New Delhi: The government is likely to form a central agency to
regulate so-called multi-level marketing (MLM) schemes after the
Economic Intelligence Council found they had become a “preferred” mode
of fraud. In the wake of an increasing number of economic offences, the
United Progressive Alliance government has also decided to set up a
multidisciplinary school of economic intelligence.
The Central
Economic Intelligence Bureau (CEIB), which was asked to prepare a
feasibility report for establishing a new agency to monitor such
schemes, has also supported the idea.
“We feel there is need for
an agency to monitor MLM because the state police is not effective at
all,” a senior CEIB official said. “We will soon present our report
recommending the setting up of the agency to the finance minister.”
Finance minister Pranab Mukherjee,. File photo
MLM
refers to a system in which commissions are paid on sales to sellers,
who also get rewarded for sales by people they recruit and so on. Also
known as pyramid marketing or network selling, it came into disrepute
after several companies, including Speak Asia Online, were accused of
defrauding members.The economic offences wing of the Mumbai
Police in November last year said the suspected Speak Asia Online fraud
amounted to Rs2,300- 2,400 crore. Speak Asia, which conducted online
surveys on a variety of products and services, had around two million
Indian panellists, or members, who paid money to join the firm’s network
and earn reward points for referring its offerings to friends and
peers.
Speak Asia’s spokesperson couldn’t be immediately reached for comment.
The
Economic Intelligence Council, headed by Union finance minister Pranab
Mukherjee, will discuss the issue when it meets at the end of this
month, said the official cited above.
“(There is a) need for a
central agency to regulate/scrutinize the schemes at the initial stages
of operation before large number of persons are cheated and operators
disappear with huge amounts of money and the operations spread across
jurisdictions, states and even countries,” read the minutes of the
council meeting reviewed by
Mint.
The schemes are currently
being monitored by state governments, besides regulators such as the
Reserve Bank of India (RBI) and the Securities and Exchange Board of
India (Sebi).
MLM schemes are mostly a state subject, according to
CEIB. They come under RBI scrutiny if the entities running them
function as non-banking financial companies, and under Sebi if listed.
However,
“it would not be possible for the state police authorities to take
effective preventive actions”, Intelligence Bureau director N. Sandhu
was cited as having said at the council meeting, according to the
minutes.
Instances of suspected fraud involving MLM schemes last
year are estimated at Rs7,000 crore, said a senior intelligence official
who declined to be named. Apart from Speak Asia, these included
Kerala-based Tycoon Empire International and a fraud estimated at about
Rs1,000 crore by the police. Tycoon Empire was not immediately available
for comment.
The government’s move has been welcomed by those who run legitimate direct-selling businesses.
“The
industry is filled with fly-by-night operators who are basically
fraudulent in nature,” said Chavi Hemanth, secretary general of the
Indian Direct Selling Association, an industry lobby group. “The
regulatory body should make some stringent rules and regulations to curb
these fraudulent, illegitimate operators from operating in the garb of
genuine direct-selling companies.”
Stringent laws are needed to govern the entry of companies, both Indian as well as global, into this sector, she added.
A
spokesperson for direct-seller Amway welcomed the initiative, saying it
was long overdue and will boost confidence in the industry at large.
“From the calamities of Speak Asia, Nano Excel, etc., we have reached a
positive point through the emergence of this regulatory body,” he said.
This
body will bring clarity to standards and guidelines for the industry,
which will be good for the smooth functioning of genuine players in the
market, added the spokesperson.
He said cases of illegitimate companies shutting down in Kerala 8-10 months back hurt the industry.
Nano
Excel Pvt. Ltd refers to an MLM company that’s been accused of
swindling about Rs350 crore after claiming to be setting up a power
project jointly with the Arunachal Pradesh government, the police said.
Nano Excel could not be immediately reached for comment.