The Madras High Court way back in its judgement of 2004, notwithstanding the claims of multilevel marketing companies, held that multilevel marketing, network marketing, referral marketing are nothing but illegal money circulation schemes.In its judgement while hearing a writ petition filed by the Apple FMCG in 2004, the Madras High Court even commented:
It is true that several companies including Multinational Companies carry on the business of the “Multilevel Marketing” and it is also true that the Executive and the law enforcing authorities keep a blind eye on such activities. This also does not make an illegal act legal. It is always a fact that the law enforcing authority would try to close the stable only after the horse had escaped.” (Para 22).
Justice A Rajan speaking on behalf of the Bench, stated that in this part of India, people are gullible and fall an easy prey to the tall promises made through the media. That was the reason why the lottery tickets were sold in large numbers in the State. Many companies want to exploit this attitude of people and float many schemes and lure the people to join the schemes.
The petitioner is not entitled for direction for prohibiting the authorities from keeping surveillance over any meeting. Sec. 7 of the Act confers the right on the police officer to enter any premises, where he has got a reason to suspect that the premises are being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of the Act. (Para 33).
The Madras High Court held that mere fact no complaints were received does not make an act legal, if it be otherwise illegal. It is true that no service fee is collected by the petitioner for registration. It is also true that the commission that is received by the distributor depends upon the volume of business generated by him. From the scheme of Multilevel Marketing, as reflected in the brochure issued by the petitioner, the commission is received only if the distributor sells the product, which he purchases, to two others and those two persons sell it to two other persons each and those four persons sell similarly to two persons each.
In this manner, if more number of persons in the next stages come into this scheme, the person through whom those persons got enrolled gets commission. "Receipt of any money or valuable thing as the consideration or a promise to pay money, on any event or contingency relative or applicable to the enrollment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.” The above definition makes it clear that any scheme by whatever name it is called whereby on a promise that one would receive or would make quick or easy money by enrollment as members into the scheme is ‘money circulation scheme’.
In this case, Justice A Rajan said that the contention of the petitioner is that there is no chain of customers. This contention appears not acceptable. The scheme, as stated above, creates chain of customers and only when the chain progresses without any break in any of the links, the ‘principal distributor’ gets more commission. If, for any reason, the chain is broken, at any stage, then the principal distributor’s commission would get reduced proportionally to that extent. Therefore, it is not correct to say that there is no chain of customers in the process. Section 2(c) of the Prize Chits and Money Circulation Schemes(Banning) Act, defines ‘Money Circulation Scheme’, as follows: “Money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for there, there is enrollment of members into the scheme; there is also a promise made that on such enrollment of large number of persons into the scheme, one would make quick money or easy money. There cannot be any doubt that by enrolling new members and by the process of selling the goods to new distributors this chain progresses; the person who became such members earlier get commission without doing any work; getting such a commission is nothing but getting quick or easy money. Therefore, such schemes the so called ‘Multilevel Marketing’, definitely falls within the definition of ‘money circulation scheme’. The event is enrollment of new members; the commission received is relative to such enrollment of new members into scheme. Therefore, the argument of the learned counsel for the petitioners that there is no promise of quick or easy money is not correct for the reasons stated above. Thus, the so-called Multi-level Marketing, though called by a very attractive name squarely falls within the definition of ‘Money Circulation Scheme’ under the Act. Hence, it is prohibited by the Act. It is for the law enforcing authorities to take appropriate action.