In a major setback to Chinese smartphone manufacturer Xiaomi Technology India Private Limited, the Karnataka High Court on Thursday declined to grant an interim relief to the company in the ₹5,551 crore Foreign Exchange Management Act (FEMA) case. The court also told the Chinese smartphone maker to provide a bank guarantee worth ₹5,551 crore in assets that are frozen.

On September 30, the competent authority under the FEMA issued an order to seize Xiaomi India’s assets worth over ₹5,551 crore. In April this year, the Enforcement Directorate seized the Chinese smartphone manufacturers assets in India worth ₹5,551 crore, accusing the company of violating the FEMA rules, and remitted the foreign currency to three foreign-based entities which include one Xiaomi group entity in the guise of royalty. “The company also provided misleading information to the banks while remitting the money abroad,” the ED said.

The ED then sent the seizure order to the competent authority under FEMA for approval. On Thursday, the Chinese smartphone manufacturer said that it has halted operations effectively while terming the actions taken by the ED as “severly disproportionate.” It also argued that a bank guarantee of its assets would mean submitting the entire amount, which will hinder in paying salaries to its employees in India.

Earlier this month, Xiaomi said that 84% of the seized amount of ₹5,551.27 crore were royalty payments to chipmaker Qualcomm Group for intellectual property (IP) used in Indian smartphones. According to the Chinese smartphone manufacturer, it had entered into a legal agreement with the US-listed Qualcomm Group to license IP for manufacturing smartphones.

“Of the entire ₹5,551.27 crore Xiaomi India paid to foreign entities, more than 84% were royalty payments made to Qualcomm Group (USA), a third-party US listed company, towards the in-licensed technologies, including Standard Essential Patents (SEPs) and IPs used in our version of smartphones. These technologies and SEPs are used across the entire global smartphone industry. Without these technologies, our smartphones would not have worked in India,” the company said.

“All royalty payments made by Xiaomi India were only related to sales done by Xiaomi India, and not for any other countries or regions. This has also been confirmed by the Qualcomm Group (USA). We would like to clarify that Xiaomi Technology India Private Limited does not own or hold any assets outside India. Hence, as per our understanding, Section 4 of FEMA does not even apply in this situation,” it added.

Notably, the government had tightened scrutiny against Chinese smartphone manufacturers such as Xiaomi, Vivo, and Oppo, who collectively control 75% market share in India. 

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