

Later, the court in July disposed of the petition while noticing that the ED had already submitted the seizure order before the competent authority for confirmation. The Court had given 60 days for the competent authority to decide the ED’s action.

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