‘Lack of laws brackets direct selling companies with pyramid schemes’

QNet, the Hong Kong-based direct selling company, which has operations across many countries, lately ran into rough weather with authorities in India. Worse, law authorities in the country have gone after some high-profile people associated with the company’s India operations, saying their operations tantamount to a Ponzi scheme.

To understand the other side of the story, Business Line interviewed Singapore-based Zaheer Merchant, Director Corporate Affairs and Director Legal Affairs.

Excerpts of an e-mail interview:

There is a controversy over QNet’s operations in India. What is it all about?

It is unfortunate that an unmerited claim of cheating against certain individuals has been turned into allegations of fraud against the company. If anyone takes the time to look at the facts of the actual case and the complaint that gave rise to this controversy, it would be obvious that the accusations are baseless.

The issue originates from an unfounded claim of ₹31,500 made in April by Parmeet Kaur Anand, wife of Gurupreet Singh Anand at Oshiwara Police Station in Mumbai. The complaint alleged that three representatives of Vihaan Direct Selling, the Indian franchisee of QNet, sold her a bio-disc, which could help her son, who is suffering from brain damage. The three representatives deny misrepresenting any product as this would be in breach of their agreement with Vihaan Direct Selling.

Company records indicate that Kaur did not even agree to purchase a bio-disc but signed up for an educational course, which was later cancelled by her husband along with the cheque. No money exchanged hands.

The original complaint was withdrawn on May 18, 2013 and the matter was recorded as a ‘No Crime’ by the police. There has been no further change in this position. But strangely, this complaint was re-filed on August 16 by Gurupreet Singh and the matter moved to the Economic Offences Wing (EOW). This is quite inconceivable in a case where no financial transaction took place and the allegation involves an amount of around ₹30,000. The EOW is generally triggered for financial matters exceeding ₹50 lakh.

The entire episode is surprising. The way this has played out in the media has done an enormous amount of damage to our reputation internationally. Our Indian franchisee has been fully cooperating with the authorities and from the headquarters we are prepared to extend any further cooperation. We trust that the truth will emerge soon and we will be exonerated.

Tell us about the binary pyramid business model that the company follows. Why has this business model been banned in some countries?

Such terminologies tend to be used without any understanding of what it means. There is no such thing as a ‘banned binary pyramid’ business model in the first instance.

QNet is a direct selling company. Direct selling is simply the marketing of products and services directly to consumers in a face-to-face manner, away from a retail location. Direct selling encompasses a variety of distribution methods; multi-level marketing and network marketing are two types of distribution methods. A binary or a unilevel plan is a reference to the compensation plan based on which commissions are calculated for payment to a distributor.

Pyramid schemes, on the other hand, are clearly declared illegal in a number of countries. These are schemes where no real products are involved, only the people joining at the early stages make money, commissions are paid for recruitment of members and not on product sales, no training programmes or marketing support is provided and people often promote these as ‘get-rich-quick’ schemes.

Pyramid schemes rarely last for longer than a year or so since promoters of such schemes are only interested in making a fast buck and disappearing.

QNet, on the other hand, has been in business for 15 years. From a small, single-product company, we have grown today to offering a wide range of high quality products and services in nine different product categories. We have a focused R&D division that invests years to source and develop the right products for our diverse, global customer base. We provide regular training programmes, promote a strong ethical code of conduct, support our distributors with marketing materials and business tools and are available 24x7 through a multi-lingual customer support centre.

India too has banned this particular form of business model. How then does QNet operate in India? Walk us through QNet’s rationale.

As stated earlier, India does not have a legislative framework for the DS/MLM industry; so the question of any compensation plan within the DS/MLM company being banned does not arise in the first place. The lack of guidelines and legislation leads to genuine direct selling companies being bracketed with pyramid schemes that disguise themselves as direct selling companies. This negatively impacts the entire industry.

Some reports make a reference to QNet being in violation of the Prize Chits and Money Circulation (Banning) Act 1978 (PCMCA).

The PCMCA is a ‘banning’ act and not a ‘regulating’ act. It sets out a framework to ban certain activities, which come under the purview of ‘Prize Chits’ and ‘Money Circulation’. QNet’s business, in the definition in the said Act, is neither prize chits nor money circulation. The Act deals with the banning of a scheme, which is aimed at making quick or easy money and on the happening of a contingent event. In the case of QNet, we neither fall under the category of making quick and easy money, nor is there any event which is contingent in nature.

The Act bans all illegal money circulation schemes. It does not regulate the direct selling or MLM industry. Also, there is no ‘entry fee’ or periodical subscription required here pursuant to Section 2(c) of the Act.

Many countries like Hong Kong, Malaysia, Singapore and the Philippines, for example, have specific and strict direct selling and MLM legislation. Based on our Policies and Procedures and Terms and Conditions with our Independent Representatives (IRs), QNet is compliant in these heavily regulated countries. In India, we have reproduced the same strict terms and our business through Vihaan is in accordance and compliance with the current guidelines in place.

Vihaan is clearly registered with the RoC as a direct selling / MLM / network marketing company that will promote its business in India through a network of IRs. The company has been paying all its taxes and complying with all the regulations of the Government of India. In fact, all commissions payable to the IRs for product sales are paid only after TDS. All documentation has been provided to the investigators and the management of Vihaan are fully cooperating with them in this investigation. The allegation of any ‘scam’ arising is far-fetched.

But clearly, there is a difference in perception of QNet’s operations between the company and the law authorities here. How do you intend to get the air cleared?

As explained earlier, the management of our Indian franchisee is cooperating with the EOW in their investigations and have provided them with everything they have asked for. We have also sent a letter from the international headquarters in Hong Kong to the EOW extending our fullest cooperation. We have done absolutely nothing wrong and we are confident the investigation will reveal this. We are also prepared to validate ourselves in Court if necessary here.

Has the current controversy hurt your expansion plans in the country?

The current controversy has been largely played out in the Indian media and in the online space and in today’s digital world, such news crosses borders very quickly. This has not just impacted our reputation in India but internationally too.

We have been doing business in India since 2001. We have grown along with India’s own economic growth and have invested heavily in the country in the last decade. We have been planning to invest more in sourcing local products from India and taking them international to our global customer base. We’ve wanted to set up a local manufacturing hub and move a lot of our international dependencies here.

The current issues we are facing are disappointing to us, and forces reconsideration of our plans. We certainly hope that a resolution will be found soon. Meanwhile, we remain committed to our distributors and customers in India and will extend our fullest cooperation to the authorities here.

COMMENT NOW