Xiaomi shares continue to drop despite suspension of $725 million asset freeze in India

Asian Tech Press (May 6) -- Xiaomi shares continued to drop Friday even as news broke that India suspended the freezing of its $725 million in assets.

An Indian court has suspended a federal enforcement agency's decision to seize $725 million from the local bank accounts of Chinese smartphone maker Xiaomi Corp.

India's Directorate of Enforcement (ED) last week seized Xiaomi India's bank assets, saying it found that the company had illegally remitted funds to three foreign entities, including one of the Xiaomi group, "in the guise of royalty" payments.

Xiaomi denied any wrongdoing, saying its "royalty payments and statements to the bank are all legit and truthful". It then filed a lawsuit in the High Court of Karnataka in southern India against the Indian financial crime fighting agency's decision.

Like many technology companies, Xiaomi has done most of its R&D in China locally. Its Indian company, however, is only responsible for manufacturing and sales, and does not do research and development, which requires the purchase of intellectual property rights and patents from other subsidiaries of the Xiaomi group.

After hearing from Xiaomi's lawyers, a judge on Thursday put ED's decision on hold.

A source said the company was granted a relief in the event that Xiaomi would inform Indian authorities of fund transfers such as royalty payments.

The case will next be heard on May 12, according to the Indian court's website.

India is an important market for Xiaomi

As one of the largest countries in the world in terms of population, India's smartphone market size is almost as huge as that of China. And most people in India are price-sensitive and greatly favor Xiaomi, which focuses on low-cost smartphones.

To compete for the Indian market, Xiaomi established Xiaomi Technology India Pvt. Ltd. in 2014 and opened its first plant in the southern Indian state of Andhra Pradesh the following year in partnership with Foxconn, a long-time iPhone assembler.

It took only three years for Xiaomi to become the largest smartphone manufacturer in India in terms of shipments. At its best sales, Xiaomi captured 30% of mobile phone market in India.

In the seven years since its entry into India, Xiaomi has built seven factories in the country to handle the manufacturing and sales of Xiaomi phones in India.

A Xiaomi India executive said in November 2019 that about 99% of Xiaomi's phones sold in India were made in India, fulfilling Indian Prime Minister Narendra Modi's "Make in India" wish.

In March 2017, Xiaomi founder Lei Jun took Manu Kumar Jain, then head of the Indian subsidiary, to visit Modi and presented him with an India-made Xiaomi phone.

(Xiaomi founder Lei Jun, accompanied by Manu Kumar Jain, presented an India-made Xiaomi phone to Indian Prime Minister Narendra Modi.)

According to market research firm Counterpoint Research, Xiaomi remained India's largest smartphone seller in 2021, with a 24% market share.

Xiaomi suffers setbacks in India

In June 2020, following the U.S. crackdown, India permanently banned 59 Chinese apps, including the popular TikTok and CamScanner, alleging that they posed "threat to sovereignty and integrity".

In August of that year, India expanded its crackdown, announcing that it had banned the Mi Browser, which was pre-loaded on most Xiaomi smartphones.

In response, Xiaomi launched a new MIUI system in India that would not pre-install any of the apps banned by the Indian government.

In December 2021, the Indian tax authorities had raided the offices and manufacturing plants of Chinese smartphone makers Xiaomi, Oppo, OnePlus, etc. in India.

In early January 2022, India's Ministry of Finance said in a statement that the Directorate of Revenue Intelligence (DRI) had issued a notice, asking Xiaomi India to pay 6.53 billion rupees ($87.8 million) in import taxes.

In April 2022, sources said that ED asked Manu Kumar Jain, the former head of Xiaomi India, to cooperate with the relevant investigation.

Market reaction

The news on the suspension of the asset freeze in India did not ease the downward trend of Xiaomi's share price.

As of the close of trading on Friday, Xiaomi's shares in Hong Kong were down more than 4%, while Xiaomi's American Depositary Receipts (ADRs) have fallen as much as nearly 10% in the last five days.

Xiaomi ADR on May 6

It appears that a series of investigations against Xiaomi in India are continuing to spark fear in the market, and the latest pending case is also worrying investors.

Counterpoint Research Ivan Lam previously said the investigation was a concern for Xiaomi investors as it could take up to six months.

"Even if it's [cleared up] in three to four months, they will be under the strict watch of the authorities," Lam said.

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