The arrest of three officials of Amway, the company that is synonymous with multi-level marketing worldwide, has given rise to a flurry of activity. The industry is reported to be craving for specific regulation. Greedy and bad losers among the consumers who currently have a vested entitlement to feel cheated when they do not make money are craving for regulation. The Indian regulatory system should be happy to do what it does best - follow the dictum: "Show me a problem and I will write you a regulation."
Multi-level marketing involves adopting a process of creating a client base that also doubles up as a sales force. The word of mouth is the strongest marketing tool, and this process taps that approach by compensating customers for recruiting new customers, who in turn recruit newer customers, and the whole chain gets compensated for every further sale made. There is no regulatory provision governing such a practice - indeed, regulation will only curb innovation, and any policy-making should only enable customers to make an informed decision rather than dictate how greed should be permitted at zero-risk.
The Centre appears to be rattled about an expat foreign investor having being arrested - a reaction most unlikely had it been an arrest of a marwari or chettiar businessman in his position. When it is an Indian citizen who is arrested, there is no official of any embassy breathing down the neck of the government seeking fair treatment for the arrested. Indeed, according to the Indian Direct Selling Association, a direct-marketing industry body, the Amway arrests are but the third incidence of arrests made in Kerala. The earlier two hardly made front page headlines.
Indian society is increasingly developing a propensity to arrest people at the drop of a hat. This is either due to over-zealous police officials and regulators desirous of demonstrating performance, or due to the un-satiable thirst for blood of those conducting business. Many an "investor" who feels cheated is celebrating the arrest of the Amway officials - a blow from an arm of the State against a large multinational corporation warms the cockles of many such hearts. Other "investors" who still hope their turn to make money from such a scheme would come, are nervous about whether they would end up getting arrested for being party to a scheme of money circulation.
Businessmen in other businesses and professions (particularly, those in securities firms such as stock brokerages) wonder what the fuss is all about. Police officials from economic offenses wings regularly pick them up for questioning on complaints made by clients who have lost money and believe they ought to turn up the heat to extract a bargain. Typically, a client who has been unable to meet a margin call from a broker, causing the broker to cut exposure and sell shares, would complain that the broker defrauded him by cutting his exposure, or worse, allege that even the purchases had been unauthorised in the first place.
Provisions in the Indian Penal Code (typically those that govern cheating, criminal breach of trust, causing unlawful loss and making unlawful gains) and in antiquated police legislation such as the Bombay Police Act, can easily be pressed into service in just about any situation.
Whether it is a business bargain gone bad or a matter of fraudulent criminality is for the criminal court to decide. In any case, there is protection of action taken in good faith - no overzealous regulator or policeman faces any serious risk of abuse of power or lack of diligence in hauling a citizen over the coals.
Sections of the media are already reporting that many other schemes should be brought into question including schemes that enable customers to pay in installments to buy assets. For example, it is said that corporate jewellers have introduced schemes for monthly payment of advances that would result in a purchase of gold at the end of the year, and that such schemes ought to be stopped.
Newspapers report that the Union Corporate Affairs Minister Sachin Pilot has said the central government is "looking to remove the legal ambiguities to differentiate between fraudulent Ponzi schemes and genuine businesses run by "reputed and law-abiding" entities. If he manages to define "reputed and law-abiding" entities it would be a marvellous wonder.
However, the direct marketing industry should be cautious in inviting regulation. In addition to local policemen, central regulators can get into the act too. Under regulations governing investment advisors, the capital markets regulator can easily say that marketing and inducing customers to buy Amway products constitutes advice relating to "investment products".
It could also be argued that such schemes are "collective investment schemes" because the money paid do not just reasonably cover just the cost of the products being sold with a reasonable margin, but also cover the earnings of those who are now distributors, and were earlier, customers.
Failure to register as investment advisors or collective investment scheme is a criminal offense and the criminal justice system can be moved to effect arrests. Even without this approach, courts may get approached to effect "civil detention" - a concept that awaits definition in the Sahara case pending before the Supreme Court. An over-zealous central bank could say multi-level marketing schemes are a provision of financial services, thereby asking each person buying Amway products to either be registered as a non-banking financial company or to stop conducting such activity.
None of this would help if the local police decides to enforce "law and order" and effects arrests. Despite central regulations, the local policemen, too, would have to be dealt with. This is what securities market intermediaries contend with every day. Or, for that matter, this is how, micro-credit finance companies had to deal with state-level interventions despite being regulated by the central bank.
The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own)
Email: somasekhar@jsalaw.com
