Authorities try to put in place regulations, as companies make huge profit.
By Rajiv Theodore
NEW DELHI: Multi-level marketing (MLM) schemes have been facing the heat in India. Several cases in recent times have surfaced to reveal sleaze, slime and even suicides.
CEO and Chairman Williams S Pinckney and two top executives of Amway in India were arrested in the state of Kerala for charges of duping, over-pricing and fraudulent practices. This has raised several questions and opened up a debate on the existence of such ‘direct sales’ companies.
Forty-one year-old Manish Goel had allegedly duped over 11,000 people of several millions of Rupees by promising them land. His company, which is into multi-level marketing, had collected money from public and distributed commissions to existing member for adding a new member in the scheme.
The Saradha scam that unfolded in West Bengal had wiped out the savings of an estimated 400,000 people, driving many to commit suicide. Saradha’s chits like ‘chain letters’ promise impossibly high returns on the assumption that investors would indefinitely multiply at geometric rates. But the scheme collapses as the chain breaks down.
Speak Asia, another multi-level marketing firm, is currently being probed by multiple agencies such as the Enforcement Directorate (ED), the income-tax department and the Serious Frauds Investigation Office (SFIO), for offences including money laundering, violation of foreign exchange laws, tax evasion and not making payments to investors. It was accused of defrauding people amounting to a whopping 2,400 crore by the police in 2010.
Such kind of business activities had a bumpy ride in China too. It may be recalled that direct selling companies in that country were accused of operating sophisticated pyramid schemes and other sales swindles. They have also been accused of manipulating and misleading sales recruits.
Because of such concerns, China banned direct selling in 1998. Big direct-selling companies disputed those claims, saying regulators simply misunderstood their business model.
In 2006, after heavy lobbying from American companies, China lifted its ban. And since then, direct selling, with some modifications, has flourished in China, growing into an $8 billion industry that now markets products as diverse as health supplements, cosmetics, toothpaste and dishwashing liquid.
“The Direct Sales Regulations limit direct selling to cosmetics, health food, sanitary products, body-building equipment and kitchen utensils. And the regulations require Chinese or foreign companies (“FIEs”) who intend to engage into direct sale business in mainland China to apply for and obtain direct selling license from the Ministry of Commerce (“MOFCOM”),’’ law firm Lehman, Lee & Xu, who is recognized in China as a leader in the area of direct sale regulations, have said.
In India, over the past few decades, companies such as Modicare, Tupperware, Quantum, Oriflame, Amway, Herbalife, Forever Living and Free India have been successful in building their businesses. While most run legitimate businesses, the industry has been tainted by the alleged wrongdoing of a few. The Indian authorities are now keeping an extended vigil on these companies to check whether they are not illegally pooling funds from investors and exposing them to risks in the absence of regulation and ways of tracking the promoters.
A finance ministry official in New Delhi told The American Bazaar that a single key regulator is required to regulate MLMs and a committee will recommend the required regulations, and help identify those entities which may have violated collective investment scheme (CIS) norms while acting as MLMs. The draft regulations for MLMs are expected to be issued later this year.
MLM refers to a business model where sales personnel engage in network marketing, direct selling or referral marketing. Though MLMs are mostly engaged in the sale of healthcare items and packaged consumer goods, they also offer a wide range of other products and services, making it difficult for regulators to categorize them. The products or services of MLMs are marketed by sales promoters to other people predominantly through word of mouth.
Coming back to the US-headquartered Amway Corp., the Company acts as an MLM in India and had reported a turnover of Rs. 2,288 crore in calendar year 2012, and aims to cross the $1 billion (Rs.5, 420 crore) mark by 2020. It employs nearly 2,500 people directly (including vendors) and has around 800,000 active distributors in India. In India, Amway sells its products through direct marketing to avoid spending on large advertising campaigns. This, however, has not translated into lower prices for the end consumer.
The Andhra Pradesh High Court had observed in 2007, while examining a petition against Amway, “By holding out attractive commission on the business turned out by the down line members, the scheme provides for sufficient inducements for its members to chase new members in their hot pursuit to make quick/easy money… that the whole scheme is so ingeniously conceived that the inducement for aggressive enrolment of new members to earn more and more commission is inherent in the scheme.”
During a recent raid at the offices of Amway in Kochi in Kerala, the Economic Offences Wing of the Crime Branch came across a list of 119 items for which the company had been charging prices four to 12 times the cost price. A calcium-magnesium tablet, the production cost of which is Rs.60.76, is sold by Amway for Rs.639 – at 10 times the cost price. Mascara costing Rs.73.14, meanwhile, is sold at Rs.445.
However, counsel for Amway K P Satheeshan told the Hindu newspaper that “There is no rule governing multi-level marketing in India. We would also like the government to formulate new rules so that Amway has a set of guidelines that it can follow.”
In the same paper, Crime Branch Superintendent of Police P.A. Valsan said, “Most of their products are priced very high. The company has the freedom to sell at whatever price they want. It is the consumer’s decision whether to buy the product or not. But people are buying Amway’s products not to use them, but for business purposes. That cannot be done.”
There are also allegations that unlike the company’s claim that its products are manufactured from the produce of special farms in the United States, many items are actually produced in factories in India. A former Amway user in India who was part of the chain once, Suresh Sukumaran told The American Bazaar that ‘’principally they play on your economic insecurities by promising dream vacations and aspiring to own cars and houses.’’
The recent best seller—‘’To Sell is Human’’ written by Daniel H. Pink talks from the premise that every one of us can sell. But in the case of Amway it is that people who sign up are usually students, homemakers, young executives who are usually un-initiated in the basics of entrepreneurship or finance. And once enrolled, new comers can only go forward by recruiting more, to create a network and get commissions but many aspirants flop eventually.
An Amway spokesperson said the industry has been lobbying for regulations in order to weed out scamsters.
“The direct selling industry has been meeting officials from the ministry of consumer affairs, corporate affairs, ministry of commerce and finance ministry, to provide regulatory clarity,” the Amway spokesperson said in an email.
Countries such as Singapore, Vietnam, Thailand, Malaysia, Hong Kong, UK, etc., have direct selling laws that provide absolute clarity on what types of businesses are permissible and what are not. That way, there is no place for the unethical as they will get exposed in a flash.
There are several hundred MLMs, based especially in India’s small towns, where regulators have limited reach and investors are mostly ignorant about Sebi norms. The legitimate direct selling industry alone, all of which comes under MLMs, is estimated at Rs.6,000 crore, according to the Indian Direct Selling Association (IDSA).
In China, the company claims to have reinvented its business model to suit to the laws there. “After the Chinese government outlawed direct selling, Amway repeatedly revised its business model to build a reputation as an honorable corporate citizen. In 2006 it received a new license, and China is now its largest market,” Amway’s President says in an article in Harvard Business Review.
Direct Selling business in China is growing too — the sector has posted combined revenues of over $16 billion in the country, or 11% of the world’s total, behind only the US and Japan, which had global market shares of 20% and 16% respectively, according to data available with the World Federation of Direct Selling Associations.
China’s government issued its first direct-selling license in 2006 and there are now 50 authorized companies with total revenue estimated at 94 billion yuan ($15 billion) last year.