Millennium Post

Direct selling, the Am(erican) way!

Direct selling is not legal in India. It contravenes the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. There are reasons for the same. Direct selling companies act somewhat like the Ponzi Schemes. Here members are encouraged to rope in more members and thus expand the base of circulation. The larger the base the more are the buyers and larger the cash flow for the direct seller. A member who fails to recruit more members ends up a loser. The turnover and profitability of the direct selling company depend on the continued enrollment of members. Like the chit funds the company’s turnover reaches the point of saturation when the base of the pyramid turns static.

When companies like Amway entered India the PCMC 1978 Act was in the Indian statute books. It entered India in May 1998, 20 years after the Act was in force. Amway knew very well that the company is in a grey area of the Indian law. Any respectable company would have taken careful note of the issue and attempted to address the same with the government before setting up their business in India. Clearly Amway did not do that.

Amway is not the only company in the market. There are companies like Oriflame, Tupperware, Tiens which are active in the country. But none of them is as large as Amway which had a revenue of Rs 2,130 crore, 500 permanent staff and 15 lakh agents. The company has been facing problems in the southern state of Kerala for quite sometime now. In fact when arrested the three officials of Amway India – chief William Pinckney and two other directors – were in the police station to discuss a case filed in October 2012 against the company. The three officials had obtained bail in the case. But they were arrested in connection with another complaint filed in 2011. According to the police of Wayanad district of Kerala there are four complaints pending against Amway there. While the arrests perhaps happened due to the overzealousness of the local police, the fact that the company officials had obtained bail in a similar complaint illustrates that Amway knew well enough its uncharted legal position. For any company operating not exactly in a clearly defined legal framework the minimum that one can expect is to keep track of the police complaints and take appropriate action. By not obtaining anticipatory bails for several such complaints from Amway agents the company officials simply took the Indian law enforcement lightly. This is an ignorance of law or maybe utter disregard of the law of the land.

The arrests made headlines, more so because the complaint was for a paltry sum of Rs 27,000. One cannot deny that Amway, by operating a scheme which did not have any legal sanctity, invited the trouble. It is an elementary principle of investment that the conduciveness of the legal framework of the host country should be checked carefully. If, despite that, Amway decided to enter India the unavoidable conclusion is that it did feel Indian laws can be bent and twisted, with a positive nod from Washington.

Waking up, the Indian Direct Selling Association (IDSA), the 19-member industry body that represents direct-selling companies in the country sought a separate regulatory framework with clearer guidelines governing the direct-selling entities in India. IDSA revealed that apart from Amway there were cases against six other members in Kerala. The problem might be acute in Kerala but exists in other states also. Clearly the law gets interpreted against the direct sellers.
There are some good reasons for the direct sellers to take umbrage. After all, they take back the unsold stock from its distributors. Clearly Amway and Sharadha cannot be treated similarly.  Still the moot point remains unanswered. When the issue of direct selling attracts the provision of the PCMC Act of 1978 why did the companies not enter India after a formal clarification on the provisions? Why did the US direct selling giant feel that Indian laws could be wished away?

The arrogance of the company was evident in what its global President Doug Devos said after the Kerala incident. He cautioned India that such incidents would weaken the India story and turn foreign investors circumspect. The primary question Doug Devos evaded is that shouldn’t his company be circumspect before putting in money!  If the law of a land is against a certain kind of business why venture into that in the first place? Why did he not get the same explained before investing? The answer is simple.  Even without proper legal backing Amway earns about half a billion dollars from India. This is just the beginning. Once the company can get a favourable legislative environment there will be quantum leap in its turnover. Clearly Amway is not doing India a favour by putting in money here. It is a business decision.

Doug Devos has no business to tell New Delhi that the Kerala incident would arrest India story.  He should look at his own follies and recast his business according to the laws of the land. Devos must not think that Indian people can be browbeaten by his sermons. He needs India more than India needs his investment in a sector where he does not offer any great skill.
The author is a communication professional

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