Source: http://www.vandruff.com/mlm.html
What's Wrong With Multi-Level Marketing?
a.k.a. "Networking" Companies
Bad Image or Bad Reality?
"Let me tell you about an incredible ground-level business opportunity," and you are invited to a house or to lunch for "a discussion." Funny enough, you feel sick in your gut that there is some hidden agenda or deception. "Probably a multi-level marketing (MLM) organization," you think. Suppose it is? Should you trust your instincts? Is there anything wrong with MLM?
This article will analyze four problem areas with MLM. Specifically, it will focus on problems of I) Market Saturation, II) Pyramid Structure, III) Morality and Ethics, and IV) Relationship Issues associated with MLMs. Thus, you can properly assess your "instincts."
I. Market Saturation: An Inherent Problem
Back to the Basics
A tutorial on market saturation hardly seems necessary in most business discussions, but with MLM, unfortunately, it is. Common sense seems to get suspended when considering if MLMs are viable, even theoretically, as a profitable means of distribution for all parties involved. This suspension is created by a heightened expectation of "easy money," but more on that later.
New, Innovative?
MLM can no longer claim to be new and, thus, exempt from the normal rules of the market and the way goods and services are sold. They have been tried and, for the most part, have failed. Some have been miserable failures in spite of offering excellent products.
Marketing innovations are not rare in the modern world, as evidenced by the success of Wal-Mart, which found a more efficient and profitable way to distribute goods and services than the status quo, providing lasting value to stockholders, employees, distributors, and consumers. But this is not the case with any MLM to date, and after 25 years of failed attempts, it is time to point out the reasons why.
Don't Some People Make Money in MLM?
First, we will analyze the "driving mechanism" of MLMs. We will detail how they are intrinsically unstable, guaranteed by design to oversaturate the market with no one noticing. We will look at why MLMs can never equalize into profitability the way companies in the real world can, so that the result will be that the organization as a whole cannot, even in theory, be profitable. When this inevitable destiny occurs, the only money to be made is not from the product or service but from the losses of people lower down in the organization.
Thus the MLM organization becomes exploitative, and many high-level MLM promoters have been shut down, the "executives" incarcerated, for selling the fraud of impossible success to others. Other, larger MLMs have survived by hiring large batteries of attorneys to ward off federal prosecutors, even bragging about the funds they have in reserve for this purpose.
The unfortunate "distributor" at the bottom is the loser, and once this becomes apparent beyond all the slick videotapes and motivational pep-talks, good people start to get a bad taste in their mouths about the whole situation.
So, yes, money can be made with MLM. The question is whether the money being made is legitimate or "made" via a sophisticated con scheme. And if MLM is "doomed by design" to fail, then the answer is, unfortunately, the latter.
But how exactly does this happen, and must it always?
Doomed by Design?
The first question is this: Is any company choosing this marketing strategy destined to fail, to degenerate into an exploitative venture, regardless of how good the product is?
To see this clearly we must go through an, otherwise, obvious and elementary discussion of how any business must be careful not to overhire, overextend, or oversupply a market.
The Real World
Any business must carefully consider supply and demand. For example, if the ReVo Corporation thinks that it will have a full-fledged fad on their ovoid sunglasses next summer, perhaps they should plan to build and distribute, say, 10M units. This involves gearing up factories, setting up distribution and dealer networks, and carefully managing the inventories at each level so that ReVo will still have credibility with their distributors, retail outlets, and the public the following year.
If it turns out that there is a "run" on ReVo products, and they sell out in mid-June, then they have miscalculated demand and will miss out on profits they could have made. The more serious problem, however, is overestimating the saturation point for the product. If they make 10M units, and sell only 2M units, this may be the end of ReVo as a company.
The all-too-obvious point here is that management of supply and demand, and keen insight into realistic market penetration and saturation are crucial to any business, for any product or service. Mismanagement of this aspect of a business will eclipse good market access, excellent product design, human resource assets, production quality, and so on. Simply stated, a failure to "hit the target" of supply and demand can ruin a company if the market is oversaturated.
Market Dynamics and the End of the Cold War
Interestingly, the issue of supply and demand is what brought the USSR to its knees. By design, the Soviet government tried to macro-manage supply, where bureaucrats would decide how many potatoes were needed, how much toilet paper, etc. Assuming these bureaucrats did the best they could, unfortunately their efforts to deliberately manipulate the control "knob" of supply and demand was not good enough. Notwithstanding their good intentions, they were usually wrong, which created huge shortages and surpluses, and led to a massive economic collapse.
Seeing the disastrous end of market naiveté in Russia should help clarify the fundamental problem with the MLM approach. In the real world, the profit of a company is directly related to the skill and prescience of the "hand" on the "supply knob," so to speak. In the USSR, that "hand" could not react fast or accurately enough to market realities through the best efforts of the bureaucrats.
With MLMs, the situation is much worse. Nobody is home. Even the Soviets had someone thinking about how much was enough! If the bureaucrat in Russia was having a hard time trying to play Adam Smith's "invisible hand" in setting the supply level in the Soviet Union, then an MLM "executive" is in a truly unfortunate position. Not only is there no one assigned to make the decision of how much is enough, the MLM is set up by design to blindly go past the saturation point and keep on going. It will grow till it collapses under its own weight, without even a bureaucrat noticing.
MLM is like a train with no brakes and no engineer headed full-throttle towards a terminal.
"Everyone Will Want to Buy This Product!"
All products and services have partial market penetration. For example, only so many people wish to use a discount broker, as evidenced by the very successful but only partial market penetration of Charles Schwab. Not everyone wishes to join a particular discount club, or buy gold, or drink filtered water, or wear a particular style of shoe, or use any product or service. No one in the real world of business would seriously consider the thin arguments of the MLMers when they flippantly mention the infinite market need for their product or services.
The Demand Problem: Of Widgets and MLMs
Imagine a neat new product called a Widget that will sell for $100 (a fixed price, to keep it simple). Now, while everyone could use a Widget, not everyone will. Some will be afraid of anything new. Some will be loyal to existing brands. Some will want to buy an inferior product for less money. Some will want a more expensive product for prestige, regardless of quality. The reasons go on and on, and the fact is that only "X" Widgets will sell at $100.
The question for would-be marketeers is... what is "X," and how can it be predicted to maximize profits? The fact that "X" is hard to pin down does not mean that it does not exist, and every Widget built beyond "X" will end up producing a problem for the organization. The market only wants "X" Widgets at $100. What are you going to do with your extra inventory of Widgets beyond "X" that no one wants, and the sales people you hired to sell them?
No one can perfectly predict "X," and the situation is not nearly as simple as considered here, but the objective for marketeers is to forecast "X" as closely as possible in order to provide lasting value to all parties involved: to avoid missed opportunities as well as waste, loss, or failure.
The MLM Forecasting Approach: Ignoring the Target
Who has an eye on "X," the point of market saturation at a given price, in an MLM? Well, the funny thing, or perhaps the tragic thing, is that "X" will be reached and exceeded without anyone noticing or caring.
Let's just suppose that "X" has been reached today in a particular MLM; the number of possible units sold at this price has just been exceeded, and you happen to be a starry-eyed prospect sitting in an MLM meeting listening to the pitch. Now consider: Does anyone in this company know about "X"? Does anyone care? Is the issue being suppressed on purpose for some other motive? Since we are supposing that the market saturation number "X" has been reached, everyone joining the MLM from now on is buying into a false hope. But that is not what the speaker will be saying. He will be telling you, "Now is the time to join. Get in on the 'ground floor'." But it is all a lie, even though the speaker may not know it. The total available market "X" has been reached and nobody noticed. All the distributors will lose from here on out. Could this be you? How could you possibly know at what point you will become the liar in an MLM?
Pop or Drop
Perhaps a better paradigm than the runaway train analogy offered earlier of how MLMs perform over time is this: a helium balloon let loose in an empty room with a spiked ceiling, where product quality is analogous to the amount of helium. The better the product, the faster the balloon will rise, accelerating unhindered, towards disaster. The other option would be the case of a lousy product, in which case the balloon will sink of its own accord, never getting off the ground. To be sure, equilibrium is not in the cards, except perhaps as an accident, and then only temporarily. MLMs are intrinsically unstable. For any company that chooses an MLM approach, it's pop or drop.
MLMs vs. the Real World
The basic question that needs to be asked is this: If this product or service is so great, then why isn't it being sold through the customary marketing system that has served human society for thousands of years? Why does it need to resort to a "special marketing" scheme like an MLM? Why does everyone need to be so inexperienced at marketing this! Is the product just a thin cover for what is really a pyramid scheme of exploiting others? But more on that later.
From Contracted, Protected Distribution... to Mayhem
Imagine that Wendy's became suddenly possessed by the idea that "everyone needs to eat," and opened four Wendy's franchises on the four corners of an intersection in your neighborhood. Who would benefit from this folly? The consumer? Certainly not the franchises; they would all lose. Wendy's corporate? Perhaps temporarily, by speculative inventory sales while the unfortunate franchises were under the delusion that they could all make money. But in the end, the negative image of four outlets dying a slow death would likely offset the temporary inventory sales bubble. Even the most unreflective of the hapless franchisees would think twice about doing business in such a manner again. This is why real-world distributorships and franchises are contractually protected by territory and/or market.
Again, the simple fact is that even the most successful products will have partial market penetration. The same is true for services. Demand and "market share" are finite, and to overestimate either is catastrophic.
So why are MLM promoters obscuring this? Who is in control of the supply "knob," carefully and skillfully managing the size of the distribution channels, number of salespeople, inventory, etc., to insure the success of all involved in the business? The truth is chilling: nobody.
Imagine trying to write a computer model of how MLMs work, and you will see this point most vividly. An MLM could never work, even in theory. Think about it.
The People Machine
Chernobyl had a control system that failed. MLMs have no control mechanisms at all.
Where is the "switch" that can be flipped in an MLM when enough sales people are hired? In a normal company a manager says, "We have enough, let's stop hiring people at this point." But in an MLM, there is no way to do this. An MLM is a human "churning" machine with no "off button." Out of control by design, its gears will grind up the money, time, credibility, and entrepreneurial energy of well-meaning people who joined merely to supplement their income. Better to just steer clear of this monster to begin with.
There is simply no way to avoid the built-in failure mechanism of MLMs. If a company chooses to market this way, it will eventually "hire" (with no base pay and charging to join) far too many people.
Thus, the only "control system" will be the inevitable losses and subsequent bad image the MLM company will gain after it does what it was designed to do: fail. And sooner or later we have got to stop blaming this particular MLM company or that, and admit that the MLM technique itself is fundamentally flawed.
II. Pyramid Structure: An Organizational Problem
The Un-Pyramid
For most MLMs, the product is really a mere diversion from the real profit-making dynamic. To anyone familiar with MLMs, the previous discussion (which focused so much on the fact that MLMs are "doomed by design" to reach market saturation and thus put the people who are legitimately trying to sell the product into a difficult situation) may seem to miss the point. The product or service may well be good, and it might oversaturate at some point, but let's get serious. The product is not the incentive to join an MLM. Otherwise people might have shown an interest in selling this particular product or service before in the real world. The product is the excuse to attempt to legitimate the real money-making engine. It's "the cover."
Intuitively, we all know what is really going on with MLMs. Just don't use the word "pyramid"!
"You see, if you can convince ten people that everyone needs this product or service, even though they aren't buying similar products available in the market, and they can convince ten people, and so on, that's how you make the real money. And as long as you sell to a few people along the way, it is all legal." Maybe...
But the way to make money in all this is clearly not by only selling product, otherwise you might have shown an interest in it before, through conventional market opportunities. No, the "hook" is selling others on selling others on "the dream."
Math and Common Sense
MLMs work by geometric expansion, where you get ten to sponsor ten to sponsor ten, and so on. This is usually shown as an expanding matrix (just don't say "pyramid"!) with corresponding kick-backs at various levels.
The problem here is one of common sense. At a mere three levels deep this would be 1,000 people. There goes the neighborhood! At six levels deep, that would be 1,000,000 people believing they can make money selling. But to whom? There goes the city! And the MLM is just getting its steam going. Think of all the meetings! Think of all the "dreams" being sold! Think of the false hopes being generated. Think of the money being lost.
It Will Fail??? It Cannot Fail???
Nothing irritates a die-hard MLMer more than the preceding argument. If you point out the absurdity, for example, that if "the pitch" at an Amway meeting were even moderately accurate, in something like 18 months Amway would be larger than the GNP of the entire United States, then listen closely for a major gear-shift: "Well, that is absurd, of course. Not everyone will succeed, and so the market will never saturate."
Well, which is it? Are we recruiting "winners" to build a real business, or planning by design to profit off of "losers" who buy into our "confidence"?
During "the pitch," anyone can make it work. "It's the opportunity of a lifetime." "Just look at the math!" But mention the inevitable saturation and the losses this is going to cause for everyone, and then you'll hear, "Of course it would never really work like that." "Most will fail," you will be told, "but not you, Mr. Recruit. You are a winner. I can just see it in your eyes."
If you are a starry-eyed recruit, it will grow as presented. If you are a logical skeptic, then of course it would never really work like that.
But the dialog usually never even gets to this. The fact that MLM is in a mad dash to oversupply is largely chided as mere "stinkin' thinkin'." Expert MLMers know how to quickly deflect this issue with parable, joke, personal testimony, or some other sleight of mind.
New Solution: A Retarded MLM
Some modern incarnations of MLMs attempt to address this particular problem by limiting the number of people you can sponsor, say, to four. But the same geometric expansion problems exist; the failure mechanism has just been slowed down a bit. And now there is the added problem of even more unnecessary layers in the organization.
The claim that an MLM is merely a "common man" implementation of a normal real-world distribution channel becomes even more absurd in this case. Imagine buying a product or service in the real world and having to pay overrides and royalties to five or ten unneeded and uninvolved "distributor" layers. Would this be efficient? What value do these layers of "distributors" provide to the consumer? Is this rational? Would such a company exist long in a competitive environment?
Confidence Men and the Shadow Pyramid
The age-old technique of "con men" is to create "confidence" in some otherwise dumb idea by diversion of thought, bait, or force of personality. The victim gets confidence in a bogus plan, and, in exchange, the con man gets your money. MLMers are very high on confidence.
Since the brain inevitably intrudes itself into the delusion that an MLM could ever work, spirits drop and attitudes go sour. But this depressive state can itself be exploited. As doubts grow when the MLM does not do what recruits were first "con"fidenced to expect, then a further profit can be made keeping the confidence going against all common sense.
Thus, a parallel or "shadow" pyramid of motivational tapes, seminars, and videos emerges. These are a "must for success," and recruits are strong-armed into attending, buying, buying, and buying all the more. This motivational "shadow pyramid" further exploits the flagging recruits as they spiral inexorably into oversaturation and failure. The more they fail, the more "help" they need from those who are "successful" above them.
So, MLMs profit by conning recruits up-front with a "distributorship fee," and then make further illicit money by "confidencing" these hapless victims as they fail via the "sale" of collateral material.
Special MLM "Job" Offer: A Losing Proposition
Would a rational person, abreast of the facts, go to work selling any product or service if he or she knew that there was an open agenda to overhire sales reps for the same products in the prospective territory?
What do you think? Is this a good "opportunity" or a recipe for collective disaster?
So, as the saying goes, "Get in early!" This is a rationalization on the level of "getting in early" on the L.A. looting riots. If profit from the sale of products is fundamentally set up to fail, then the only money to be had is to "loot" others by conning them while you have the chance. Don't miss the "opportunity," indeed!
Where is the money coming from for those at the top? From the sucker at the bottom... as in every pyramid scheme. The product could be, and lately has been, anything.
The important thing is to exploit people while the exploiting is good, if you want to make quick money at MLM.
III. Morality and Ethics: A Problem of Greed
Moral Riddle: What is Ever Present but Universally Condemned?
While issues of morality and ethics can be tricky to discuss, materialism and greed are universally condemned by every major religion, and even by most of the irreligious. This does not mean people are not materialistic or greedy; in fact, the common ethical call to not be so is strong evidence that we are.
For most people, this means if we are going to be materialistic or greedy, we would rather not be obvious about it. Thus, Madison Avenue has subtle, highly polished ways of appealing to these vices without being heavy handed. We don't mind so much... as long as it is "veiled." This hypocrisy, while sad, is the status quo. So, Madison Avenue is trying to be ever more subtle in appearing not to be manipulating our immoral "bent" towards greed and materialism.
A Blatant Appeal to Materialism and Greed
Not so with the MLM crowd. Pick up any brochure or videotape for an MLM and you are more than likely to see a cheesy, obvious, and blatant appeal to greed and materialism. This is offensive to everyone, even die-hard materialists. Typical is an appeal to "the American dream." Usually there will be a mood shot of a large new home, a luxury car, a boat, perhaps a beautiful couple boarding a Lear jet, and so on.
While this need not necessarily be part of the MLM approach, it usually is.
Such a transparent appeal should make people suspicious. "Why the bait?" "Are they trying to 'get my juices going' so that my brain turns off?" "Couldn't they show people doing more wholesome things with the money they make?" "If this is really a legitimate opportunity, why not focus on the market, product, or service instead of people reveling in lavish materialism?"
But we have reason enough to know, having read this far, why the distraction is needed. Unbridled greed suspends good judgment. When the eyes gloss over in a materialistic glaze, common sense is a stranger.
Besides being cheesy and offensive to our sensibilities, this is not a big deal for participants, right? But consider that all companies must have control over the way they are presented to the public. Thus, an MLM has the right and obligation to dictate what material is used. Otherwise any agent could say whatever he or she liked about the nature of the company, causing obvious problems. Again, it would take too much time to audit and approve each individual's idea for a presentation where the goal is mass marketing. Using "boilerplate" presentations affords the added benefit of consistency. This is basic "information quality control."
The net effect is that the MLM rep is "stuck" with the company-approved video, brochure, and presentation outline.
"Not Me, I Would Never Stoop That Low!"
In 1991, some distributors in the MLM FUND AMERICA began to produce their own, improved recruitment material. They were summarily fired, which did not please them since many of them were founding members who had "gotten in early."
Later the same year, by the way, the founder of FUND AMERICA was arrested for having generated some 90% of revenues selling "distributorships" versus product... making it clear that this particular MLM was little more than a pyramid scheme.
Job Opening: Salesperson of Sin!
Do you want to be involved in the blatant promotion of values contrary to your belief system?
In most MLMs you will have no choice. You are going to have to sit through meeting after meeting after meeting after meeting. You are going to be "motivated" to coerce your friends and family to hear "the pitch." This is the way the "dream" is planted and fertilized. Get used to it.
Sunday, February 10, 2008
* 100000 Crore scam by MLM Companies
http://www.india-today.com/btoday/20030706/features5.html
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.
Pramod Khullar/Chairman
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
Other Story Links...
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.
Pramod Khullar/Chairman
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
Other Story Links...
* 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.
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.
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