FT: “William Pinckney, chief executive of Amway India, the country’s biggest direct selling consumer goods business by sales, was released on bail on Tuesday evening after his arrest along with two fellow directors. Business leaders have been dismayed by the episode, saying it will damage investment and confidence.
It’s an odd tale that says much about the unpredictability of India’s police forces. What lies beneath is even more perplexing: the way a business regarded as entirely legitimate in the west may be viewed as an illegal pyramid scheme under Indian law.
Amway India, a wholly owned subsidiary of Amway Corporation of the US, has 1.5m agents across the country who distribute products on commission by selling door to door and who help recruit more agents like themselves. The company had revenues of Rs21.3bn ($380m) in 2011.
Amway is far from the only player. India’s direct selling industry employs some 6m people, 70 per cent of whom are women, according to the Federation of Indian Chambers of Commerce and Industry.
This week’s arrests were triggered by complaints from agents in the southern state of Kerala. They were angry after making losses on products they bought from Amway before securing customers. But Sudeep Sengupta, an Amway spokesperson, said the police were making this a case of “money circulation”, as defined under the Prize Chits & Money Circulation Scheme (Banning) Act of 1978.
The law is designed to deal with what in the west are known as pyramid schemes – fraudulent investment vehicles in which returns are paid to initial investors from the funds generated by later ones. In India, these can take the form of “chit funds” – popular and often legitimate schemes in which groups of people club together to buy products collectively, for instance, or to save money on a regular basis. But chit funds can go wrong, as demonstrated by a scandal that erupted this month in West Bengal after agents of several funds who lost money committed suicide.
Direct selling companies can fall foul of the law if their sales agents are paid for recruiting new agents (as well as earning commission for making sales). This, the thinking goes, brings them into the scope of the law because no real wealth is created in the recruiting process and the system must implode as the pool of new recruits dries up.
However, Amway and others insist that they pay their agents only when they make sales, not for getting new sales agents on board.
“We enroll distributors who are all meant to retail products. The growth of the network is not compensated for,” Sengupta told beyondbrics. “The growth of the network is only meant to expand the depth of the market and never meant as a model for compensation.”
One problem facing Amway and others is that there is no legislation that recognises direct selling as a specific type of commerce in India. The Indian Direct Selling Association, the industry’s self-regulatory body, is asking the government to change that.”
via Amway India snared by law against pyramid schemes | beyondbrics.
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