Amway,MLM and the Law!!!

The arrest of Amway’s CEO William Pinckney a couple of months ago summarise the problems with regulatory laws in India — either they are too arcane or they do not exist at all. The arrest was made using the Prize Chits and Money Circulation Schemes (Banning) Act (PCMC Act) which was passed in 1978.

As with most things, if you ask two people their views on multi-level marketing schemes (MLM), you will get three opinions.

INCORRECT UNDERSTANDING

The Amway issue seems to have arisen from an incorrect comprehension of both the business model of MLM companies and the PCMC Act. There is no doubt that the business model of Amway is “different”. The emphasis on grooming a chain of people to sell products on your behalf and the concepts of Business Owner, Business Volume and Point Value are relatively new in India.

The complexity of this chain of business owners ensures that an owner gets paid even for sales done by others. Comparisons have been made between this model and Ponzi schemes, though there is a huge difference between the two. The focus of any MLM scheme would be to sell products or services by building a network of co-sellers. A Ponzi scheme is invariably involves luring one person to invest in the scheme to pay off another who is creating a ruckus that his investment is idling.

The PCMC Act prohibits a person from making quick and easy money, and this appears to be the charge against MLM schemes, even though selling is not a walk in the park. The Act does not distinguish between direct selling, MLM and pyramid schemes as the focus seems to be on banning the distribution of abnormal returns — a far cry from a selling strategy involving multiple players down the line, which is the core of an ethical MLM scheme.

TIMING MISMATCH

The arrests in Kerala and the overall perception of the business of MLM calls for a model law on direct selling and MLM at the Central level, to be followed by the States. Such laws exist in most countries where MLM has worked as a concept. The benefit is that such a law would define what is direct selling, multi-level marketing and pyramid schemes; this would clear the hazy air around it. The equivalent law in other countries insists on registering the business owners and displaying the list on a website. Many of these statutes place restrictions on the activities of MLM companies. An important restriction is the buyback requirement, which grants distributors the right to cancel contracts of participation for any reason and at any time and requires that the company to repurchase the inventory and sales materials from the distributor at a price not less than 90 per cent of the distributor’s original net cost, as well as refund the fees paid by the distributor. Some statutes also prohibit companies from representing that distributors have or will earn stated amounts.

Kerala appears to be one step ahead of other States in that it has a draft law which is in public circulation now. The Centre should pick this up and strengthen it to make it a national law. The ordinance route beckons for this as well as for regulatory oversight on commodity exchanges.

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