The global smartphone manufacturer Xiaomi recently found itself in a rather embattled legal battle with the Indian Directorate of Enforcement (ED) over alleged violations of foreign exchange trade regulations. The Chinese smartphone manufacturer and its global investors were accused of bypassing the Foreign Exchange Management Act in order to bring investment into India.
The battle began when Xiaomi was encountering difficulties in violating the FDI rules while bringing an investment fund into the country. The Director-General of Enforcement had requested Xiaomi to pay a hefty fine and faces a jail term. Xiaomi had used its own special purpose vehicles to bring in this investment, but the ED had accused it of indulging in foreign exchange manipulation.
The Chinese giant had vehemently denied the accusations and stated that it was compliant with all laws. In fact, the company had sought legal counsel from experts in the Indian laws and was confident of emerging victorious from the battle with the Directorate.
Nevertheless, the judgement of the Mumbai High Court has come out in favor of the ED. The court has ruled that the Chinese entity had violated the FDI rules and ordered it to pay a sizeable fine. The non-compliance with the FDI regulations had hence resulted in a huge penalty for Xiaomi.
The case has shed light on the harsh nature of foreign investment regulations in the country. Yadvi Kalra, a noted lawyer and legal expert states that, “the harshly imposed fines by the ED is a reminder that companies need to take FDI regulations seriously. It is up to the companies to be familiar with the complicated laws of different nations or else they could face serious consequences.”
This is a cautionary tale to other companies looking to set foot in India. But the legal system of India is still far from perfect and there is a need for more effective foreign business regulations to make the process smoother for foreign companies.