Should direct sales firms be treated on par with those raising money through Ponzi schemes?

The recent arrest in Kerala and subsequent release of three top executives of Amway India, including its CEO and Chairman Williams S Pinckney, have raised questions on the business practices of the company and opened up a debate on whether ‘direct sales’ companies such as Amway should be treated on a par with those raising money through multi-level marketing (MLM) schemes or Ponzi schemes.

Amway India, which brands itself as a direct sales company, operates through a MLM model, and this scheme, according to experts, mirrors a Ponzi scheme, though Amway has categorically stated that it is solely into selling products and services and not into any money circulation business as practiced by Ponzi schemes.

Pyramid scheme

Amway has also denied operating a pyramid scheme as the commissions earned by its distributors are not distributed across the board to each and every person in the company’s sales network.

In a pyramid scheme, which the government is planning to ban, an entity promises the participants payment or services primarily for enrolling other people into the scheme rather than supplying any product or service to the public.  “We have been unfairly targeted. We don’t pay any remuneration for enrolment so there is a clear distinction between us and money circulation schemes. One has to sell to earn. Yes, ours is a MLM but so are conventional FMCG companies operating in indirect sales format,” said Sudeep Sengupta, National Head of Corporate Communication & CSR, Amway India. According to Amway, like it has several layers of distributors, companies operating through an indirect sales format also has several layers through which the product lands in shops.

Membership drive

But not everybody agrees. Soon after action by Kerala police, their counterparts in Hyderabad asked the public not to join Amway as its business is ‘illegal’ since the company is promoting its products through ‘money circulation by conducting membership drive, cheating the public by luring and enticing them with incentives and commissions. The activities of Amway India are covered under Money Circulation, and are in clear violation of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978’.

Advertisement ban

The Andhra Pradesh government has issued a government order banning the company’s advertisements. As a result, negative perception has been created on the business practices of Amway which in 2012 earned revenue of Rs. 2,288 crore from a direct sales force of 15 lakh out of which 50 per cent are women buying products for own consumption at a discounted price.

Direct sales may have advantages for the company and some practitioners, but at many times new recruits do ‘force’ friends, relatives and family members to buy highly expensive Amway products. In their greed for earning extra points or to make enough money by selling products, some were found to have accumulated huge inventory which remained unsold causing financial loss. For Amway, the distributor is a business associate and this business is prone to risk as well.

A college professor from Delhi who has been with Amway India for 10 years is happy as she has been procuring beauty, home products and nutrients for her own consumption at discounted prices. She is entitled for 15 to 20 per cent commission apart from reward points. “I don’t sell to others. The company and products are good. The controversy is unwarranted,” the professor said asking not to be named. Questions can be raised on Amway India’s business model or whether there is a problem in its business concept; or, there could be a debate on the quality and high prices of its products but it is not a cheating business as made out to be and neither is the company into defrauding people, said legal and financial experts while speaking to The Hindu.

“Amway’s is a proven business model and it has worked elsewhere. There should not be any problem here,” said Saurabh Tripathi, Partner and Director (Financial Services), Boston Consulting Group (BCG). “What Amway is doing as a marketing technique may have similarities with a money circulation scheme but it is nothing but selling products. Money circulation scheme is different. Though Amway is into MLM, it is not a money circulation service.  The key difference has been misinterpreted by law enforcing agencies. The chance of obtaining a conviction does not look bright at all,” said Ramesh Vaidyanathan, managing partner, Advaya Legal, a law firm.

“Though I don’t find anything wrong with Amway’s business model, indirect sales is better than direct sales in India. This American concept does not go well here raising doubts about their operations. The Kerala episode will impact the Amway brand and consumer confidence will go down,” said a leading marketing consultant asking not to be named.

Kumar Rajagopalan, CEO, Retailers Association of India, said: “The problem is when direct marketers sell spurious or inferior products. Now online direct sales channels have been established and companies are selling directly. The question is when the company doing direct marketing resorts to illegal activities and does not pay sales taxes then the authorities should penalise it. If the law of the land is taken care of, then it is legal and should be allowed.” However, not everyone is impressed.

Too late

“The crackdown (on Amway) should have happened much earlier. One has to unearth all wrong committed by companies operating Ponzi schemes. They have to be regulated by the Reserve Bank of India. Time has come for the RBI to step in. There should be a global ban on chit funds or companies running ponzi schemes,” said financial expert Anil Singhvi, Chairman I-Can Advisors and former CFO Gujarat Ambuja Cement.

IDSA demand

Meanwhile, the Indian Direct Sellers Association (IDSA), of which Amway is a leading member, has reiterated its demand before the government to distinguish between them and other the multi-level marketing companies operating money circulation schemes. “We want to emphasize on separate regulation that should govern this industry. Since there is no definition in the statutory books of India on the business of Direct Selling, many fly-by-night operators are misusing the concept. Hence, it is extremely important to define a distinction between direct selling companies and fraudulent financial pyramid schemes which operate under the garb of direct selling companies,” Amarnath Sengupta, Chairman IDSA, said. Some leading direct selling organisations in India include Avon, Oriflame, Tupperware, Mary Kay, Modicare, Hindustan Unilever Network and Herbalife.

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