A selling proposition

The arrest of the Amway India’s CEO by the Andhra Pradesh police, a year after he was picked up in Kerala, has reignited the debate about multi-level marketing (MLM) firms. Proponents of MLM argue that this is a legitimate alternative to traditional distribution methods of consumer companies — that it cuts costs and allows lay people to tap into a lucrative business opportunity. They want direct sellers to be kept out of the purview of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. On the other hand, critics argue that MLM schemes are no more than illegal ‘money circulation schemes’ banned by this Act. They allege that MLM firms and their top distributors earn revenues mainly by enrolling an army of new recruits lured by promises of high returns, but are left to foot losses from unsold stock. It is time policymakers clarified the legal status of MLMs and drafted specific regulations to govern them. After all, Amway, Herbalife and Tupperware are very visible consumer brands in India and have lakhs of ‘business owners’ under their fold.

Framing these regulations should pose no difficulty. The US regulators already have clear tests to differentiate legitimate multi-level marketers from illegal pyramid firms. They require that a genuine MLM firm should derive most of its revenues from product sales to actual consumers (not agents), allow ‘business owners’ to return unsold stock at full price and not make unsubstantiated claims to recruit members. Yes, enforcing these rules is easier in the US because leading MLM firms such as Amway or Herbalife are listed entities there. None of their Indian arms are listed and so operate behind a veil of opacity. The way out is to put in place regulations that establish deserving MLM firms as mainstream businesses in India, thereby settling issues about their legality. For one, MLMs should be made to file periodic returns, either with the consumer affairs or corporate affairs ministry, disclosing revenues and profits, including how much of these originate from end-consumers. Two, they should be made to furnish a written statement to all prospective recruits on the average earnings of the agents in their system and the volume of sales needed to earn it. This will ensure that a novice signs up with a realistic understanding of the business potential.

Finally, there is a need to ensure that consumer interests are not ignored in the zeal to make the MLM model a paying proposition for ‘business owners’. Today, MLMs rely mainly on word of mouth to sell their products, leading to the risk of over-the-top claims on product efficacy and quality. In quite a few cases, the sale is concluded without a formal invoice or a printed maximum retail price. A separate legislation covering all these aspects, with a clearly defined enforcing authority, would have obviated extreme and questionable measures such as the repeated arrest of the firm’s chief executive officer.

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