MLMs now want to ‘invest’ money in India, really?

Will the forthcoming meeting of the Foreign Investment Promotion Board lead to much-needed tightening of the rules for global MLM companies operating in India, or will the politically powerful MLM lobby use it improve its current dodgy status under the Prize Chits Act?

The Foreign Investment Promotion Board (FIPB) will meet on 24th August to deliberate on the perils of allowing foreign direct investment (FDI) in multi-level marketing (MLM) companies, says a PTI report. However, experts worry that top multinational MLMs will use the meeting to legitimise their existence, which is currently uncertain under the Prize Chits & Money Circulations Schemes (Banning) Act, 1978.

Following reports of the FIPB meeting on 24th August, EAS Sarma, former expenditure secretary, Government of India, has written to Arvind Mayaram, secretary for economic affairs warning, “I apprehend that the FIPB route will be sought to be misused to obtain cover for these MLM companies which are nothing but a way to swindle the public to raise illegal funds to enrich unethical and anti-social persons.”

“Many of these (MLM) companies are not even registered under the Companies Act. Even those registered evade regulation. Those booked regroup under different names and continue to cheat the people. All these companies and those that promote them should be dealt with an iron hand and be prosecuted effectively,” he said. This follows several letters by him to the prime minister, ministry of corporate affairs, ministry of finance, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and others, on the subject. All of this has been backed by a solid body of investigation and research by Hyderabad-based DIG V C Sajjanar.

Meanwhile, pressure against MLMs and various other ponzi schemes has been mounting. Moneylife has been exposing scores of the shady operators over the past two years. Moneylife Foundation, a not-for-profit entity has also sent a representation to the prime minister, urging for a complete ban on MLM companies or to bring them under the regulatory ambit of either RBI or SEBI.

A set of powerful MLMs, which are part of an exclusive closed club, called the Indian Direct Selling Association or IDSA (on the lines of the Direct Selling Association of the US) has been lobbying hard to make a distinction between their operations and those of others, who they call, fly-by-night operators such as SpeakAsia and Ad Magnet. In fact, the tens of thousand ponzi/double-your-money schemes that exploit poor financial literacy cause the biggest losses to Indians across the economic spectrum today. SpeakAsia, the most notorious of these in recent times, raised over Rs1,300 crore in under a year from 12 lakh people, managed to do so without even registering the parent company in India. Instead, a bunch of entities, which flew below the regulatory radar were registered all over India to act as collection agents that pooled the collections from SpeakAsia’s empanelment fees of Rs11,000 per identity and transferred them overseas. The case is important because various regulators including the RBI and the ministry of corporate affairs claimed not to have the power or jurisdiction to act against the company.

Moneylife has also exposed the links between Speak Asia and AdMatrix, both operating with a similar modus operandi to deprive people of their savings. We pointed out that both these MLM companies were started by the same set of people who are working together since 2003.

MLMs, chain companies or networking companies—also known as chit funds or blade companies, have turned very powerful in several states which are ruled by regional parties and have strong political connections. Their political funding protects them from any action. Also, as Mr Sarma has pointed out, “Many of these promoters have political links and they approach various ministries in the guise of marketing companies and make overtures to protect themselves. They know that they can play one ministry against the other and get away with their loot.”

This is reflected in the fact that the ministry of corporate affairs (MCA) has been warning people against investing in the schemes (‘Multi-level marketing companies con many to benefit few’) while the FIPB wants to discuss FDI in these companies. A company like Amway, which would have been disallowed under the Prize Chits Act, entered India through the FIPB route. It has been embroiled in long drawn litigation on the subject. Interestingly, a MCA study itself concludes that “such (MLM) schemes are inherently money circulation schemes and sale of products is only a camouflage... (and) voilative of the Prize Chits and Money Circulation Schemes (Banning Act), 1978.”

According to the study, the products by multi-level marketing companies are “over-priced” to enable them to pay huge commissions to people sitting at the top of pyramid and earn exorbitant profits for the company.”Such schemes enrich the company and the top of the pyramid participants at the cost of 90% of the participants who are at the bottom two levels,” it said.

The study added that in the pyramid or multi-level marketing schemes ‘product’ “is only a way to disguise the real intention” and such schemes are primarily “a variant of the earlier money circulation schemes” without any products.

The study further said that now the trend was to introduce sale of products to camouflage real intention and to give an air of legitimacy, deceive the regulatory, law enforcement agencies, media and the public into accepting them as legitimate business.

“These pyramid schemes are so cleverly designed that unless a very meticulous investigation is done and the con game is properly understood, it would be difficult to establish the deceptive nature of the schemes,” it said.

The main difference, it added, between direct sales and pyramid sales is that in direct sales the person making the sales gets the maximum commission, while in pyramidal scheme the person at the top of the pyramid gets maximum commission.

“Such a compensation plan rewards enrolling more members down line rather than give incentives to sell directly to the consumers who are not interested in becoming members. The deceptive and fraudulent nature of such scheme is because very soon saturation is reached and more members cannot be enrolled,” it said.

The MCA study said, “The scheme is inherently deceptive because mathematically it is not possible to create an endless chain in enrolment. Such schemes are extremely dangerous from society’s point of view because to gullible public, the scheme looks very attractive. The opportunity of being self-employed and earning money sitting at home by contacting family and friends appeals to most of the people”.

In April, the then corporate affairs minister Veerappa Moily had said he has suggested to the home ministry to set up an SFIO-type special body to probe frauds by the multi-level marketing companies and chit funds in a time-bound manner.

Anil Kumar Sharma
1 decade ago
Just few days back central governmment made it clear that there will not be any central agency to look into the affairs of MLM companies.

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Veeresh Malik
1 decade ago
Some other ways in which these MLMs make money - usually cash without footprints - organise "get togethers" with invited speakers, organise "travel tours" for shopping and most of all, by selling their books / CDs / other mediums which contain so-called success stories. The other interesting aspect is that some of the larger MNCs are now looking at getting their products direct to customer, which may be fine, but some of these products are simply without any legitimate basis in India - no ISI/BIS, no FSSAI for foodstuff, often no adherence to any regulatory/mandatory requirements.
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