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FinMin for ban on pyramid marketing schemes

May 30, 2013 09:13 IST

RupeeWithin days of top Amway India executives being arrested in connection with a case over violation of the Prize, Chits & Money-circulation Schemes (Banning) Act, 1978, it is learnt that the Department of Financial Services has proposed banning pyramid marketing schemes through an amendment to the Act.

However, it is not yet clear whether pyramid structures would include multi-level marketing firms like Amway, too.

An association of direct-selling firms distanced itself from pyramid marketing structures, saying multi-level marketing companies did not incentivise the direct-selling distributors on recruitment of another distributor in the network, unlike in pyramid marketing schemes.

According to people in the know, following inter-ministerial meetings over plugging the loopholes in the current legal structure that governs multi-level marketing schemes, Ponzi schemes and pyramid marketing, the department, under the finance ministry, has proposed that pyramid marketing schemes be banned and necessary changes in the existing Act be accordingly made.

The proposal, which has been sent to various central ministries and all state governments, says the words ‘Pyramid Marketing Schemes’ and ‘For Matters Connected Therewith’ should be added in the very title of the Act.

The confusion over whether multi-level marketing firms are included in the pyramid marketing structures has arisen because the background to the proposal says: “. . . in view of such ambiguities in existing law, it is felt that there is a need to amend the provisions of the Act to extend the same to pyramid or multi-level marketing schemes”.

When contacted, an India Direct-Selling Association official said: “Multi-level marketing is just a compensation structure used to incentivise the direct-selling distributors on the sale of goods and services -- and not recruitment of other distributors in the network.”

However, the proposal’s background note refutes this argument. It says pyramid marketing or Ponzi schemes are justified (by supporters of multi-level marketing firms) on the ground that these are for selling goods and not for money circulation and hence the provisions of the Act do not apply to such marketing schemes.

To a query on this, Abhimanyu Bhandari, managing partner, Axon Partners, a law firm, said: “My reading is that the proposal is talking about banning pyramid marketing structure and not multi-level marketing firms.”

However, there should be clear definitions of various kinds of structures when the final law came up, he suggested.

There might not be a clarity on whether or not multi-level marketing firms would be included in the definition of pyramid marketing but it is clear they, too, would face tougher regulations.

They might be asked to have written agreements between direct-selling firms and agents, analysts said.

In fact, the department of consumer affairs was asked to frame the definition of multi-level marketing companies after the department of financial services came up with the proposal.

However, the department had said that fresh look at definitions was unwarranted when the law was being amended, according to officials.

THE MAZE OF MONEY-RAISING SCHEMES

Prize chit funds Each member subscribes to a certain sum of money by way of periodical instalments over a period.

Each subscriber, in his turn, as determined by various ways, is entitled to the prize amount

Banned by the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

Money-circulation schemes

Promises to give commissions not only in the event of personal efforts of recruiting members for the scheme but also on the contingency relative to enrolment of new members

Banned by the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

Ponzi scheme

Pays returns to investors from its own money or that paid by subsequent investors, rather than from profit earned by the firm running the operation.

The scheme usually lures new investors by offering fancy returns

Collective investment schemes

A way of investing alongside other investors to benefit from the advantages of working as part of a group

Sebi approval needed to launch such schemes

Pyramid schemes

Offer payments to participants primarily to recruit other people for the scheme; there is no real investment or sale of products

Multi-level marketing

These schemes sell products directly; salesmen are compensated for their own sales as well as for those of people who join the company through them

Sanjeeb Mukherjee & Indivjal Dhasmana in New Delhi
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