Hundreds of companies are using the direct selling route to run Ponzi schemes. It's probably time to blow the whistle on them.
The district centre in
At first sight, Sterling Life
All one has to do to become a distributor with Sterling Life is to buy consumer durables worth Rs 17,500. "Well, this amount, being significant, makes the distributor feel he is investing in a business, and therefore makes him serious about the business," is how Kalsi explains the higher-than-high entry-cost. Most known direct sellers charge a nominal entry fee;
There's more to this unique business model: distributors aren't eligible for refunds; and when something goes wrong with a product, and it can't be repaired, "we simply replace it with a new one," in the words of Kalsi. By the end of this year,
A Proxy for Ponzi
Pyramid schemes are illegal in
Take the case of the two-year old, Rs 40-crore Life Care, a 90,000-member strong New Delhi-based company, ostensibly selling a discount card and a range of cosmetics and toiletries, all eponymous. When this writer visited its office-plus-distribution centre in Rohini, a residential area in North-West Delhi, the outlet supposed to dispense products was locked. It was subsequently opened for this writer's benefit, but there wasn't a single distributor in sight-strange, for a company that claims 15,000 active distributors in
Companies such as Life Care can operate with impunity, reasons Sameer Modi, Managing Director of direct seller Modicare, because there are no specific laws governing direct selling in this country. Most countries, including
The law can't touch these companies because they have a product to show. "Where the business thrives more on structure of business rather than actual product sale, our suspicions are raised,'' says S. Krishnamoorthy, an Indian Police Service officer, handling crime in Chennai. "There is no question of everybody benefiting, somebody always loses.'' Yet, the police has not made much headway in its investigations into the activities of Conybio Healthcare, a direct seller of toothpaste (minimum price Rs 210) and sun beads (Rs 15,000).
There's no shortage of gulls. Another Chennai-based company, GoldQuest International hawks a gold coin at Rs 43,000, a 100 per cent premium over what it should cost. It has found 12,000 takers even though D. Hemchandra Rao, President, Madras Coin Society, warns that, "In the case of GoldQuest, the coin is neither a period coin nor is it by an authorised body (like government mints)." But the company's Country Head Pushpam Naidu defends it by saying: "GoldQuest is well within its rights to operate in
Over 37,000 people have already bought an e-shop for Rs 5,000 each, from the New Delhi-based First Biz Network! Heard of Revolution Forever? The company's main product is a discount card priced at Rs 6,500 (it has 15,000 distributors). Ezeebiz has over 55,000 distributors for a set of four basic Hindi-to-English translation books and audio cassettes priced at Rs 6,615 besides other packages. And Pune-based Infiniteopps offers computer education packages starting at Rs 1,350 (it has over 1,00,000 customers and 15,000 distributors).
Almost every one of these companies has a binary direct selling plan that rewards distributors for recruiting other distributors. "Binary plans, by and large, are just recruitment-focussed and walk a thin line from being a pyramid scheme," explains IDSA's Pental, who is also Managing Director of the Rs 100-crore Avon Beauty Products. IDSA estimates that there could be 1,000 such companies out there, paying unsustainable returns of around 80 per cent on sales (some of the crooks pay 40 per cent.) largely for recruitment. At average sales of Rs 3-4 crore, the size of this industry is around Rs 4,000 crore (the actual number could be much larger), far higher than the Rs 1,723-crore organised and legitimate direct selling industry in India.
Buoyed by the lack of regulation, more unscrupulous entrepreneurs are entering the business. In the past six months, 39 new members sought membership of IDSA, with just two being shortlisted for consideration, a measure of the rot that has set in the industry. And existing ones are diversifying. First Care is moving into durables and gift hampers; Sterling Life and Revolution Forever into toiletries and cosmetics. And all of them believe there is nothing illegal (there isn't) about their business. "We're not pyramid, but binary," says Manmohan Gupta, Chairman, Interworld.Com. "And who is IDSA to cast aspersions on our model?" Not that these aspersions count for anything: IDSA reported the activities of First Biz Network to Delhi Police in April 2003 ("...we feel is operating money circulation scheme..."), through a letter to the Assistant Commissioner of Police, Kalkaji (a
Things will probably continue in the same tenor until a large pyramid scheme company disguised as a direct seller goes under (all pyramid schemes are based on the company's ability to keep growing its base of distributors; the minute its network stagnates, its business becomes unsustainable). By then, it may be too late.