Is multi-level marketing (MLM) like Amway illegal?
It is very difficult to avoid the messengers of Multi Level Marketing who feel very sorry for your inability to understand that you can make a couple of lakhs a month by selling three bottles of an Amway product instead of struggling not knowing what to write in DDT. Success stories are fed into eager ears where ordinary clerks who could not afford a bicycle are now going round in imported cars all because they were and are able to sell three packets of detergent or three tins of those protein powders. How much does a packet of detergent cost? Rs. 600/-! But is it not 20 times more than your normal packet?. But don't grumble; you are going to make your lakhs.
The whole idea is, you find three unsuspecting victims who will buy that washing soap for Rs. 600/- each. And assume you get a commission of 10% - you get Rs. 60/-. But where do you get the lakhs from? Before you can say MLM, those three will sell to three each and each of those nine will sell to three each and by the time you finish hearing the talk, the whole world is selling that 600 rupee soap and your cash registers are jingling with lakhs of rupees. What are you waiting for? Jump into the MLM circuit – it is multi level money making.
Who are into the fray? Unsuspecting housewives who are lured into making those millions sitting at home. The underpaid government employee who has connections with the public and can use it to sell those three pieces of soap to make millions. Well – paid government officers who can influence people into buying the initial kit for Rs. 4000/- so that millions come rolling in.
But do they really make all the money? Studies have proved that the average income of the MLM players is Rs. 1000/- a year! If you take into consideration the number of soaps they themselves use, on an average almost every one ends up in a loss. Of course the initial players do make some money – they are the classic exception.
We have nothing about people making millions or losing their valuable time and hard earned money in these schemes, but the important point is, the whole scheme is illegal.
In India , money circulation schemes are banned under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Section 2 (c) of the Act defines a money circulation scheme as, any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.
But can making quick money be an offence? The Supreme Court considered this issue in State of West Bengal Vs Swapan Kumar AIR 1982 SC 949 and reproduced the definition without adding or deleting a comma or word but in a different shape to make the meaning clear:-
‘money circulation scheme' means any scheme by whatever name called,
(i) for the making of quick or easy money, or
(ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money,
on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the member of such scheme or periodical subscriptions;
But is it not unconstitutional to restrict freedom of occupation? The Supreme Court considered this issue in Srinivasa Enterprises Vs Union of India and observed, "Can you save moths from the fire except by putting out the fatal glow?” That explains everything! The Apex Court further observed that these schemes are prejudicial to the public interest and also adversely affect the efficacy of fiscal and monetary policy.
Then what are the consequences?
• The offences are cognizable.
• A police officer can enter premises, search, seize and arrest.
• Imprisonment up to three years or fine or both
• Minimum imprisonment of one year
Who are liable? Any person who
• Promotes or conducts any money circulation scheme
• Enrolls as a member to any such scheme
• participates in it otherwise
• receives or remits any money in pursuance of such scheme
In spite of such grave risks why and how do these schemes continue? That's what money is all about.
How are we interested in all this? A recent judgement of the Karnataka High Court which we are carrying today again considered the issue.
There was a time when a smuggler who was caught by Customs could claim the loss as business loss under Income Tax. But later the law was amended to bar deduction for an activity which was illegal. The Karnataka High Court held that Deposit linked incentive scheme is “money circulation scheme” and is illegal under the 1978 Act.