Strict regulation of multi-level marketing likely

Written by Bijay Shankar Patel | Subhash Narayan | New Delhi | Updated: May 28 2011, 05:35am hrs
The dubious business model of multi-level marketing (MLM) companies, where sales agents recruit customers to join their distribution army, has come under the governments scanner.

Concerned over the potential of pyramid and money circulation schemes run under such flawed model to collapse sooner or later, the government is planning to bring them under stringent regulations on the lines of similar rules in the US, EU and Singapore. The move could impact firms such as Amway, Tupperware and Oriflame.

According to sources, the consumer affairs ministry has asked the Central Bureau of Investigation (CBI) to look into the operations of MLM companies. In parallel, the income-tax department would ask these companies to reveal the source of funding of various schemes run by them, suspecting involvement of black money.

We have received many complaints about the functioning of multi-level marketing companies. It is felt that there is a need to bring them under strict regulations. Many investors are also duped by the Ponzi schemes run by these firms, an official source told FE, on condition of anonymity.

In a Ponzi scheme, returns are paid to separate investors not from any actual profit earned by the company but from the money paid by subsequent investors. Direct selling is the system where companies engage private citizens on a contractual basis to sell their products and services.

These persons enjoy freedom to set their schedule and retail price and profit from the difference between the wholesale and retail prices and bonus linked to sales volume paid by the company. But in some cases which is what MLM is sales agents are offered extra gains if they recruit customers to become sales agents. This model is considered unsustainable and hence the need for regulatory oversight.

The recent case of Speak Asia, an online survey company, which collected sums running into crores of rupees from users by promising huge payments for filling surveys, has also come as an an eye-opener for the government. Bank accounts of its agents have been frozen. We suspect the incidence of many such cases and we are looking into it, an income tax department official said.

Analysts feel that what is needed is to ensure proper regulation of MLMs so that they dont degenerate into unsustainable Ponzi schemes.

Said India Direct Selling Association secretary general Chavi Hemanth: The sector needs regulation. Over the last few years, we are in discussions with the government to bring the industry under some sorts of (regulatory) framework. There is no official definition of direct selling in the country.

The CBI has been roped in by the consumer affairs ministry as its findings could be key to framing new regulations. The ministry has asked the apex investigative agency to present its findings in the form of a report so that action on new legislation could be initiated immediately.

There is no comprehensive Act to deal with direct selling in India unlike in countries like Malaysia which have effective mechanisms to deal with this industry. In India, there are several regulatory bodies governing this sector, which needs to streamlined. According to an ICRIER study, the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, which is sometimes cited for regulating this sector, is not applicable to direct selling and is outdated.

Catching illegal marketing activities under this Act is difficult. And the CBI is expected to go into the depth of current regulations that have given a free hand to operations of these companies without proper checks, said another government official privy to the development.

The I-T department has heightened its vigil as well, keeping a close eye on the sources of funding and illegal wealth generated. The move is line with the department's drive to curb the flow of black money. According to an official, ponzi scheme is a new area which the income tax department is tracking closely. Many such schemes are under the department's scanner.

The ICRIER study has endorsed the need for a comprehensive Act focusing on banning fraudulent practices such as pyramid schemes. The Act should have a clear definition of pyramid and other money circulation schemes and draw a distinction between fraudulent schemes and legitimate multi-level marketing (including direct selling), the study said.

There are more than 100 companies operating in the country under the multi-level marketing format, most of which have questionable operations. The concern is also that under the format, while customers are promised huge returns on their investment by participating in a marketing chain, the benefits flows only to a very minuscule percentage of participants. Others just lose money they invested in such schemes.