• LAWGIC STRATUM

MLM SCAM ALERTS IN INDIA

Author: Ritika Rajkumar



Introduction


Multi-Level Marketing (MLM) is a strategy where certain direct sales organizations put action to advance existing distributors to employ new distributors who paid a percentage of their recruits’ sales. Distributors also raise money through direct sales of products to customers.In the MLM schemes, there might be a few hundreds or thousands of members globally, but to some extent, only a few earn meaningful income through their works.


Many MLM practices are permitted by law the Federal Trade Commission (FTC) has been investigating for decades and has found many with questionable authorized practices. MLM is commonly referred to as Pyramid Selling Scheme, Referral Marketing,and Network Marketing.


Though Multi-Level Marketing is controversial in India, it is a legitimate business design. The only problem is pyramid schemes that utilize money from fresh recruits to pay off human beings at the highest rather than those who carry out the work. Pyramid schemes can be spotted by their greater focus on recruitment rather than on product sales. These schemes involve taking preference of individuals by being untrue to be active in legitimate Multi-Level or network marketing.


An example of a Multi-Level Marketing Company is Herbalife Nutrition Ltd. that manufactures and distributes weight-loss and nutritional products with more than 500,000 distributors. Some of the most prominent MLM Companies of India are Avon, Forever Living, Mary Kay, and Amway. These companies wandered all over the Indian market intending to increase direct sales and improve employment chances targeting unemployed persons, retired persons, and housemakers.


Scams that India Fell for


Multi-Level Marketing schemes are prevailing in India for over two decades use Pyramid to trick innocent persons. These schemes are financial scams that target naïve individuals on the pretext of offering easy sources of income.


1.QNet – In 2020,Mumbai police began their search for Michael Ferreira, former billiards champion, who failed to present himself in the court to be questioned about the 425 Crore scam of QNet in which he holds shares. It sold products such as crystal balls and herbal products, magnetic disks.


2. Amway Scam – In 2013, William S Pinckney, the Chief Executive of Amway India, was arrested for involving its distributors in a pyramid scheme. This particular scam did not involve the actual sale of products however these products were incorrectly overpriced. By mesmerizing distributors with fake promises of easy and quick money, if they engaged more distributors, the organization continued to make sure that its overpriced products somehow got passed through the ever-widening net.


3.The Saradha Group chit fund scam –In 2006, the Saradha group named after Sarada Devi, through various ways and means it managed to lure investors centrally in West Bengal and Exchange Board of India’s Oversight. A wide network was built by returning close to 40% of the money which was deposited by the initial investors. In 2013, it collapsedan approximate loss of 200 to 300 Crores which could have been more than 1.7 million depositors.


Pros and Cons of Multi-Level Marketing


  • An organization can gradually increase access to a large customer base in a broad geographical range through multi-level marketing.

  • Since the distributors are self-reliant, the organization does not need to pay any fixed salaries.

  • To distributors, multi-level marketing allows them to make excess income with sufficient flexibility. They can choose to work full-time or part-time according to their schedules.

  • The distributors in the lower tier, though they have to work harder they get much lower incomes than the ones in the upper tier.

  • The lack of sales training or support from experienced may make their sales effort very inefficient.

  • A multi-level marketing organization lacks control over its salesforce. They experience damage to its reputation if some of its distributors are acting irresponsibly to customers.


Conclusion


In India, MLM organizations have, for few years at present, facing the hard finish of the law, as a conclusion of the Prize chits and Money Circulation Schemes(Banning) Act,1978.The amendment goes by a wide description of money circulation schemes and outlines it as one which accepts money from a joining member and agrees to pay the money if they recruit more members. It is forbidden by law not only to promote or run such a scheme but also to participate as a member. Breaking the legal code of the condition of the Act is punishable by imprisonment for up to three years.


India has come ahead by leaps and bounds in the field of defending regulation and corporate laws which have more sophisticated tools and mechanisms to detect and present pyramid schemes.


The Standing Committee on Finance of the Lok Sabha in its 21st report submitted in 2015 had recommended two steps with a request to MLM.

  • First, there has to be a compulsory registration process for direct selling facilitated through a central regulatory body.

  • Second, they recommend a clear description of direct selling differentiating it from pyramid schemes.


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