MULTI LEVEL MARKETING & FAKE COMPANIES BY D M DESHPANDE (The Navhind Times - Goa , 05/06/2013) After the arrest of Amway Chairman and his two other officers by Kerala Police recently, the issue of regulatory framework for direct selling companies has gained some urgency. Besides Amway, there are other successful direct selling companies such as Oriflame, Modicare Avon and the like. A cabinet committee is working for over a year now but has not come up with anything concrete in this regard. The three were arrested and later on released on bail under the archaic Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Since Amway Chairman for Indian operations happens to be an ex-pat foreign investor, there has been media hype over the issue; otherwise this is the third such instance of arrests in Kerala alone. The other two incidents have not even hit national headlines. The Indian direct selling market is estimated to be worth ` 6300 crore with Amway leading with 36 per cent market share. It operates through 1.5 million distributors half of whom are customers themselves. In terms of annual revenue of ` 2,288 crore, Amway is ahead of fast moving consumer giants such as Proctor and Gamble, Gillette and home grown Emami. Now it is closing in quickly with Godrej Consumer Products and Marico. It is important to nurture this sector as it can bring in innovations in service delivery as well as in core product/brand. There exists a certain amount of confusion both in law and practice as to the difference between Multi Level Marketing (MLM) firms and fake companies; the later make their money by using Ponzi or a variant of it. Ponzi, an Italian, is believed to be the first ‘inventor’ of shady schemes which essentially end up cheating the gullible people. Fortunately, it is possible to distinguish between the two; a lot of research has gone into this, especially in the west. For instance, way back in 1975, Amway was investigated by US Federal Trade Commission to determine if it were a pyramid scheme and it was cleared. In a typical pyramid scheme, the higher portion get benefit (in terms of commission, bonus etc) for the work done by the people in the lower strata. It is stuck at the base when there is no more recruitment or circulation; so a large number would feel cheated because they did not get returns commensurate with their ‘work’ or in the same manner as those higher up in the pyramid. It is important to look at the revenue model of the firm. Where are the major portions of revenues coming from? Is it from the sale of product or the service to third party clients? Or is it from distributors/owners. It has been seen that in some of the fake companies, there is no worthwhile product or even if it is there, it is used only as a front. It is sold at a huge premium, many times, two to three times higher than the competitors. It is promoted on the plea that it contains a special ingredient or a miracle virtue. Celebrities, even Doctors are used to propagate, endorse and stand behind the product. The direct selling company appoints a large number of lay men and women as Agents; they are also given fancy designations such as business partner or owners. Essentially, they will have to purchase ‘starters’ kit very often at exorbitant cost. They are required to sell products amongst their friends, relatives or even to strangers for which they are paid commission. They can also find new Agents for enrolment for which they get commission on the business done by their recruits. Since most of these persons do not have any training in selling nor do they possess adequate entrepreneurial skills, they drop out in significant numbers. How can the firm succeed if its agents are not? Perhaps, only by recruiting more and more new agents. This is where an MLM starts acquiring colours and shades of a Ponzi scheme. Persons at the top of the pyramid are amassing wealth. Amway or Tupperware and several other direct selling companies are listed Public Limited companies in their country of origin, mostly US. But their Indian arms are not listed and therefore are not subjected to scrutiny. Therefore, we need clarity and perhaps a separate law that serves twin objectives of this industry’s growth even while ensuring that the unscrupulous elements are kept at bay.
Posted on: Wed, 05 Jun 2013 16:09:58 +0000
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