Pyramid schemes face government crackdown Draft norms being drawn up to rein in multi-level marketing MLM firms

The Securities and Exchange Board of India has at least 552 unregistered multi-level marketing schemes under its scanner.

The government wants to crack down on multi-level marketing (MLM) firms that operate pyramid schemes and is drawing up draft guidelines to rein in such scamsters, according to two government officials with knowledge of the matter.

“Model rules” are likely to be finalized in the next two weeks to check “fraudulent MLMs”, said one of the officials cited above. Neither wanted to be identified as the rules haven’t been formally approved yet by the government.

“Although the (Prize Chits) Act already bans such schemes, there is nothing to effectively check those that are operating online and from outside India,” said the official. “Most concerned ministries and departments have already given their in-principle approval.”

The move comes as the government has detected an increasing focus by such schemes on people based in the north-east and West Bengal as well as their being marketed online by entities outside the country, in a bid to stay off the regulatory radar, unlike, say, Speak Asia Online, which was accused of defrauding people to the tune of Rs.2,300-2,400 crore by Mumbai Police last year. Speak Asia chief executive Manoj Kumar did not respond to text messages and phone calls.

Also, the plan to set up a new central regulator for MLMs has been shelved in favour of a system that will be policed by the states.

The new rules will be in the nature of legal guidelines and operate under the Prize Chits and Money Circulation Schemes (Banning) Act 1978.

The idea behind the new guidelines is to ensure there is clarity in the implementation of the money circulation Act (as the Prize Chits law is also known), especially among state governments, said the second government official. The economic offences wings of state police forces are not clear about how to implement the Act, and hence the new guidelines, the second official said.

“There is a great deal of overlap in regulations both at the Centre and the state. We want these things to be made clear,” he said. “Several big companies are operating these schemes under the guise of marketing products. The new rules will effectively check that.” He didn’t elaborate.

Multi-level marketing companies typically operate under a business model that compensates people not only for the product sales they generate, but also for enrolling other sellers and creating a pyramid structure. This is illegal under Indian law, officials said.

Several key government arms have been involved in the framing of these guidelines, according to one of the officials cited above. They include the ministries of corporate affairs, consumer affairs and law, the department of financial services under the finance ministry, the Securities and Exchange Board of India (Sebi) and the Central Economic Intelligence Bureau (CEIB).

Information with various law enforcement agencies suggests there are at least 18 large MLM companies in the country with an annual turnover of Rs.4,000-5,000 crore, said the first official cited above, adding that these are estimates as there is no data available with the government.

“In the course of framing these guidelines, we came across some new trends. Such companies are aggressively targeting the north-east states and West Bengal,” the first official said. “And now, these schemes are being increasingly marketed online, by people based outside India.”

This was in addition to the four southern states—Andhra Pradesh, Tamil Nadu, Karnataka and Kerala—where such schemes always are active, he said. At least 552 unregistered MLM schemes are currently under Sebi’s scanner, he said.

While no data was available on the number of people registered with these schemes, a recent investigation in Madhya Pradesh showed that out of 31 MLM networks in the state, the top three had 2.1 million members.

“This data is indicative of the fact that throughout the country, millions could be enrolled as members with such schemes,” he said.

Earlier this year, the Serious Fraud Investigation Office (SFIO) had recommended that the central government set up a regulatory body for MLM companies that would work in conjunction with the Enforcement Directorate and the Intelligence Bureau.

“That proposal has been shelved. We want state governments to themselves police these companies,” the second official said.

The regulations should help bonafide companies, said Gaurav Gupta, senior director at consultancy Deloitte Touche Tohmatsu India Pvt. Ltd.

“Some non-genuine players have misused this channel for illegal purposes. This is a positive step from the government to bring transparency to the system,” he said.

The Indian Direct Selling Association (Idsa), an industry lobby group, welcomed the move.

“We are really very delighted to know the government has decided to come up with modal rules,” said Chavi Hemanth, secretary general, IDSA. “Our member companies have always ensured that the consumers and public at large should not be deceived and cheated by fraudulent financial pyramid schemes operating under the garb of direct selling.”

Idsa has also asked the government to set up a single-window regulator to further ensure clarity of operations within the industry and to protect the interests of bonafide companies.

If the regulations are “logical” and “address the issue”, it would benefit the sector, said an independent analyst with a leading consultancy firm who did not want to be named.

“The government’s objective is to (expose) the scamsters. This would help genuine players who get bracketed in the same light,” he said. Still, “the genuine players in the sector are apprehensive of the regulations, though in the long-term it will only benefit them”.

Besides Speak Asia, some other companies operating in the direct selling sector in India include Amway, Oriflame and Tupperware among others.

Amway India Enterprises Pvt. Ltd said the government move is in the best interest of consumers and ethical players in the market.

“Though we have no information of the same, Amway welcomes this possible move as this will bring clarity to the market. It will certainly protect consumers from fraud schemes, and could also safeguard the operations of ethical companies.” said Bill Pinckney, chief executive and managing director, Amway.

“Direct selling contributes to the livelihood for over four million homes in India. We and the entire direct selling industry look forward to being part of the process with the government as the guidelines are being framed.” added Pinckney.