The government has dropped the proposal of regulating multi-level marketing companies through a separate authority. Instead, the finance ministry has asked state governments to take action against such companies under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
Such companies came under the radar of the financial regulators after they fleeced crores of rupees from gullible investors through ponzi schemes. In one version of such fraudulent schemes, a company would entice people to deposit an initial amount of say R10,000 in its bank account, with a promise to pay R1,000 every month for the next one year, and return the principal amount of R10,000 at the end of the year.
The clamour to crack down on such companies grew after the news of MLM company Speak Asia garnering public funds became public. The Singapore-based company had duped thousands of people of over R2,300 crore.
A number of such companies are amassing funds, especially in the rural areas, through such means. After a large user base is built, the company would typically run away with the funds. These kind of pyramid schemes have already fleeced depositors in India.
An inter-ministerial group, which was formed under the Central Economic Intelligence Bureau in the finance ministry, had recommended that state governments and police authorities be empowered to act against MLM companies, sources said.
Accordingly, the finance ministry has written to state governments to take action against fraudulent multi-level marketing companies. The IMG observed that the wide spread of such schemes make it difficult to regulate these through setting up of an authority. The ministry has now left the task to state governments to take action against such operations.
Both the Reserve Bank of India (RBI) and the finance ministry have deliberated on this topic, calling such companies as ?social menace?.
Even as the Centre has left the task of monitoring and regulating such companies to state government, it is doubtful whether states have the wherewithal to perform this task. This is especially difficult since most MLM companies are registered overseas to escape regulatory scrutiny.
