Amway India: A grey area called direct selling

Anil Sasi Posted online: Monday, Jun 09, 2014 at 0000 hrs
New Delhi : For Amway India chairman and CEO William S Pinckney, there is little respite since his sudden arrest by the Andhra Pradesh police.

Pinckney, 65, who was picked up from Gurgaon and brought to Kurnool on a warrant by the Andhra police on May 27 in connection with a complaint filed against the US-based direct-selling firm in that state, almost exactly a year after he was arrested under similar circumstances in Kerala, finds himself under much more pressure this time round. Remanded to 14 days in judicial custody by a Kurnool court, Pinckney, along with two colleagues, is battling multiple FIRs and is being shepherded from one Andhra town to another in relation to each of these cases. Intriguingly, the complaints, despite being filed presumably by different Amway distributors in distant towns such as Kurnool, Khammam and Guntur, use almost identical language, according to Samir Behl, Amway’s regional president, Europe, Africa and India. Behl, who is based in Germany, is camping in India.

At the centre of the arrest is the Prize Chits and Money Circulation Schemes (Banning) Act (PCMC Act), 1978, under which Pinckney was booked in both cases. Apart from IPC section 420 that covers cheating, all these complaints also invoke sections 3, 4, 5, and 6 of the PCMC Act. Over the years, the legislation has been leveraged successfully by state governments in tackling ponzi schemes, including high-profile ones run by SpeakAsia, Pearls Agrotech Corporation Ltd, Japan Life, and recently the Saradha Group. The Act, which was strengthened last year as a potential deterrent to those who float pyramid schemes in the wake of the Saradha scam, allows the police to seize, seal and arrest merely on the basis of a complaint.

Amway, an $11.8 billion Michigan-based direct-selling firm that conducts business through a number of affiliated companies in more than 100 countries, is evidently different from the other entities charged. Amway — short for American Way — has tangible products that include home care products, personal care products, dietary supplements, water purifiers and cosmetics.

The law

Since the PCMC Act was implemented at a time India had no direct-selling companies, most of which would start operations in the mid-nineties, firms such as Amway have been lobbying hard for an amendment, citing the possibility of misuse.

Section 2C the Act defines “money circulation schemes” as “any scheme... for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme...” The clause “on any event or contingency relative or applicable to the enrolment of members etc” does not make a clear distinction on whether it can be applied to multilevel marketing schemes used by direct sellers.

Direct selling involves sellers at the top of the pyramid recruiting others below them, which makes it a multilevel marketing scheme. According to Ajay Khanna, chairman of Indian Direct Selling Association, a consensus on major provisions had almost been reached on the draft of a bill to amend the PCMC Act. However, a final push by the government to change the law did not come through.

Pinckney, who arrived in India in February 1998, is described by many in the direct-selling industry as one of its poster boys. FICCI has come out in support of Amway and said there was no criminality involved in the latest case which was in all likelihood the result of a dispute between Amway and a consumer.

On May 28, 2013, the Kerala police arrested Pinckney and two directors of the company in connection with a case filed in 2011 in Wayanad, for an alleged violation of the PCMC Act, though the three men had already been granted anticipatory bail on May 3 by the Kerala High Court over a different case filed in Kozhikode in 2012. The Kozhikode case was filed by one Visalakshi, who claimed she suffered losses after having bought Amway products worth Rs 3 lakh that she was unable to sell.

This time, Pinckney was arrested on the orders of the Kurnool district court in a case that goes back to 2006, when the Andhra Pradesh CID registered a criminal case against Amway. The company in turn approached the Andhra Pradesh High Court requesting a declaration that its scheme does not fall under provisions of the PCMC Act. A division bench of the high court held Amway’s scheme is an illegal money circulation scheme and fell within the “mischief of definition of money circulation scheme”. Amway tried to file a special leave petition in the Supreme Court, which was dismissed.

The dissonance in the Amway model and the Act as it stands today is evident. The company sells its products through members who are called Amway Business Owners. The allegation is that when the business owners are not able to sell their products, they buy these themselves to achieve a level of sales for higher incentives. This is called “inventory loading”.

Behl refuted the allegation and said Amway has safeguards to prevent this. “Anyone down the chain automatically gets disqualified if he indulges in inventory loading,” he told The Indian Express.

The WORRIES

Direct-selling firms have started to cut their Indian exposure. Last year, US-headquartered brand Mary Kay quit India citing “regulatory concerns” and “poor sales”. Earlier this month, HUL chairman Harish Manwani, in the company’s annual report, noted that 2013-14 had been “extremely challenging” due to “ambiguity on acceptable norms for direct selling in India” and said the company is “reviewing” the strategy for this business.

Behl has maintained a brave face. “We are committed to this (Indian) market. We are hopeful about working with the new government to find a long-term solution to this issue,” he said. India is one of the top 10 markets by sales for Amway, with a range that includes Glister toothpaste and Nutrilite nutrition supplement. The current direct-selling market in India is estimated to be worth Rs 7,200 crore, with Amway alone accounting for sales of Rs 2,169 crore.

“If there is a consumer complaint, there are consumer redress systems in place. But arresting the CEO without any trial or conviction is baffling,” Behl said Amway is lobbying at various levels, including seeking a meeting with Finance Minister Arun Jaitley. But with judicial relief elusive, on Friday, Amway president Doug DeVos, in a video message for the Indian market, made a dramatic appeal to Prime Minster Narendra Modi, seeking his government’s help in the release of the company’s India head.

But till the law stands the way it is, any reprieve for embattled Amway and other direct-selling firms could at best be short-term relief.