The story so far: China on Wednesday, July 6 issued a strong statement against the Enforcement Directorate’s ongoing investigation into Chinese mobile company Vivo in India. The Chinese Embassy’s spokesperson in New Delhi had said that frequent investigations by Indian authorities into Chinese firms not only disrupted their business but also chilled the “confidence and willingness of market entities from other countries, including Chinese enterprises, to invest and operate in India”.
The ED, after raiding 48 places across the country in a money-laundering investigation against Vivo and related firms this week, said on July 7 that the company remitted 50 per cent of its turnover (₹62,476 crores) from Indian operations mainly to China to avoid payment of taxes in India.
How has Vivo performed in India?
Chinese smartphone company Vivo, headquartered in Guangdong, with its parent firm as BBK electronics (also the owners of Oppo and Realme), entered India in 2014 as Vivo Mobile India Private Limited and has a manufacturing unit in Noida.
According to Vivo’s 2021 impact report, it had crossed 100 million smartphone users in India. Having made ₹1,900 crore worth of manufacturing-related investments in India till 2021, the company has pledged another ₹3,500 crore by 2023 to boost production and begin exporting smartphones from India.
Vivo held a 16 per cent market share and the third spot in the Indian smartphone market after Xiaomi and Samsung in 2021, clocking 25.7 million smartphone shipments in the country, as per technology market analysis firm Canalys. In the first quarter of 2022, however, the company dropped to the fourth spot in market share and shipments.
According to a Counterpoint research report, Vivo became the top 5G brand in the ₹10,000-20,000 price segment in the country during the March 2022 quarter.
Vivo in India was also involved in sponsoring the Indian Premier League (IPL), first signing a two-year title sponsorship deal worth ₹100 crore in 2016, and then renewing the contract for a five-year cycle from 2018 to 2022 for ₹2,199 crore. The company, however, had to pull out of the contract before time in the aftermath of the Galwan Valley border standoff between India and China.
Why is the ED investigating Vivo?
The ED conducted raids at 48 premises in multiple states including Delhi, Uttar Pradesh, Meghalaya and Maharashtra, in an investigation into Vivo and linked companies, including one Grand Prospect International Communication Private Limited (GPICPL), under sections of the Prevention of Money Laundering Act (PMLA).
The ED’s money laundering case is based on a complaint it registered in February taking cognisance of a December 2021 FIR registered against GPICPL and its director and shareholders by the Delhi Police. This in turn was based on a complaint filed by the Ministry of Corporate Affairs. The FIR said that GPICPL (with registered addresses in Himachal Pradesh and Jammu and Kashmir) and its shareholders had used forged identification documents and falsified addresses at the time of incorporation in December 2014.
The ED said it suspected that the identities were forged in order to launder money through shell or paper companies, meaning companies that don’t actively participate in business which may be used to disguise ownership or engage in dubious financial manoeuvres.
The action is being seen as a part of the government’s increased scrutiny of Chinese firms or those with Chinese links that are allegedly engaging in financial crimes like money laundering and tax evasion while operating here. Action has been stepped uppost the LAC standoff between China’s People’s Liberation Army and the Indian Army in 2020. India has since banned over 250 Chinese apps and is making Chinese FDI investment proposals go through a strict approval process.
The action on Vivo came two months after ₹5,551 crore worth of deposits were seized from of Chinese smartphone giant Xiaomi India for allegedly contravening the Foreign Exchange Management Act (FEMA).
This is also not the first time Vivo India has come under scrutiny from investigating agencies. In 2021, the Income Tax (I-T) Departmentinvestigated Chinese firms Xiaomi, Oppo and Vivo and their distributor companies claiming afterwards that it detected alleged unaccounted income worth over ₹6,500 crore due to violation of Indian tax laws.
What has the ED reportedly found?
Overseas remittances to avoid Indian taxes: The ED said that out of the total sale proceeds of ₹1,25,185 crores, Vivo India remitted Rs. 62,476 crores, or almost 50 per cent of the turnover, out of India— mainly to China. The Central Agency said that these remittances were made in order to show huge losses in Indian incorporated companies to avoid payment of taxes in India or for the purposes of tax evasion.
False identities and addresses: ED found that GPICPL, accused of falsifying addresses and shareholder identities was incorporated by Chinese nationals Bin Lou, Zhengshen Ou, and Zhang Jie with the help of chartered accountant Nitin Garg.
The ED’s investigation found 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”.
Shell Companies: The Central Agency revealed that Bin Lou, the director of GPICPL and a former director of Vivo, floated 18 companies across the country just after the incorporation of Vivo India in 2014-15. Another Chinese national, Zhixin Wei, created four companies. These 22 companies were together found to be transferring huge funds to Vivo India. The creators of these companies, Mr. Lou and Mr Wei left India 2018 and in 2021, respectively.
Seizure: The ED has so far seized 119 bank accounts of various entities linked to Vivo with a gross balance of around ₹465 crores. These accounts also have Fixed Deposits of ₹66 crores of Vivo India. The agency also made a seizure of 2kg gold bars and cash of nearly ₹73 lakhs from the probed locations.
Why has Vivo approached the Delhi High Court?
Vivo had filed a plea in the Delhi High Court against the ED’s July 5 order to freeze its bank accounts. Justice Yashwant Sharma heard the case on Friday, July 8. According to legal news portal LiveLaw, Vivo claimed that its nine seized bank accounts held about ₹250 crores.
The smartphone maker’s petition said that because it won’t have access to the money in the frozen accounts, it would not be able to pay its statutory and regulatory dues such as customs duties and GST, apart from other expenses such as salaries of employees and rents of offices.
Vivo said that due to all of this, “its business has now been set on a path towards a commercial and civil death”.
The petition further said that contrary to what is required under Section 17 of the PMLA, the ED had not determined or quantified the amount that allegedly made up the “proceeds of crime” or was used in money laundering.
The ED’s counsel Zoheb Hossain said thatthere was indeed reason to believe that possible proceeds of crime existed, based on evidence gather from the ED’s searches. The agency said that the company GPICPL received ₹1,400 crore of which nearly ₹1,200 crore was deposited into multiple accounts of Vivo.
The Court did not grant Vivo its requested relief of unfreezing its bank accounts. It, however, asked the ED to consider Vivo’s representation, bearing in mind the financial constraints cited by the company.
