Business Standard

Direct-sellers in a spot

What could connect illegal money-pooling firms and Amway India is the principle of chain marketing

Namrata Acharya 

William S Pinckney

About two decades ago, Amway India, a wholly-owned subsidiary of US-based Amway Corporation, stepped into India, and in a short span of time emerged as the largest direct-selling fast moving consumer goods company in the country.

Today, however, is in the league of companies such as Saradha, the illegal money-pooling firm that duped many investors. William S Pinckney, chairman and chief executive officer (CEO) of was recently arrested by the Andhra Pradesh Police on allegations of unethical ways of money circulation. About a year ago, Pinckney was arrested by the Kerala police on similar allegations.

What connects and is the principle of chain or referral marketing. The fundamental difference, however, is while money-pooling companies extend their network on promises of higher returns on investment, direct-selling companies increase theirs by promising higher commission on sales. Therefore, unlike money-pooling, direct-selling is backed by actual products.

Moreover, while money-pooling companies pay commission to agents for roping in new agents, direct-selling companies pay a commission for selling products.

Through direct-selling, a person can primarily record profits in two ways: 1) As a non-agent, by earning a profit out of the difference between the purchase and selling costs and 2) as a registered agent of the company, one who gets commission on the sales volume. Commissions vary from six to 21 per cent, depending on the sales value and the position of the agent in a group. In contrast, money-pooling companies offer commissions of 35-40 per cent to agents.

Under direct-selling companies' agent model, suppose 'A' buys products worth Rs 100 from a distributor of a direct-selling company, the person gets a bonus of three per cent cash-back; 'A' shares the product details with nine others and each of the new buyers purchase products worth Rs 100; each gets a cash bonus of Rs 3. However, as 'A' was instrumental in roping in nine others, he gets a higher commission of, say, 12 per cent on the entire sale, or Rs 108.

Despite a specific business model, the direct-selling business faces many hurdles in India. Here, the bone of contention is the Prize Chits and (Banning) Act, 1978, which empowers states to formulate their own rules to implement the law. Section 2(c) of the Act defines money circulation as "any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions."

In India, direct-selling companies are trying hard to disassociate themselves with two specific phrases - "quick or easy money" and "enrolment of members".

These companies argue no incentive is paid for merely adding agents and, therefore, there is no quick money. Rather, profitability stems from increasing business volumes. "The problem is there is no specific law for direct selling. More, a banning Act should be explicitly explained," says Chavi Hemanth, secretary-general of Indian Direct Selling Association. Typically, prohibitive acts give authorities extensive power.

For instance, in 2013, when Pinckney and two other directors of Amway were arrested in Kerala, the arrests were based on the complaint of a woman called Visalakshi Amma, who claimed Amway agents had collected Rs 3.5 lakh for products and when she couldn't rope in new members and demanded her money be returned to her, the agents refused.

Earlier, three similar cases had been registered against Amway in Meppady in Wayanad district of Kerala.

Experts say the fact that the scale of Amway's operations is large and its marketing aggressive have made the company an easy catch for authorities. A May 28 statement issued by Amway, in response to Pinckney's arrest by the Andhra Pradesh police, said, "This Act (Prize Chits and Money Circulation Schemes (Banning) Act 1978) gives the police power to seize, seal and arrest on the basis of a complaint. It is a grim reminder that unless the Act is suitably amended and a new legislation introduced to recognise legitimate direct-selling companies, such repugnant incidents might repeat themselves."

Clearly, mis-selling is a grey area in the direct-selling sector. Also, owners of direct selling companies often have little control over their long chain of distributors, who might offer unrealistic returns to customers. Kerala and Rajasthan had issued guidelines on direct selling in 2011 and 2012, respectively. However, despite this, the sector has been wiped out in Kerala through the past year, primarily on account of a large number of consumer complaints. "We shut operations in Kerala about a year ago, mainly because of action taken against Amway agents," said Amarnath Sengupta, country manager, Daeshan Trading India. Early last year, the Kerala government had formed a committee to draft new laws for direct-selling companies. At that time, the central government, too, had constituted a panel with representatives from the Reserve Bank of India and the consumer affairs, financial services, financial intelligence, revenue and corporate affairs departments. The panel was aimed at amending the Prize Chits and
(Banning) Act, 1978.

However, till direct-selling companies come up with measures to ensure strict control over their chain of agents, they will risk being equated with the likes of

First Published: Sun, June 15 2014. 21:15 IST