Karnataka High Court Upholds Seizure of Rs, 5,551 Crore from Xiaomi for FEMA Violation

Karnataka High Court Upholds Seizure of Rs, 5,551 Crore from Xiaomi for FEMA Violation

The Karnataka High Court has rejected the petition filed by Xiaomi India challenging an order passed by the Competent Authority appointed under the Foreign Exchange Management Act, 1999 (FEMA), confirming the order issued by the Enforcement Directorate (ED) seizing Rs. 5,551.27 crore of the company. The single judge Justice M Nagaprasanna dismissed the petition, by ruling that Section 37A of FEMA Act is constitutionally valid.

In 2022, the ED had ordered the seizure of Rs. 5,551.27 crore in the accounts of Xiaomi for allegedly violating FEMA rules and transferring money in the guise of royalty to three companies outside India; two in the USA and one in China.

The company had approached the High Court against this order. The High Court had however ordered it to approach the Competent Authority under FEMA. The Competent Authority had upheld the seizure.

Aggrieved, by the same Xiaomi had approached the High Court again challenging the Competent Authority’s order. After hearing the arguments, Justice M Nagaprasanna had reserved the judgement on 17 November, 2022.

In its petition, Xiaomi had challenged the Constitutional validity of Section 37A of FEMA, which authorizes the Authorized Officer prescribed by the central government to order seizure of property held outside India for violating Section 4 of the Act. Further, it was argued that the mandate of section 37A is vague because it uses terms such as ‘reason to believe’ and ‘suspected’ in the same breath, yet at the same time gives the Authorized Officer unrestricted authority to seize any property he wishes.

Appearing for the Central Government, Additional Solicitor General M B Nargund argued that Xiaomi is a foreign entity and cannot maintain the writ petition.

To which the High Court had retaliated, “Challenge to the Constitutional validity of Section 37A of the Act by the petitioner is held to be maintainable, on the fulcrum of the allegation that it is violative of Article 14 of the Constitution of India. As Article 14 is person centric whereas Fundamental Rights under Article 19 are citizen centric.”

The Court noted that a petitioner need not be a citizen to contest the core of Article 14, which grants everyone the right to equality and equal treatment under the law.

ASG Nargund had defended Centre's action saying it was government's endeavor to bring back the money kept outside of India.

“The amount parked outside is around Rs 5,551 crore, so we have attached it. Even if today the petitioners bring it back, the attachment order goes and so will the prosecution,” he argued.

It was contended that the department has followed the procedure and action taken was scrutinized by officers and was done by a Competent officer not belonging to ED, but an officer not below the rank of Joint Secretary from another department.

While Xiaomi contended that Section 37A does not specify the timeline till when the order will be in operation. It was also submitted that once the order is passed by the authorized officer and confirmed by the competent authority, the same can continue to be in operation till final adjudication of the proceedings.

Referring to Section 37A of the Act, the department argued that, “Section 37A has enough safeguards and also provides appeal opportunity. Therefore, how can be called arbitrary. So many checks and balances are available thus it cannot be said to be arbitrary.”

Lastly, after recording the facts and submissions the Court upheld the constitutional validity of Section 37A and stated that it does not suffer from any manifest arbitrariness.