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--------------- Print Magazine --------------
 
  May 2016
 
  April 2016
 
 
 
 
CYBER SPACE - By Sanjay Gade
Pyramid marketing companies are looting the public easily, while the government watches. Many countries have banned them outright

O n any given day, hundreds of
pyramid marketing schemes are cashing in on the greed, ignorance and poor financial literacy of millions of people to rob them of their hard-earned savings. In the absence of proper legislation, regulation or registration requirements, these schemes are able to operate quietly and fly below the radar to build up unsustainable pyramids, project a credible business model and payment structure and a cult-like environment to keep people hooked. They come into public gaze only when the payments stop coming in and the founders inevitably decamp with the money.

They are considered outright frauds and are banned in dozens of countries including the US, UK, Canada, China, Iran, Mexico, most of the European Union, South Africa, many Latin American and East Asian countries as well as Australia, Nepal and Sri Lanka. On the other hand, countries such as Singapore ban pyramid companies but permit multi-level marketing (MLM) or direct selling firms to operate, subject to stringent regulation. The difference between the two is subtle and even big MLM names, such as Amway, Tupperware and Avon, are often viewed with a great deal of suspicion and face frequent litigation. Worse, many a time, it is claimed that only influential people, such as doctors or teachers, who are able to recruit more and more distributors, make money. India, however, is a happy hunting ground for pyramids as well as MLMs.

On paper, we have a statute and a Supreme Court judgment to stop pyramids on their tracks. Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, specifically covers all schemes promising quick and easy money based on enrolment of new members.

If that weren't enough, the Supreme Court of India observed, in the case of Kuriachan Chacko and Ors . v. State of Kerala, JT 2008 (7) SC 614 that promoters of the scheme ( aka , pyramid) knew that they were making 'tall promises' which would only work for some time. And, that they were operating on the basis that 'Paul can be robbed to pay Peter' but, "ultimately, when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money." So the principle of what constitutes a dubious lure is enshrined in the statute and ratified by the Apex Court.

Why then do pyramid marketing schemes proliferate with impunity in India? Because, although there is a Union statute barring money circulation schemes, it is for the State Governments and the police to initiate action. And most pyramid schemes work to ensure that influential people in the government and the police are part of their network. For instance, when City Limouzine, a Mumbai-based Ponzi scheme, folded up after three years, it was discovered that almost 6,000 policemen had been entrapped by its promise of high returns. Even Speak Asia, which has triggered a national furore, has been enrolling policemen.

Over the past decade, the only decisive action against pyramid schemes has been initiated by the Andhra Pradesh police, mainly under DIG (Deputy Inspector-General) of Police, VC Sajjanar. He went after Japan Life (which sold magnetic mattresses for a whopping Rs. 1.32 lakh), Gold Quest (sold what it claimed were two numismatic coins at Rs. 30,000) and a few others. The Orissa police also blocked a similar scheme that raised over Rs. 1,000 crore from the poorest villages not too far from the Bangladesh border. In many cases, they initiated action under the Money Circulation Act, along with section 420 of the Indian Penal Code as well as relevant sections of the Drugs and Cosmetics Act, 1940, and the Drugs and Magic Remedies Objectionable (Advertisement) Act, 1954.

Clearly, with no blanket ban or registration and regulatory supervision, pyramid companies can operate freely until they collapse. The police, in most States, especially Mumbai, initiate some desultory action only when investors throng to file complaints after the cheques stop coming in. Even the Reserve Bank of India (RBI), maintains a Sphinx-like silence (as in the case of Speak Asia) or, at best, writes to Chief Secretaries of various States to initiate action ( e.g ., after Moneylife wrote to the RBI repeatedly about Gold Quest).

While the government refuses to act, pyramid schemes are getting more brazen, more sophisticated and are running global operations. Also, unlike in the past, when such dubious schemes flew below the radar and spread quietly, Speak Asia, registered in Singapore, was in a tearing hurry. It offered a stunning return of 500% by getting people to fill meaningless surveys and enroll new 'panelists'-each of whom would pay Rs.11,000 to join. Its declared intention was to enrol one crore people by the end of 2011. And it was creating a cult-like following with a mega event at Goa that had Bollywood artists and singers entertaining the panelists, between super-charged speeches by its officers. Speak Asia claimed a Singapore registration and also hired a top PR agency (LinOpinion of Lintas) to launch an advertising blitz in newspapers and on television during IPL (Indian Premier League) cricket matches. Ironically, all it did was to stir up a huge controversy and force the somnolent RBI and the Ministry of Corporate Affairs to launch an investigation. 'Coercive persuasion' and 'brainwashing' are charges often made about pyramid schemes. It would explain the large number of Speak Asians who post abusive e-mails against anyone who questions the credibility of its dubious claims. While its minimum joining amount is Rs.11,000, there are innumerable examples of people irrationally joining Speak Asia with four to 10 IDs. 

Clearly, this cannot be allowed to continue. In a country with low general literacy and abysmal financial literacy, the government cannot act after people have been looted in broad daylight.

Sanjay Gade

 
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