* Amway was held illegal in India by High Court of AP and Supreme Court of India

High Court of AP and Supreme Court of India held Amway's scheme as Money Circulation Scheme (Pyramid scheme) banned in India. High Court of AP Order

Case Law Reference: 2007 (4) ALT 808(D.B.)

IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD
HON’BLE SHRI G.S.SINGHVI, CHIEF JUSTICE
AND
HON’BLE SHRI JUSTICE C.V.NAGARJUNA REDDY

WRIT PETITION Nos. 20470 AND 20471 OF 2006 – DECIDED ON 19-07-2007.
Between:
Amway India Enterprises, (a Private Company with unlimited liability),
Through Mr.Yoginder Singh, Authorised Signatory and another … Petitioners
Vs.

Union of India, rep., by Secretary, Ministry of Home, New Delhi and others. … Respondents

PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978, Sections 2(c) and 3 – Money Circulation Schemes – Applicability of provisions of Act to Pyramid Structured marketing Scheme being run by first petitioner through which money is earned by enrolling members – Scheme whether attracts definition of ‘Money Circulation Scheme’ banned under the Act – Writ petitions filed to declare tha provisions of the Act have no application to the scheme run by 1st petitioner and to restrain the respondents from interfering with petitioners’ business – Complaint made again petitioners that it is a money circulation scheme prohibited under Section 3 of the Act which petitioners denied – Plea taken by petitioners that none of the ingredients of Section 2(c) of the Act exist in the business carried on by them as there is neither quick or easy money involved in the scheme nor the money received by promoter or sponsor member depends on any event or contingency relative or applicable to enrolment of new members into the scheme – Petitioners further pleaded that the scheme does not provide for payment of money on a mere enrolment to attract Section 2(c) of the Act – Respondents taken a plea that scheme involved easy quick money by enrolling members into the scheme which is prohibited under the Act – ingredients of Section 2(c) – It must be proved that first petitioner is promoting or conducting a scheme for the making of quick or easy money and the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to enrolment of members into that scheme – Held that scheme of first petitioner provides for easy / quick money to its distributors – The money which the sponsor member at the top of the line gets depends upon members whom he enrolls or the members enrolled by him enroll – Payment made by a member on his enrolment and his future earnings by enrolling other members constitute event or contingency relative to his enrolment – Distributor gets all the said money as a consideration for a promise made by the sponsor at the time of his enrolment – Thus, held that both the ingredients of Section 2(c) of the Act in respect of distributor satisfied – Inducement for aggressive enrolment of new members to earn more commission is inherent in the scheme – Scheme provides for sufficient inducements for its members to chase for new members to make quick easy money – By promising payment of commission on the business turned out by down-line members sponsored either directly or indirectly by the up-line members constituting a contingency relative to enrolment of members, first petitioner (promoter) is earning quick / easy money from its distributors apart from ensuring its distributors to earn quick/easy money – The two ingredients are thus satisfied in the case of promoter too – Held that the scheme run by petitioners squarely attracts the definition of ‘Money Circulation Scheme’ as provided in Section 2(c) of the Act.
Held: As is evident from the contentions advanced on behalf of the petitioners as noted earlier, the petitioners have taken the stand that there is no quick or easy money involved in the scheme and that the money which the sponsor member gets does not depend on any event or contingency relative or applicable to the enrollment of the members into the scheme. But on a careful analysis of the true nature of the scheme as explained above, it is quite apparent that one of the components of the income earned by a sponsor member is the commission which is calculated not only on the personal PV of the sponsor member, but also from the PV earned by all the remaining 102 members falling within his group. There is, therefore, no gainsaying that a substantial part of the income which the first sponsor member of the group gets depends on the event or contingency relative or applicable to the enrollment of members into the scheme. This conclusion can be tested by a further analysis of the income figures given in the earlier paragraph. Supposing the sponsor member at the top does not introduce any member and if he merely sells the products given to him, he gets an income of Rs.12,420/-. If he sponsors only six people and they in turn do not sponsor any member, then he will get an additional income of Rs.23,760/-. If those six members whom he sponsored again sponsor four members each, he will get a further income of Rs.1,14,480/- and if the 24 members sponsor three members each, he will get a further sum of Rs.6,83,300/-. Thus the money which the member at the top of the line gets depends upon the members whom he enrolls or the members enrolled by him enroll. (Para 28).

From the aforementioned discussion, it is proved that the scheme provides for easy/quick money to its distributors. The first ingredient is thus satisfied (Para 30).

Whether second ingredient is also satisfied or not is to be considered now. As seen above, each member on his enrollment pays Rs.4,400/-. Payment of Rs.4,400/- by a member on his enrollment and his future earnings through marketing/enrolling other members constitutes event or contingency relative to his enrollment. The distributor gets all this money as a consideration for promise made by the sponsor at the time of his enrollment. Thus as far as the member joining the scheme is concerned, both the ingredients of Section 2(c) of the Act, i.e., a) making of quick or easy money, and b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied (Para 31).

As pleaded by the petitioners themselves, out of Rs.4,400/- a substantial part, namely Rs.1,800/- is collected as subscription fee, license fee, business kit etc. To qualify for earning commission a member has to earn the minimum monthly PV of 50 which he will get by selling products worth Rs.2,000/-. Respondent No.6 in para-11(c) of his counter affidavit specifically pleaded that “Amway” (First petitioner) would automatically get a business of the quantum of Rs.1080/- crores (4,50,000 x 2,000 x 12(months) ) per annum which would yield an astronomical profit and it cannot but be stated as “easy/quick money” without any service to the distributors/members irrespective of whether they sell the products or not, though the company may conveniently refer it as “turnover by sale of products”. Significantly, this assertion made in the counter affidavit is not denied in the rejoinder of the petitioners. They have merely tried to explain the said allegation by offering certain justifications. The petitioners have not specifically denied that the first petitioner would get a sum of Rs.1,080/- crores by ensuring that each distributor maintains the minimum sales level. Even though the scheme per se does not stipulate that each distributor has to maintain the minimum required business level, prescription of minimum level of 50 PV to qualify for getting commission is sufficient inducement for the members to relentlessly strive for maintaining the PV level at or above the said minimum levels. (Para 33).

It is, thus, evident that the whole scheme is so ingeniously conceived that the inducement for aggressive enrollment of new members to earn more and more commission is inherent in the scheme. By holding out attractive commission on the business turned out by the downline members, the scheme provides for sufficient inducements for its members to chase for the new members in their hot pursuit to make quick/easy money. On the part of the promoter by pushing each member to achieve the minimum sales worth Rs.2,000/- per month, (this sale includes enrollment of new members) he is assured of about 1000 crores per annum. All this squarely satisfy the description of quick/easy money. In addition to this, it is an admitted fact that each person in order to continue to be the distributor, shall pay renewal subscription fee of Rs.995/- per annum. In para-11(b) of the counter affidavit on the admitted number of distributors of 4,50,000 this amount is calculated at about Rs.45 crores per annum. These figures are not denied by the first petitioner in its rejoinder. The plea of the first petitioner that there is no compulsion that a member shall renew his distributorship looks to us to be specious. Once a person becomes a distributor in a scheme of this nature where the sops in the shape of commission are so luring, it would be very difficult for a member to withdraw from their membership to avoid payment of the annual renewal subscription fee. (Para 34).

From the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him. In any event the petitioners have not specifically denied the turnover they are achieving and the income they are earning towards the initial enrollment of the distributors, the renewal subscription fee and the minimum sales being achieved by the distributors as alleged in the counter affidavit. By no means can it be said that the money which the first petitioner is earning is not the quick/easy money. By promising payment of commission on the business turned out by the down-line members sponsored either directly or indirectly by the up-line members (which constitutes an event or contingency relative to enrollment of members), the first petitioner is earning quick/easy money from its distributors, apart from ensuring its distributor earn quick/easy money. Thus the two ingredients are satisfied in the case of promoter too. We are, therefore, of the considered view that the scheme run by the petitioners squarely attracts the definition of “Money Circulation Scheme” as provided in Section 2(c) of the Act. (Para 35).

PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978, Sections 2(c), 3, 4 5, 6 and 7 – Indian Penal code, 1860, Sections 385 and 420 – Constitution of India Article 226 – Criminal Procedure Code 1973, Section 482 – Money Circulation Scheme – Interference in criminal investigation by High Court - Complaint made that Pyramid Structured Marketing scheme being run by first petitioner is a money circulation scheme prohibited under the Act – C.I.D. Police registered a crime – Petitioners taken a plea that the scheme was approved by Government of India and that as it was not cancelled, they cannot be prosecuted – None of the brochures referred to in writ petition not placed before Government of India – Committee which recommended for the approval – Secretary, Government of India clarified that the scheme of first petition falls within the provisions of the Act – Fact that it is not cancelled or withdrawn by Government of India not a ground to stultify the investigation of case – On admitted material, court held that it is a Money Circulation Scheme – Allegations contained in complaint taken on their face value make out an offence punishable under sections 4, 5 and 6 of the Act – No warrant for restraining investigating agency from proceeding with criminal case – Plea taken by petitioners that their business cannot be interfered with until they are found guilty of the offence – Rejected – Police empowered to take action under Section 7 of the Act for offence committed under the Act – Alleged that police sealed the various office premises of petitioners after registering crime – Held that action complained of falls well within the powers of Police vested under Section 7 of the Act.

Held: Though the petitioners herein have not specifically sought for quashing of FIR and it is stated in para-27 of the writ affidavit that the petitioners are reserving their right to initiate appropriate action for annulment of the action of respondents 5 and 6 in registering the case against the petitioners, in reality granting of relief claimed in these writ petitions would virtually have the effect of quashing the criminal proceedings initiated against the 1st petitioner. Therefore it is necessary for us to consider the contents of the complaint in the light of the law laid down by the Supreme Court on the scope of interference by the High Courts in criminal investigation/trial while exercising power under Article 226 of the Constitution or Section 482 of the Code of Criminal Procedure. (Para 40).

The complaint submitted to the CID Police, Hyderabad in this case is exhaustive. The complainant graphically described how the scheme run by petitioner No.1 through the other petitioners and various distributors in the country constitutes money circulation scheme. The gist of the complaint has already been extracted herein before. From the conclusion arrived at by us on the analysis of the admitted material available before us concerning the scheme, we have no doubt whatsoever that if the allegations contained in the report of C.No.1474/C-27/CID/2006 dated 24.9.2006 are taken on their face value they make out an offence punishable under the provisions of Sections 4, 5 and 6 of the Act. (Para 41).

By applying the principles set out in the aforementioned judgments, we hold that there is no warrant for us to restrain the investigating agency from proceeding with the criminal case. (Para 48).

Section 7 of the Act empowers the police officer not below the rank of an officer in charge of a police station to exercise all or any of the powers enumerated therein. (Para 49).

In para-28 of the affidavit filed in support of the writ petition it is averred that after registering the crime respondents 5 and 6 have conducted simultaneous raids on the petitioners’ branches at 9 centers in Andhra Pradesh and sealed the various office premises of the petitioners. The action complained of in the writ petition falls well within the powers of the police vested in them by Section 7 of the Act. However, we would like to observe that if in the process of exercising such powers the police exceed their powers, it is always open to the petitioners to approach the competent court of law for redressal of their grievance. (Para 50).

Quotable points : (1) Money Circulation Scheme – Scheme promoted to make quick or easy money depending upon contingency relative or applicable to enrolment of members into that scheme comes under Money Circulation Scheme prohibited under Prize Chits and Money Circulation Schemes (Banning) Act of 1978.

(2) Criminal case in regard to Money Circulation Scheme – Police has power to make investigation into an offence of Money Circulation Scheme and seal the office premises.
CASES REFERRED :

1. State of West Bengal V. Swapan Kumar Guha: (1982) 1 SCC 561. (Para 6).
2. State of Haryana and others V. Bhajan Lal and others : 1992 Supp. (1) SCC 335. (Para 42).
3. State of Bihar V. P.P. Sharma, IAS and another 1992 Supp. (1) SCC 222 (Para 43).
4. State of Orissa V. Saroj Kumar Sahoo. 2005(2) SCJ 804 = 2005 (2) ALT (Crl.) 16(SC). (Para 44).
5. A.V. Mohan Rao V. M. Krishan Rao: (2002) 6 SCC 174. (Para 45).
6. State of Bihar V.Murad Ali Khan. (1988) 4 SCC 655. (Para 45).
7. Mahavir Prasad Gupta V. State of National Capital, Territory of Delhi: (2000) 8 SCC 115. (Para 45).
8. State of Karnataka V. M.Devendrappa: (2002) 3 SCC 89. (Para 46).
9. State of Maharashtra V. Ishwar Piraji Kalpatri. (1996) 1 SCC 542. (Para 47).

Mr. B. Adinarayana Rao for Mr. C. Sudesh Anand, Counsel for the Petitioners in W.P.No.20470 of 06 and for Respondents No.7 in W.P.20471 of 2006.
Mr. S.R. Ashok for Mr. S. Niranjan Reddy, Counsel for the Petitioners in W.P. 20471 of 2006.
Mr. A. Rajasekhar Reddy, Assistant Solicitor General for Respondent Nos.1 and 2.
Advocate General for Respondent Nos.3 to 6 in W.P.20470 of 2006.
Avocate General for Mr. J. Sudheer, for Respondent Nos.3 to 6 in W.P.20471 of 2006.
Mr. D.Seshadri Naidu, Counsel for Respondent No.8 in W.P.20471 of 2006.