Chinese giants committing fraud in India? Why Xiaomi, Vivo, Oppo, Huawei are under fire
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Chinese giants committing fraud in India? Why Xiaomi, Vivo, Oppo, Huawei are under fire

Smartphone leaders like Xiaomi, Vivo, Oppo, and Huawei, besides smaller fintech players, are under the scanner of various central agencies for a laundry list of alleged offences.

   

Illustration: Manisha Yadav

New Delhi: This seems to be a bad time for Chinese companies operating in India.

After banning more than 200 Chinese apps since June 2020, the Modi government is cracking the whip on several Chinese companies, right from top multi-crore players like Xiaomi, Vivo, Oppo, and Huawei, to smaller fintech firms.

Various central agencies — including the Enforcement Directorate (ED), Income Tax Department, and Directorate of Revenue Intelligence (DRI) — as well as the local police of different states have begun investigations against these firms, on allegations ranging from income tax evasion and customs violations to fraud and money laundering.

Sources in various agencies have claimed that though these companies were registered in India as separate entities from their parent firms, they were taking “direct directions from China” and “routing substantial amounts of money” back to the neighbouring country.

While in some cases there are accusations that money was being ‘laundered’ as royalties or licence fees, in others it is alleged that sales books were manipulated to show losses to save income tax, while channelling profits to shell companies.

“Such actions cause depletion of tax base in India. These offences have come to light now and therefore require strict action,” Karnal Singh, former director of the Enforcement Directorate (ED), told ThePrint.

In the case of some smaller fintech companies, it has been alleged that they ‘duped’ thousands of people by giving short-term loans at high interest rates, and then hounded them using personal data mined through mobile phone apps.

Earlier this year, the Ministry of Corporate Affairs (MCA) registered more than 700 cases against companies with alleged Chinese links. The move came after an alert from the Union Home Ministry, which claimed that some Indian companies had Chinese nationals on their boards and could be fronts for money laundering and other illegal activities.

The spurt of crackdowns — following years of burgeoning investments in India by private Chinese companies — coincides with the souring of bilateral relations between the two countries due to the standoff at the border in Ladakh, the issue of Indian students not being allowed to return to their universities in China due to Covid restrictions, and a tussle for influence in South Asia where the neighbouring giant has been aggressively trying to expand its footprint.

The Indian government’s actions have not gone unnoticed by Beijing. China’s state-run English-language daily Global Times published an editorial in May stating that India should stop its “regulatory assault” on Chinese companies.

More than once, China through official channels has urged India to provide a “fair” and “non-discriminatory” environment to Chinese companies with investments and operations in India. In July, an official from the Chinese embassy in Delhi criticised the “frequent investigations” by India into Chinese enterprises. The Chinese government, the official said, “firmly supports Chinese enterprises in safeguarding their legitimate rights and interests.”

Experts, meanwhile, believe that while it is necessary to make Chinese companies comply with laws and regulations, care should be taken to not discourage investments or harm the interests of Indian enterprises.

“The agencies while probing the big giants should ensure that there is no collateral. They need to protect the Indian companies associated to these giants,” said Baljit Kalha, a specialist in international law.


Also Read: ‘Fake address, intent to defraud’: Why India is cracking down on firms with Chinese directors


Xiaomi case: ‘Royalty payments didn’t make sense’

In late April, the ED seized more than Rs 5,555 crore from the bank accounts of Xiaomi Technology India Private Limited, a wholly owned subsidiary of China’s Xiaomi Group. Soon afterwards, it also took in the company’s global vice-president, Manu Kumar Jain, for questioning.

File photo of Manu Kumar Jain, Xiaomi’s former India managing director, who was summoned by the ED earlier this year to appear before it in a probe linked to the firm’s business practices | ANI

In a press statement, the ED said it had initiated an investigation under the provisions of the Foreign Exchange Management Act (FEMA) in connection with “illegal remittances made by the company”.

The ED alleged that the company, which started operations in India in 2014, had remitted foreign currency amounting to Rs 5,551.27 crore “in the guise of royalty” paid to one Xiaomi group “entity” and two other US-based “unrelated entities”, starting from 2015.

All of these transactions, the ED claimed, were “on the instructions of their Chinese parent group entities” and for the “ultimate benefit of the Xiaomi group entities”.

A source in an investigating agency claimed that there was no “plausible explanation” or “valid documentation” for the transfers.

“The company, without availing any service from the foreign entities and without having any authorisation, remitted this money abroad which is a clear violation. The money was sent to tax havens,” he alleged, adding that royalties “are the easiest method to send money out”.

Xiaomi India — the country’s smartphone market leader — procures mobile sets and products from local manufacturers under an agreement and then sells them, the source said. No technological input or software-related assistance is given by the company to these contract manufacturers.

The source also claimed that the company made huge margins, but showed losses in its books to evade taxes.

Xiaomi India, meanwhile, has denied that it committed any wrongdoing and challenged the seizure of its assets in the Karnataka High Court. On 5 July, the court directed a “competent authority” under FEMA to pass an order within 60 days either confirming or dismissing the ED’s seizure order.

Earlier this year, in January, the DRI also also accused Xiaomi India of customs duty evasion of Rs 653 crore.

According to a source in the DRI, an intelligence input alerted the agency to the company seemingly evading customs duty by way of “undervaluation”. In the subsequent investigation, the DRI found that the company was “remitting royalty and licence fee” to Qualcomm US and to Beijing Xiaomi Mobile Software, under “contractual obligation”, the source added.

This money, sources said, was not being added in the transaction value of goods imported by Xiaomi India and its contract manufacturers.

Responding the allegation, a Xiaomi India spokesperson told ThePrint that all royalty payments that Xiaomi India has made are legitimate and under valid legal contracts.

“About 84 per cent of the total royalty remittances were made to Qualcomm, a listed American corporation, for various licensed technologies including Standard Essential Patents (SEPs) and other intellectual property. These licensed technologies are critical for lawful functioning of Xiaomi products in India,” the spokesperson said.

“All royalty payments were made through normal banking channels post tax deductions… as a global organisation, we continue to respect and abide by the law of the land,” the spokesperson added.

Vivo case:Shell companies, forged records, 50% turnover sent to China’

The dust from the Xiaomi raid had barely settled when the ED, on 5 July, carried out searches at 48 locations belonging to Vivo Mobiles India Private Limited and 23 of its associated companies in the country.

The ED has accused Vivo India of laundering money by creating a web of nearly two dozen shell companies and remitting Rs 62,477 crore to China between 2017 and 2021. This sum, according to the ED, amounts to almost 50 per cent of the company’s turnover.

These remittances, an ED officer claimed, were made in order to disclose huge losses in Indian incorporated companies to avoid taxes in India. The officer also alleged that investigations have suggested that all major decisions for Vivo India flowed from China.

“While Vivo India maintained that they did not have any relation to Vivo China and functioned independently, it was found that all major decisions for Vivo India were being made from China,” the source said. “We have recovered electronic evidence substantiating this.”

Vivo Mobiles India Pvt Ltd was incorporated in August 2014 as a subsidiary of Multi Accord Ltd, a Hong Kong-based company, and was registered by the Registrar of Companies (RoC) in Delhi.

According to this ED officer, the company’s “sales books were manipulated” to show crores of phones being sold in a remote corner of India in the last four years.

“The money involved in this is much more than what is known,” the source claimed.

Representational image | File photo of actress Payal Rajput launching the Vivo V23 Series smartphone at a store near Hyderabad in January this year | ANI

Vivo India has been under the scanner for a while.

The ED launched its investigation under the Prevention of Money Laundering Act (PMLA) in February this year on the basis of a case filed by the Economic Offence Wing of the Delhi Police in December 2021 against Grand Prospect International Communication Pvt Ltd (GPICPL) — a company associated with Vivo — and its directors, shareholders, and certifying professionals.

The FIR was filed after the Ministry of Corporate Affairs lodged a complaint alleging that GPICPL and its shareholders had used “forged identification documents and falsified addresses at the time of incorporation”.

According to an ED statement, GPICPL was registered on 3 December 2014 at RoC Shimla, with addresses in Solan (Himachal Pradesh) and Gandhi Nagar (Jammu).

“[T]he investigation revealed that the addresses mentioned by the directors of GPICPL did not belong to them, but in fact it was a government building and house of a senior bureaucrat,” the statement read.

When the ED started the money laundering investigation, it purportedly found that Bin Lou, director of GPICPL, who was also a former director of Vivo, incorporated over 18 companies across India, just after the incorporation of Vivo, in 2014-15. Another Chinese national, Zhixin Wei, was also said to have incorporated four companies.

These companies, investigators allege, transferred huge amounts of funds to Vivo India.

The ED has claimed that some Vivo India employees, including Chinese nationals, did not cooperate with search proceedings and tried to “abscond” and “hide devices”.

So far, the agency has reportedly seized 119 bank accounts of “various entities” with balance amounting to Rs 465 crore, 2kg gold bars, and Rs 73 lakh in cash under provisions of the PMLA.

ThePrint contacted Vivo India via email, but did not receive a response until the publishing of this report.

In earlier reports, Vivo has maintained that it is “cooperating with the authorities to provide them with all required information” and that it is “committed to be fully compliant with laws”

Oppo case:Wrongfully availed duty exemption, money sent to China’

The Directorate of Revenue Intelligence (DRI) turned up the heat on Oppo Mobiles India Private Limited in July, alleging that the company had evaded customs duty amounting to Rs 4,389 crore, among other suspected infractions.

A subsidiary company of Guangdong Oppo Mobile Telecommunications Corporation Ltd in China, Oppo India deals in the assembly and trade of various mobile phone brands, including Oppo, OnePlus, and Realme.

According to a DRI statement, searches at the office of Oppo India and the residences of key management employees yielded “incriminating evidence” that there had been a “wilful mis-declaration in the description of certain items” that the company had imported for use in the manufacture of mobile phones.

A DRI officer told ThePrint that the company allegedly availed of duty exemptions that it was not eligible for, amounting to over Rs 2,900 crore. He added that, during questioning, members of the senior management as well as domestic suppliers admitted that they had submitted “wrongful descriptions” to customs authorities at the time of import.

An Oppo mobile phone | Representational image | Photo: Twitter

Not just that, the DRI has alleged in its statement that Oppo India made provisions to pay royalties and licence fees to various multinational companies, including some based in China, for the use of “proprietary technology/brand/IPR licence etc”. However, the company reportedly neglected to add these royalties and licence fees to the transaction value of the goods it imported.

This, the DRI officer said, was a violation of the Customs Act and the alleged “duty evasion” on this account came to Rs 1,408 crore.

A showcause notice has been issued to Oppo India to pay up customs duty amounting to Rs 4,389 crore, the officer said.

In response to the customs raid, an Oppo spokesperson said, “We have a different view on the charges mentioned in the SCN [showcause notice]. We believe it’s an industry-wide issue many corporates are working on.”

The spokesperson added that the company will reply to the notice and present its side after reviewing the SCN.

“Oppo India will take appropriate steps as may be needed in this regard including any remedies provided under the law,” the spokesperson said.

Huawei case: Tax evasion, inflated books’

Much as in the case of Vivo, Huawei Telecommunications India was accused by the Income Tax Department in July of remitting Rs 750 crore to its Chinese parent company even as it recorded a drastic fall in its revenue.

Prior to this, in March, the I-T Department had claimed that the company tried to evade taxes by suppressing Rs 400 crore in their books.

According to government sources, the company manipulated its books to reduce its taxable income in India through the creation of various provisions for expenses. “This included expenses such as provisions for obsolescence, provisions for warranty, doubtful debts/ loans and advances, which have little or no scientific or financial rationale,” a source said.

The alleged evasion case came to the fore in February when the I-T Department conducted searches at Huawei offices in Delhi and Bengaluru, and also the residential premises of its key officebearers.

Representational image | File photo of Huawei Technologies founder Ren Zhengfei at the 50th World Economic Forum annual meeting in Davos in 2020 | ANI

A government source said that investigations suggested that the company had made “inflated payments” for “technical services” from its related parties outside India.

“This money was being sent to China,” the source alleged. “When the company was asked about the details, it could not justify the genuineness of obtaining such technical services for which payment was made.”

According to a statement issued by the Ministry of Finance, in which the company was not named, “a major telecom group” spent Rs 129 crore over a period of five years for the payment of such services.

In addition, it allegedly recorded spending more than Rs 350 crore towards “royalty” to related parties.

“Such expenses have been incurred for the use of brand and technical know-how related intangibles. During the search, the group has failed to substantiate receipt of any such services/technical know-how, or the basis of quantification of royalty rate for such claim,” the statement said.

On 1 May, David Li, a Chinese national who was appointed CEO of the Chinese telecommunication giant’s India operations in April 2020, was stopped from boarding a flight to Bangkok at New Delhi’s Indira Gandhi International Airport. He had then moved the Delhi High Court challenging the lookout circular (LOC) issued against him at the request of the I-T Department.

In a written response to ThePrint on the allegations, a Huawei spokesperson said that the company was “fully cooperating” with the Indian authorities and had submitted all the information requested of it.

“[A]s a significantly invested partner in India, we respect the law of the land… We are in the process of filing our replies/rejoinder as per the due process of the law,” the response said. It concluded that since the matter is sub judice, it would not be “appropriate” for Huawei or its officers to comment any further.

Loan apps case: ‘High interest, data theft’

In the last one year, the ED has come down heavily upon micro-financing applications allegedly run by Chinese-owned fintech companies and have registered multiple cases in this regard. The agency has attached assets worth more than Rs 158.97 crore so far in loan apps cases.

According to ED sources, there are several fintech firms located in India — including in Gurugram, Delhi, Mumbai, and Bengaluru — that are either directly owned by Chinese nationals or companies or indirectly by “dummy directors” appointed in Indian companies. These companies, sources said, are getting funds, directly or indirectly, from China or Hong Kong.

ED sources claim that these fintech companies gave “instant micro loans” ranging from Rs 2,000 to Rs 20,000 to thousands of customers, on a very high rate of interest ranging from 182 per cent to 365 per cent per annum along with a high penalty for default.

Logo of Enforcement Directorate | Twitter

The time period for this loan ranged from one week to a few months and an amount of 15-25 per cent of the sanctioned loan was deducted as processing fees at the time of sanctioning itself.

ED sources have also alleged that, while processing these loans, these companies “captured personal data of customers”, and then used it against the customers, forcing them to cough up inflated interest amounts.

According to the ED source, these fintech companies identified dozens of defunct non-banking financial companies (NBFCs) with meagre capital ranging from Rs 3.5 crore to Rs 11 crore and used their licence as their own for this business.

‘Crackdowns could hit economy’

Experts believe that the crackdowns so far have been “necessary” but could discourage Chinese investment in India. This, in turn, could hit the economy, they added.

Speaking to ThePrint, Dr Madhu Bhalla, a former professor in Chinese studies at the Department of East Asian Studies, Delhi University, said that India seems to be sending China a message through these cases filed against Chinese companies.

This, she said, served as a “political message” rather than a purely economic one given that the objective of moving away from Chinese companies is undermined by the fact that India’s biggest corporates are deeply entrenched in the Chinese market.

The agencies’ actions, however, are also in line with global trends, she added.

“After 2020, the pressure on Chinese companies with reference to compliance with local laws has increased globally. After Covid hit, the US disengaged with the Chinese and there has been pressure to see how these Chinese companies behave in terms of business practices. India is taking the US route on this,” Bhalla said.

Bhalla also said that the government’s agenda — whether it is to make companies compliant or to decouple from China — needed to be understood. If compliance was the objective, she said, the pressure to comply with Indian laws would also be exerted on non-Chinese companies.

“Can we have a proper auditing of each and every corporate? An attack on Chinese firms alone doesn’t meet this objective,” she said.

Speaking to ThePrint, Baljeet Kalha, a specialist in international law, said that although the scrutiny of Chinese companies is important, investments should not be discouraged, especially at a time when the economy is slow.

Kalha said that the agencies should also pay heed to the fact that many Indian companies are facing issues due to the crackdowns.

“As an offshoot of these investigations, a lot of vendors and businesspeople, who are purely doing business with no intention of committing a violation, are suffering,” he said.

Karnal Singh, former director of the ED, said that the registration of these cases by agencies indicate that Chinese companies are shifting profits to other countries, which qualifies as an offence under various laws.

He pointed out that multiple agencies were going after the companies for a reason. “Here, one offence involves multiple agencies. For instance, if companies were formed using forged documents to launder money, then both local police (to probe criminality) and ED to probe the money laundering, will come into the picture,” he said.

(Edited by Asavari Singh)


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