Another Rs 4,000 Crore In The Making!
Hundreds of companies are using the unregulated direct selling route to run Ponzi schemes. It's not illegal yet, but it's probably time to blow the whistle on them.
By Shailesh Dobhal
Rajat Verma/Director (Operation)
EZEEBIZ: Translation, anyone? The company recently launched a set of four Hindi-to-English books and cassettes (Price: Rs 6,615). Distributors enrol by purchasing a set but can earn returns only by signing on more distributors, not selling the books.
LIFE CARE: The company that sells privilege cards and toiletries has 90,000 distributors. None could be seen at its distribution centre. Now, Life Care is diversifying into durables and gift products.
Jeet Kalsi/Managing Director
STERLING LIFE: Its Delhi distribution is abuzz with activity; distributors from lower middle-class families are scrambling to pay Rs 17,500, and buy durables they do not need, and can't even sell. Their income is dependent on their ability to hire more distributors.
The district centre in Delhi's western borough Janakpuri presents an impressive sight. In heaving Delhi it is an oasis of order: neat rows of shops; covered corridors that protect shoppers from the scorching summer sun; and enough underground parking to accommodate a fleet of Hummers. Should you take the trouble to visit, you can't miss hordes of young men, some probably still in college, sporting black ties with a legend that says SL. In the basement of District Centre, Jaina Tower I, is the Delhi office and distribution centre of a relatively unknown company, Sterling Life (SL) India. The young men are its distributors.
At first sight, Sterling Life India appears to be just another network marketing company-those that sell through networks or parties-in the same league as "the Amways and Avons of the world", as Jeet Kalsi, Sterling's Managing Director, claims. It sells consumer durables (coffee makers, water heaters, colour televisions, and vacuum cleaners) through a network of distributors. And what a network that is; in three years of existence Sterling Life has acquired an enviable 45,000 distributors across seven North Indian cities, including Delhi.
All one has to do to become a distributor with Sterling Life is to buy consumer durables worth Rs 17,500. "Well, this amount, being significant, makes the distributor feel he is investing in a business, and therefore makes him serious about the business," is how Kalsi explains the higher-than-high entry-cost. Most known direct sellers charge a nominal entry fee; Avon charges nought. Sterling is a unique multi-level marketer in more ways than one. The products distributors buy is rarely sold; they just need to buy them, whether they need another television or not. Distributors earn virtually their entire commission on new referrals and not on product sales. Indeed, of the company's sales of Rs 50 crore, just around Rs 1 crore comes from such business. The rest comes from new distributors.
There's more to this unique business model: distributors aren't eligible for refunds; and when something goes wrong with a product, and it can't be repaired, "we simply replace it with a new one," in the words of Kalsi. By the end of this year, Sterling hopes to add 30,000 distributors to its network (that's a cool Rs 52.5 crore in sales).
Is Sterling really an above-the-board direct seller as Kalsi would like us to believe? And what about hundreds of other such companies, Life Care (sales: Rs 40 crore; 90,000 distributors), Interworld.Com, the erstwhile First Biz Network (sales: Rs 20 crore; 37,000 distributors), Revolution Forever (sales: Rs 6 crore; 15,000 distributors), Ezeebiz (sales: Rs 8.35 crore; 55,000 distributors), Infigrow, In Paradise Network, SBC Network, Speed Matrix India and White Sapphire, all in New Delhi; Conybio Healthcare (sales: Rs 60 crore; 1,80,000 distributors) and GoldQuest International (12,000 distributors) in Chennai; Infiniteopps (sales: Rs 17.5 crore; 15,000 distributors) in Pune; Cossets in Chandigarh; and Pioneer Ebizz in Hyderabad?
A Proxy for Ponzi
Pyramid schemes are illegal in India; the Prize Chit and Money Circulation (Banning) Scheme Act, 1978, bans them. But direct marketing is alright, and don't network marketers reward distributors for hiring more distributors? It didn't take long for some unscrupulous, but wholly legal, companies to come up with the kind of get-rich-quick-through-direct-marketing schemes that appeal to Indians. They purport to sell everything from privilege cards, soaps and cosmetics, grocery products, durables, vacations, books, educational CDs, gold coins, even sun beads.
Take the case of the two-year old, Rs 40-crore Life Care, a 90,000-member strong New Delhi-based company, ostensibly selling a discount card and a range of cosmetics and toiletries, all eponymous. When this writer visited its office-plus-distribution centre in Rohini, a residential area in North-West Delhi, the outlet supposed to dispense products was locked. It was subsequently opened for this writer's benefit, but there wasn't a single distributor in sight-strange, for a company that claims 15,000 active distributors in Delhi alone. "I am discontinuing the existing scheme, and starting a new plan with unlimited depth," says the apologetic Chairman, Pramod Khullar, when told that his company's direct marketing scheme seems more like a money-chain than anything else.
HOW IT WORKS?The M.O. of unscrupulous direct marketers.
STEP 1: The law bans pyramid money schemes......So call yourself a direct marketer and identify a product you can sell
STEP 2: Sell this product to distributors but don't encourage them to re-sell....... Instead reward them for identifying more distributors
STEP 3: Build the chain of distributors......as long as you can continue to, the Ponzi scheme will not come unstuck
Companies such as Life Care can operate with impunity, reasons Sameer Modi, Managing Director of legit direct seller Modicare, because there are no specific laws governing direct selling in this country. Most countries, including Malaysia and South Africa, regulate their direct selling industries through specific legislation. In India, the concerned ministry, the Ministry of Consumer Affairs, Food & Public Distribution, states that, "...The need for a separate legislation was not felt in view of the fact that there are adequate provisions available in the Sale of Goods Act, 1930, (for regulating the sale of goods); the Indian Contract Act, 1872, (for the sale of services) and the Consumer Protection Act, 1986, (to promote and protect the rights of the consumers." That doesn't really help, says Harmeet S. Pental, the President of the Indian Direct Selling Association, because, by the time these laws can be called into effect, the damage is done. "Pre-emption and not just redressal is the need here," adds IDSA's Pental.
The law can't touch these companies because they have a product to show. "Where the business thrives more on structure of business rather than actual product sale, our suspicions are raised,'' says S. Krishnamoorthy, an Indian Police Service officer, handling crime in Chennai. "There is no question of everybody benefiting, somebody always loses.'' Yet, the police has not made much headway in its investigations into the activities of Conybio Healthcare, a direct seller of toothpaste (minimum price Rs 210) and sun beads (Rs 15,000).
There's no shortage of gulls. Another Chennai-based company, GoldQuest International hawks a gold coin at Rs 43,000, a 100 per cent premium over what it should cost. It has found 12,000 takers even though D. Hemchandra Rao, President, Madras Coin Society, warns that, "In the case of GoldQuest, the coin is neither a period coin nor is it by an authorised body (like government mints)." But the company's Country Head Pushpam Naidu defends it by saying: "GoldQuest is well within its rights to operate in India and I have a document from the Minister of Consumer Affairs that says so." Over 37,000 people have already bought an e-shop for Rs 5,000 each, from the New Delhi-based First Biz Network! Heard of Revolution Forever? The company's main product is a discount card priced at Rs 6,500 (it has 15,000 distributors). Ezeebiz has over 55,000 distributors for a set of four basic Hindi-to-English translation books and audio cassettes priced at Rs 6,615 besides other packages. And Pune-based Infiniteopps offers computer education packages starting at Rs 1,350 (it has over 1,00,000 customers and 15,000 distributors).
Almost every one of these companies has a binary direct selling plan that rewards distributors for recruiting other distributors. "Binary plans, by and large, are just recruitment-focussed and walk a thin line from being a pyramid scheme," explains IDSA's Pental, who is also Managing Director of the Rs 100-crore Avon Beauty Products. IDSA estimates that there could be 1,000 such companies out there, paying unsustainable returns of around 80 per cent on sales (the legit ones pay 40 per cent) largely for recruitment. At average sales of Rs 3-4 crore, the size of this industry is around Rs 4,000 crore (the actual number could be much larger), far higher than the Rs 1,723-crore organised and legitimate direct selling industry in India.
Buoyed by the lack of regulation, more unscrupulous entrepreneurs are entering the business. In the past six months, 39 new members sought membership of IDSA, with just two being shortlisted for consideration, a measure of the rot that has set in the industry. And existing ones are diversifying. First Care is moving into durables and gift hampers; Sterling Life and Revolution Forever into toiletries and cosmetics. And all of them believe there is nothing illegal (there isn't) about their business. "We're not pyramid, but binary," says Manmohan Gupta, Chairman, Interworld.Com. "And who is IDSA to cast aspersions on our model?" Not that these aspersions count for anything: IDSA reported the activities of First Biz Network to Delhi Police in April 2003 ("...we feel is operating money circulation scheme..."), through a letter to the Assistant Commissioner of Police, Kalkaji (a South Delhi neighbourhood), in whose jurisdiction the company is based. Nothing much happened, because existing laws are geared for redressal, not pre-emption.
Things will probably continue in the same tenor until a large pyramid scheme company disguised as a direct seller goes under (all pyramid schemes are based on the company's ability to keep growing its base of distributors; the minute its network stagnates, its business becomes unsustainable). By then, it may be too late.
-additional reporting by Nitya Varadarajan and Dipayan Baishya
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