Lama Shree Narayan Singh, India, Tibet, Budhhism, HH Gwalwang Karmapa, Dalai Lama, Tibetan Healing

Network Marketing

Indian Express April 11, 2003

Network Marketing: Fact or Fiction?

On April 8 this newspaper announced the launch of a new referral marketing programme. In reponse, several thousand people have called or come into our offices to sign up for the programme or to ask questions regarding how it works. Some have expressed doubts or concern because of the activities of some fly-by-night operators who have subverted the system. Intrinsically, however, MLM is a worthy programme with tangible benefits for its participants. Here we answer some of the most common questions regarding multi-level or network marketing schemes.

What is direct marketing?

Direct marketing refers to a method by which the manufacturer of a product markets it directly to the consumer, without recourse to a distributor or retailer in between. Mail order catalogues and tele-marketing are common forms of direct marketing.

What is multi-level marketing?

MLM or network marketing is a form of direct marketing in which the ultimate consumers of the product also act as distributors who sell the product to other consumers, earning a commission on the sales they make. It is called multi-level because commission is paid not only on the direct sales they make but also on the sales downline made by consumers who they have introduced to the programme, so there are multiple levels of distributors.

How can companies afford to pay commissions to multiple levels of distributors?

In ordinary indirect marketing, the manufacturer sells to a distributor and the distributor resells to a retailer who then sells again to the final consumer. At each level, the price of the product increases. In addition to these distribution costs; manufacturers must also pay for publicity and other marketing expenses to create brand awareness for their products.

In the USA , the average, mark up from manufacturer to ultimate consumer in normal indirect marketing may be 400-500 % or even more. In India , the average mark up is somewhat lower.

In MLM programmes, the manufacturer sells directly to the consumer, by-passing the distributor and retailer while also reducing the need for expenditure on marketing and brand building, since that is done by word-of-mouth from consumer to consumer.

In a properly structured MLM programme a major portion of these savings are placed in a pool of funds that is utilised to pay consumer-distributor, commissions on the sales they make directly as well as the sales made by distributors downline. The consumer buys the product at normal retail price but has an opportunity to earn on each subsequent sale.

Why do companies utilise network marketing programmes?

Legitimate MLM programmes are particularly suitable for marketing products which have a very wide potential market among the general public but which require a high level of personal knowledge by the sales representatives. The ultimate consumer of a product is very often the most qualified person to speak to others about the pros and cons of a product, because he or she uses it on a regular basis. Since MLM distributors are also consumers of the product, they can pass on their own personal experience of the products to other prospective consumers.

Is multi-level marketing legal?

Properly designed MLM programmes are legal in India , USA and other countries around the world and are operated by many reputed companies. Amway, a $5 billion US company, which has been operating MLM programmes for more than 40 years, currently has more than 3 million distributor-members in 80 countries.

Amway [for example] has been operating in India since 1995 and currently generates more than Rs 600 crore business through 3.5 lakh distributors. Hindustan Lever Ltd. has recently established an MLM division in India . [Many other reputable MLM companies too are functioning in India as well.]

Worldwide thousands of companies working with millions of distributors operate legitimate MLM programmes.

Is there anything immoral or unethical about MLM programmes?

Network marketing is a creative method of marketing which offers significant benefits to consumers, enabling them to purchase any consumer product they desire, while earning additional income on the side. MLM enables the consumer to make use of his personal contacts to earn.

In this sense, it is similar to other innovative programmes such as insurance, hire purchase, leasing or chit funds. Insurance provides the individual with security at a fraction of the cost by distributing the risk among a large population. Hire purchase and leasing enable people to buy now and pay later out of future income. Chit funds enable people to invest their savings and borrow from a group.

These and similar methods, which tap a portion of the society's unutilised potentials have contributed enormously to the development of society. Yet all of them have been subject to abuse and fraudulent misrepresentation by unscrupulous elements.

Why then is there so much negative publicity about MLM?

As there are both honest and dishonest non-banking financial institutions, both reliable and unreliable companies have launched MLM programmes. Also, MLM programmes are some times, confused with pyramid schemes, which are illegal, some pyramid schemes are even disguised to appear as if they were legitimate MLM programmes.

How can I distinguish a legitimate MLM programme from a pyramid scheme?

Pyramids are programmes similar to chain letters where people just invest money based on the promise that other people will put in money that will filtrate back to them and somehow they'll get rich. A pyramid is strictly a money game and has no basis in real commerce. Normally, there's no product involved at all, just money changing hands.

Modern-day pyramids may have a product, but it's clearly there just to disguise the money game. Pyramids are illegal and are based on taking advantage of people. For a person to actually make money in a pyramid scheme, someone else has to lose money. But in network marketing, each person can multiply his or her efforts, skills and talents by helping others to become successful. Network marketing has proved itself as part of the new economy and a productive way to do business around the world.

Is It really possible for people to earn large commissions in legitimate network marketing programmes?

The simple answer is ‘Yes, it is possible for those who work hard as distributors to resell the products to other consumers. Let us take the hypothetical example of a company manufacturing water filtration units for homes, in which the cost to make each unit is Rs 800 and the normal retail price is Rs. 2,400. Through indirect marketing, the company would perhaps sell the unit to a distributor for Rs. 1,400 each, who would in turn sell them to retail stores for Rs. 1,800. The stores would sell them to consumers for Rs. 2,400. Out of the Rs 600 which the company gets as gross margin, it has to pay all its overhead, administrative, marketing and sales expenses. Hopefully, at the end of the day it is left with a Rs. 100 net profit per unit.

Now let us assume that the company offers the same product to consumers directly for the same retail price i.e. Rs 2,400, and sets aside Rs 1,000 per unit to pay commissions to its customer-distributors. On sales of one lakh units, the commission pool would then be Rs l crore to be shared among members according to the sales they make -- to be shared among the distributors. This is not a static pool, but one that keeps growing each time a new member joins.

The company might structure its programme so that the distributors earn commission of Rs. 600 for the first two units they sell, Rs. 300 for each of the next five pairs sold downline by members they introduce into the programme, and then a proportionate share in the remaining commission pool for its subsequent pair they sell. Consumers, who do not make a serious effort to resell any units, end up purchasing the water filter at a fair market price and do not lose anything. Consumers, who sell two units, earn a discount of Rs. 600 on the water filter. Those, who achieve downline sales of five pairs or more, either directly through their own efforts or through the efforts of those they have sold to, recover the full cost of the water filter. The remaining group of entrepreneurs, salaried employees and housewives, who make a serious marketing effort to sign up lot of new customers downline, are left to divide between themselves the remainder of the commission pool. Out of this last group, there may be a smaller subset of perhaps a few hundred people who build a downline distribution system with hundreds of new members.

This subset may be eligible for cumulative commissions of up to Rs. one lakh or even more. All these commissions are paid by the company; out of money saved by avoiding the normal distribution channel, [with tax being deducted at source].

As the example illustrates, in a properly structured MLM programme, no one loses, since even the members, who make no additional sales, receive product equivalent to the full value of their investment, just like any consumer who buys the product in a retail store. In MLM, each consumer has an opportunity to earn in proportion to the effort and skill he or she invests as distributor.

What happens when the MLM programme ends?

There is no compelling reason for a commercially viable MLM programme to end. This is especially true for programmes that market consumable products that need to be repurchased or renewed daily, monthly or annually. Amway has been running its programme for decades. Of course, the market for a specific product may reach the saturation point. In this case, companies have the option of offering their members new products to sell in place of the original product line.

What questions one must ask in evaluating an MLM programme?

First, avoid all schemes that ask you to pay money without getting .any product in return, but merely on the promise of earning money by enlisting other distributors. These are pyramid schemes not real network marketing programmes and they are illegal.

Second, find out whether the company offering the programme is well-known, and reputable. Many reputable companies offer attractive MLM programmes. Beware of fly-by-night operators using the promise of high earnings to lure unsuspecting consumers.

Third, find out whether the products offered by the company are widely accepted in the marketplace and readily salable. Beware of companies offering unproven new products with lofty premises about their performance. Some companies have employed MLM to market suspect medicinal, dietary and cosmetic products.

Fourth, ensure that you are paying only a fair market price for the product and not an inflated price.

Fifth, ensure that you are dealing only with authorised company representative who can prove their authority to sell on the company's behalf.

Finally, if in addition to enjoying the products you purchase, you also want to earn money, remember it depends on your ability and effort to sell the products to others, not on chance or luck.

[Currently there are a large number of genuine companies marketing their products through MLM in India. Amongst the better known besides Amway are Aviance, Oriflame and Modicare both of which deal with products required by a modern household. Companies such as DXN or Daehsan Trading (I) Pvt Ltd and K-Link Healthcare (I) Pvt Ltd both based in Chennai, specialise in health management products and are thus instrumental in spreading an awareness of good health as well!]

Government of India

Ministry of Consmer Affairs, Food & Public Distribution

Department of Consumer Affairs.

LOK SABHA

UNSTARRED QUESTION NO. 4875

TO BE ANSWERED ON 20/12/2002

INDIAN DIRECT SELLING ASSOCIATION

4875 SHRI SUBODH MOHlTE

Will the Minister of CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION be pleased to state

(a) whether the Government have received any proposal from Indian Direct Selling Association to enact legislation to weed out fraudulent elements from direct sellers;

(b) if so, the details thereof;

(d) the effective measures proposed to be taken by the Government to save the interest of consumers?

ANSWER

THE MINISTER OF STATE IN THE MINISTRY OF CONSUMER AFFAIRS, FOOD & PUBLIC DISTRIBUTION

(SHRI V. SREENIVASA PRASAD)

(a) to (d): Yes Sir.

Proposal were received from the Indian Direct Selling Association as well as M/s Frontier Trading etc, requesting to enact a separate legislation to cover direct selling / multi level marketing / network marketing. The main contention of the representation was that members of Direct Selling Association are being targeted due to vagueness of the "Prize Chits and Money Circulation Scheme (Banning) Act, 1978" in distinguishing between Prize Chit Funds and genuine agencies, involved, in direct marketing.

This matter was examined in detail in consultation with concerned Ministries. The need for a separate legislation was not felt in view of the fact that there are adequate provisions available in the Sale of Goods Act, 1930, (for regulating the sale of goods); the Indian Contract Act, 1872 (for the sale of services) and the Consumer Protection Act, 1986 (to promote and protect the rights of the consumers). The provisions of the Prize, Chits and Money Circulation Scheme (Banning) Act, 1978 seek to be ban the promotion or conduct of Prize Chits and Money Circulation Schemes. The provisions of this Act had come up for scrutiny before the Hon'ble Supreme Court of India who have ruled that the "Network Marketing Plan" and direct sale of goods and service by the direct selling companies do not fall within the mischief of the aforesaid Act,

NOTE ON THE LEGALITIES

The marketing of products through direct sales to customers known as Multi level Marketing MLM / Network Marketing / Customer referral etc has been in vogue for a long time. It is recognized, and has been legitimate worldwide. This marketing trend has been adopted recently by many multi nationals in India namely Hindustan Levers market their products by the name and style of 'Aviance', Indian Express as ‘Express Net’, Reliance etc. There is no specific law on direct marketing concepts. Although companies like Amway, Herbal Life, Medicare, Conybio etc have been operating for more than five years in India through MLM.

Unfortunately this marketing concept has been perceived wrongly by the enforcement agency in the State of Tamil Nadu. The police have alleged that this marketing concept is a money circulation scheme attracting the provisions of the Prize, Chits and Money Circulation Schemes (Banning) Act, 1978. Although the companies marketing through MLM have been welcomed by the government, of Kerala, Karnataka, etc as giving employment opportunities and benefiting society etc.

During the third week of January 2003, the police raided and arrested 86 people of a company called 'Frontier Trading* alias Japan Life. The 86 people, mostly customers of the said company were educated people who were doctors, engineers, lawyers, bank officials etc. This created a wave of panic in the Network Industry in Tamil Nadu. The Police had also raided some more companies causing apprehension in the MLM industry. Hence decision was taken by Gold Quest to initiate proceedings for protection against the present legal implications due to Tamil Nadu Government's stand on multi level marketing, that the same attracts the provisions of Prize, Chits and Money Circulation Schemes (Banning) Act, 1978.

Criminal Original Petition No. 2347 of 2003 was filed before the High Court of Madras. The above said criminal petition was filed seeking a direction from the Madras High Court to the police restraining the enforcement agency to withdraw all instructions given to the enforcement agency as far as GOLD QUEST is concerned in this regard. The case was heard by Hon'ble Judge Mr. Justice V. Kanakaraj. The Hon'ble High Court dismissed the petition directly without understanding the scope of MLM on 9-4-2003.

A Writ petition was filed on behalf of Gold Quest International Private Limited, seeking for a declaration to declare that the Multi level Marketing is not a Money Circulation Scheme and will not attract the Prize, Chits and Money Circulation Schemes (Banning) Act 1978. The same was heard by Hon'ble Judge K. Govindarajan on 22-4-2003. An injunction was granted by the Hon'ble Court that the enforcement agency can investigate but only in accordance with the Central Government directive from the Ministry of Consumer Affairs dalted 31-3-2003.

The Central Government circular from the Union Ministry of Consumer Affairs states that MLM/ Network marketing/ direct marketing concepts do not fall within the provisions of the aforesaid Act. It also instructs the officials concerned to distinguish the Companies and to desist from harassing such companies and from creating commercial losses to bona fide investors. The Circular further states that the issues has also been referred to the Ministry of Law and have been examined in detail. The circular also refers to three Supreme Court decisions in this regard favoring the MLM companies.

On 20/12/2002, Shri V. Sreenivasa Prasad, the Minister for Slate in the Ministry of Consumer Affairs had reiterated in the Lok Sabha as follows:

'That the Indian Direct Selling Association have been requesting to enact a separate Legislation to cover direct selling / Multi Level Marketing / network marketing. That the main contention of the representation was that members of the Direct Selling Association are being targeted due to the vagueness of the Prize, Chits and Money Circulation Schemes (Banning) Act, 1978 in distinguishing between Prize Chit funds and genuine agencies involved in direct marketing.'

This matter was examined in detail in consultation with the concerned Ministries. The need for a separate legislation was not felt in view of the fact that there are adequate provisions available in the Sale of Goods Act, 1930, (for regulating the sale of goods); the Indian Contract Act, 1872 (for sale of services) and the Consumer Protection Act 1986 (to promote and protect the rights of the consumers). The provisions of the Prize, Chits and Money Circulation Scheme (Banning) Act, 1978 seek to ban the promotion or conduct of Prize, Chits and Money Circulation Schemes. The provisions of this Act had come up for scrutiny before the Hon'ble Supreme Court of India who have ruled that the ‘Network Marketing Plan and direct sale of goods and services by the direct selling companies do not fall within the mischief of the aforesaid Act.'

Further Gold Quest also filed another criminal original petition seeking an interim direction to the enforcement agency only to investigate on a legitimate complaint and not to harass its customers, agents, employees etc at their premise which was also granted by Hon'ble Judge G. Murugesan on 22-4-2003.

A petition seeking for suspension of the order dated 9-4-2003 was filed and the same came up for hearing on 22-4-2003 and was admitted by Hon'ble Judge V. Kanakaraj. The CrWOP # 2347 of 2003 order of dismissal by Hon’ble Judge V. Kanakaraj was also suspended on 22-4-2003.

All the above proceedings initiated by the Management to establish the legitimacy of Gold Quest International Private Limited is not on the basis of any complaint. The initiative taken was to safeguard and protect the interest of its customer and well wishers. Gold Quest till date does not have any FIR filed against its business operations in Tamil Nadu or in any part of India.

A copy of the Central Government circular and the extract of the speech of the Hon’ble Minister, is herewith attached for your record and appreciation of the full facts.

Seal: Ashok Stambha.

Wajahat Habibullah D.O. No. 21/22 IT/2001

Secretary Govt of India, Ministry of Consumer Affairs, Phone no.: 23702007 Food, and Public Distribution,

Fax: 23304716 Dept of Consumer Affairs, Krishna Bhavan, New Delhi 110001.

March 31, 2003.

Subject: Inapplicability of the provisions of the Prize, Chits and Money Circulation Scheme (Banning) Act, 1978 to direct/network/multilevel marketing.

Shri A. M. Nimbalkar,

A number of representations have been received by this department regarding alleged harassment of companies dealing with direct/network/multi level marketing by the police authorities in various states/union territories. Very often the provisions of the Prize, Chits and Money Circulation Schemes (Banning) Act 1978, are invoked against these companies. We have examined this issue in detail, including consulting the Ministry of Law regarding the applicability of the said Act to these companies. It is our considered view that the provisions of the Prize, Chits and Money Circulation Schemes (Banning) Act 1978 are not applicable to companies dealing with distribution of goods including multi level/network marketing companies. Interpretation of various judgments by the Hon'ble Supreme Court (a) State of West Bengal Vs. Swapan Kumar Guha, (1982) 1 SCC 561; (b) Srinivasa Enterprise Vs. UOI (1980) 4 SCC 507; and (c) Reserve Bank of India Vs. Peerless Co. (1987) 1SCC 499 implies that activities of direct/network/multilevel marketing do not fall within the provisions of the aforesaid Act.

In light of the above, I would request you to kindly instruct the officials concerned to distinguish between Companies dealing with activities coming strictly under the purview of the above Act and those such as direct/network/muItilevel marketing dealing in distribution of goods so as to avoid harassment and commercial losses to bona fide investors.

With regards,

Yours sincerely,

Sd/ Wajahat Habibullah
Shri A.M. Nimbalkar,
Chief Secretary, Govt. of Maharashtra,
Mantralaya, Mumbai 400 032.

NOTE ON THE LEGALITIES

During the third week of January 2003, the police raided and arrested 86 people of a company called 'Frontier Trading’ alias Japan Life. The 86 people, mostly customers of the said company were educated people who were doctors, engineers, lawyers, bank officials etc. This created a wave of panic in the Network Industry in Tamil Nadu. The Police had also raided some more companies causing apprehension in the MLM industry. Hence decision was taken by Gold Qucst to initiate proceedings for protection against the present legal implications due to Tamil Nadu Government's stand on Multi level marketing, that the same attracts the provisions of Prize, Chits and Money Circulation Schemes (Banning) Act, 1978.

On 20/12/2002, Shri V. Sreenivasa Prasad, the Minister for Slate in the Ministry of Consumer Affairs had reiterated in the Lok Sabha as follows:

All the above proceedings initiated by the Management to establish the legitimacy of Gold Quest International Private Limited is not on the basis of any complaint. The initiative taken was to safeguard and proltect the interest of its customers and well wishers. Gold Quest till date does not have any FIR filed against its business operations in Tamil Nadu or in any part of India.

A copy of the Central Government circular and the extract of the speech of the Ho’nble Minister, is herewith attached for your record and appreciation of the full facts.

SATURDAY, MAY 10, 2003 THE NEW INDIAN EXPRESS, MADURAI

FM clears network marketing, denies favour to Japan Life

express news service

New Delhi May 9: Finance Minister Jaswant Singh said in the Lok Sabha on Wednesday that network marketing did not fall under the purview of the law banning money circulation schemes.

Replying to a question by Congress member Jaipal Reddy, the Minister cleared popular misconceptions about modern multilevel marketing techniques used in many parts of the world by reputable companies.

The Minister clarified that the Prize Chits and Money Circulation Scheme (Banning) Act 1978 (PCMCSBA) was a Central Act but its implementation fell under the jurisdiction of state governments. The state could take action without reference to the Reserve Bank, he said.

Jaipal Reddy's calling attention notice had specifically charged Japan Life India, a company selling "total sleeping systems", of perpetrating "a huge

high-tech fraud .... through illegal schemes." He said the business was handled in India by the Mumbai-based Frontier Trading which had managed to obtain Customs concessions on the one hand and thwart police actions against it on the other.

In his answer, Finance Minister Jaswant Singh said that no Customs concessions were given to the company other than what was normally allowed to products with therapeutic value. The mattress that was marketed had embedded magnets in it with some medical properties.

The Minister said Frontier Trading's owner, V. R. Pandit, had paid a personal income tax of Rs. 6.21 crores for 2001-02 and Rs. 6.62 crores for 2002-03. "If an individual had paid these taxes" Jaswant Singh said, "I can only assume that the Corporation to which he belongs must also have been assessed and taxed."

The Minister said that he would examine whether a new Act, as suggested by Jaipal Reddy, was necessary to deal with offences of the kind he complained about.

The discussion, however, made it clear that Japan Life was selling a product and, therefore, did not attract the provisions of the PCMCSBA. This Act covered chit prize and money schemes, not companies dealing with distribution of goods, including multilevel and network marketing companies.

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