MLMs to face scrutiny by FIPB following action by Andhra Police
Moneylife Digital Team 03 September 2012

The FIPB, in its forthcoming meeting may discuss various alternatives, including whether action should be taken against MLM companies, as states such as Andhra Pradesh have found their business model prohibited under the PCMCS Act and have requested a review of approvals for these operators

Multi-level marketing (MLM) companies that follow the model of Amway, one of the largest direct selling companies in India, will come under Foreign Investment Promotion Board (FIPB) scrutiny at its meeting in the third week of this month, says a Business Standard report.
According to newspaper, the issue has been referred to the FIPB after an inter-departmental meeting, which involved representatives from the Department of Financial Services (which administers the  Prize Chits and Money Circulation Schemes (Banning) Act or PCMCS Act, 1978) and the Department of Economic Affairs (DEA), responding to requests from the Andhra Pradesh government, decided that as there were many companies engaged in similar activities as Amway it was imperative that clear provisions be incorporated in the foreign direct investment (FDI) policy at the earliest, the reports said.
The report quotes a spokesperson for Amway India as saying that the company has filed a special leave petition (SLP) before the Supreme Court following a decision of the high court, which observed that the company’s business model may come within the mischief of money circulation scheme under the PCMCS Act.
However, a former superintendent of police, Economic Offenses Wing, Andhra Pradesh, who was involved in the investigation of Amway, said this (the comment of the spokesperson) is nothing  but a propaganda used by the company to continue its MLM operations. “Section 3 of the PCMCS Act prohibits any entity from promoting, conducting any prize chit or money circulation scheme, enrolling any member of any such chit or scheme, or participating in it otherwise, or from receiving or remitting any money in pursuance of such chit or scheme. This is the provision we used to ban Japan Life, Amway and GoldQuest,” said the officer, who is now DIG at Hyderabad.
At present, the FIPB is not approving any new proposals for FDI in MLMs or network marketing companies. The Board, in its next meeting is also expected to discuss whether action in one state (Andhra Pradesh) should merit such companies to lose their FDI approval across the country, says the Business Standard report.
EAS Sarma, former secretary to the Government of India (GoI), 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 Deputy Inspector General (DIG) of Police, VC Sajjanar. But he is fighting the battle alone.
Interestingly, the PCMCS Act, 1978, was promulgated only after large-scale loot by these dubious companies and a report by the James Raj Committee (1974) called for a total ban on such schemes arguing that they were prejudicial to public interest. It is clear the Act has failed in the 35 years thereafter, barring sporadic action by exceptional police officers like Mr Sajjanar.
In India, AP was the first State to enact a law to ban money circulation schemes in 1965. Both the Supreme Court and several high courts have passed landmark judgements against the operation of these schemes as they violate the law of the land and are detrimental to the interests of the public. There are ongoing cases against SpeakAsia and Amway, to cite two examples.
“While there are existing laws such as the PCMCS Act and others under which the concerned agencies could prosecute the culprits, there is no effective mechanism in place today to ensure a coordinated approach to identify the fraudulent operators in advance and book them well before they destroy the livelihoods of thousands of households and launder the ill-gotten funds to unknown destinations,” says Mr Sarma.
He said, there are infirmities in the existing laws to tackle the problem of these schemes effectively. For example, the penalty for offences committed under PCMCS Act does not exceed a few years of imprisonment and a few thousands of crore of rupees of fine, whereas the schemes act as a “slow poison” in the society; the culprits would have violated several economic laws and have links to anti-national groups and swindled thousands of crore of public money, the former secretary explained. 
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