Multi-level marketing firms face FIPB scrutiny

By : Surajeet Das Gupta
Last Updated: Sun, Sep 02, 2012 19:03 hrs
A man walks past a board showing graphs of Japan's stock price indexes outside a brokerage in Tokyo

Multi-level marketing (MLM) companies that follow the model of Amway, one of the country's largest direct selling companies, will come under Foreign Investment Promotion Board (FIPB) scrutiny at its meeting in the third week of this month.

The FIPB will discuss various alternatives, including whether action should be taken against such companies, as states such as Andhra Pradesh have found their business model prohibited under the Prize Chits and Money Circulation Schemes (Banning) Act (PCMCS) and requested a review of FIPB approvals to such MLM operators.

The Act bans various money circulation schemes that help in making quick or easy money and prize chit schemes. The other alternative expected to be discussed is whether to formulate new terms and a regulatory framework for giving permission to MLM operators following this model rather than cancelling approvals. An inter-ministerial committee has been set up a few weeks ago to formulate either guidelines or legislation or incorporate changes in the PCMCS to regulate MLM companies.

The issue has been referred to the FIPB after an inter-departmental meeting, which involved representatives from the Department of Financial Services (which administers the PCMCS) and the Department of Economic Affairs, responding to requests from the Andhra Pradesh government, decided that as there were many companies engaged in similar activities as Amway it was imperative that clear provisions be incorporated in the FDI policy at the earliest.

In multi-level marketing companies, a sales person gets paid not only for what he sells directly to consumers but also on sales made by members he recruits as his down line. In some cases, a pyramid structure is created where a distributor gets paid for recruiting another member in the scheme without any sale of products.

An Amway India spokesperson said the company was not aware of the Andhra Pradesh government's request for an FIPB discussion. "As such, Amway India Enterprises continues to operate its lawful business in every state of India, including Andhra Pradesh," he added.

The spokesperson said with the Andhra Pradesh police disrupting its operations, the company filed a writ petition before the state high court, which observed the business model of Amway may come within the mischief of money circulation schemes as described under the Act. Amway challenged that judgment by way of a special leave petition before the Supreme Court. "The court, while not allowing the SLP, passed the order dated August 14, directing the investigation officers to complete the investigation within six months uninfluenced by any observation made by the high court," he said.

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