The Serious Fraud Investigation Office (SFIO) has proposed a regulator for multi-level marketing companies, most of which have welcomed and pushed for the move. Through a recent study, the government’s investigative agency found many direct selling companies are fly-by-night operators who hoodwink consumers.
Top multi-level marketing companies operating in India include Amway, Oriflame, Avon and Tupperware. This industry, estimated at Rs 5,200 crore, is growing at 27 per cent yearly.
The Indian Direct Selling Association (IDSA), which has just 18 members, including Amway, Oriflame and Tupperware, has welcomed the move, as it believes a regulator would not only ensure benefit to customers, but also provide recognition to the industry. “There are various fraudulent companies that use direct-selling as their umbrella, and their whole system is based on recruitment. Initially, the members benefit. But then, the whole model collapses very easily. This spoils the image of the whole industry,” said S Subramanian, chairman of IDSA and director (finance) at Oriflame.
In a proposal to the Ministry of Corporate Affairs, SFIO suggested a specialised agency to keep a check on the operations and functioning of such companies. “Most multi-level marketing companies woo consumers for quick cash. For most of these, one is primarily required to become a member and bring in more members to create a down-line, which looks like a pyramid,” an SFIO official told Business Standard.
“Since money circulation programmes are not legitimate in India, these companies are disguised as ones selling products, in order to operate….Except for a few reputed ones, most of these schemes are inherently money-circulation schemes, and the sale of products is only a camouflage,” he said.
He added while most of these products were over-priced and had huge margins, the hefty commissions are enjoyed only by a few sitting on top of the pyramid. Also, in some cases, the products do not even cater to customers’ daily requirements.
According to Subramanian, the size of the industry is expected to double over the next four years. While most of the companies are international players, many fraud companies also exist.
IDSA secretary-general Chavi Hemanth said, “Not all companies in the segment are fraud, but these, too, earn a bad name. The genuine companies function in a very systematic way. We have a money-back guarantee and a cooling-off period. Besides, we also train our members before they go out to sell.”
According to Hemanth, while companies like Amway, Avon and Oriflame popularise their schemes as ‘quick-rich’ programmes, these are not really so, as their members have to work hard to sell the products. While such schemes violate the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, there is no particular agency to monitor companies flouting the law, said the SFIO official.
In 2002, the Reserve Bank of India (RBI) had questioned some Amway schemes. The case was later forwarded to the state police for further investigation. “There are over 30,000 such cons operating in the country. Agencies like RBI cannot look into all these cases. If these find any wrongdoing, action has to be taken by the state police. But the state police does not understand the technicalities. So, companies with such schemes are having a free show,” the official said. Though most of these companies are registered under the registrar of companies, this does not help the government monitor their operations.
During recent investigation, companies like Gold Quest and Quest Net, both based in Chennai, had come under the SFIO scanner.