Why pyramids tumble?

The pyramid remains stable as long as the lowest level remains bigger and wider than the upper
levels. Once the lowest level trims, the whole structure collapses.

People are deceived into believing that by giving money into such schemes, they will make
more money. However, the scheme simply banks on getting more and more contributions from
an increasing number of people at the bottom levels. In reality, no wealth ever gets created, no
product gets sold, no service is offered and no investment is made that can generate returns or
any tangible output.

Since it is impossible for the cycle to sustain itself, people will lose their money somewhere
down the line. Early adopters, like those at level 2 or level 3, may still have chance to recover
their invested money, only if they are paid back.

Incorporation of MLM company in India

Foreign company perspective

● AS A FOREIGN COMPANY – An international company can do direct selling in India

through the following:-
■ Liaison Office/Representative Office
■ Project Office
■ Branch Office
● LIAISON OFFICE
■ The opening & operation of such office is regulated by FEMA and RBI
approval
■ Expenses of such offices are to be met through inward remittances of
foreign exchange from the Head Office abroad only
■ Such offices should not undertake any trading or commercial activities,
and their activities should be limited to collecting and transmitting
information between the overseas Head Office and potential Indian
customers
■ Such offices should not charge any commission or receive other income
from Indian customers for providing liaison services
■ Through a Chartered Accountant such offices have to file an annual
activity certificate to RBI
■ The permission to hold such office is given for three years subject to
renewal
● PROJECT OFFICE: A foreign company can set up a project office in India if they are
planning to execute a specific project. RBI allow companies to set up offices but,
such offices cannot carry any activity except those which are related and incidental to
the execution of said project
● BRANCH OFFICE: Its role will be broader in respect of liaison and branch office but
will be limited: –
■ To represent the parent company/ other foreign companies in various
matters in India
■ To conduct research work in the area in which the parent company is
engaged
■ To undertake export and import trading activities

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 ■ To promote possible technical and financial collaborations between the
Indian companies and parent or overseas group companies

The branch office is not allowed to carry on manufacturing activities. It has to submit annual
activity certificate to RBI. For granting the approval, RBI considers the history of the applicant
company.

Indian company perspective

A foreign company can incorporate an Indian company as prescribed by the Indian Companies
Act:

 The foreign equity in such companies can be 100% depending on the

requirements of the foreign investor and the FDI rules
 For registration, an application has to be filed with Registrar of Companies
 A foreign company can also do a joint venture with an existing Indian company
and enjoy the established distribution channels of its partner.

Some important ruling in pyramid

 The Prize Chits and Money Circulation Schemes (Banning) Act, 1978
Key features of the Act:-

 Banning of prize chits and money circulation schemes or enrolment as members

or participation: Promotion of any prize chit or money circulation, or enrolment in
it as a member or participating in these activities is banned as per section 3 of
the act

 Penalty for contravening the provisions of section 3- In case the clauses of

section 3 is contravened, the offense is punishable with an imprisonment that
may extend up to 3 years or a fine which may extend up to five thousand rupees
or both.

 The penalty for other offenses in connection with prize chits or money circulation
schemes:- In addition to the above if anyone participates in the activities here—
(a) prints or publishes any ticket, coupon or other document for use in the prize
chit or money circulation scheme;
(b) sells, distributes, offers or advertises for sale / distribution, or has in his
possession for the purpose of sale or distribution any ticket, coupon or other
document for use in the prize chit or money circulation scheme;
(c) prints, publishes or distributes, or has in his possession for the purpose of
publication or distribution
(i) any advertisement of the prize chit or money circulation scheme;
(ii) any list, whether complete or not, of members in the prize chit or
money circulation scheme;
(iii) any such matter descriptive of, a price chit circulation scheme
(d) Invites any person for the purpose of sale or distribution of ticket, coupon or
other document for use in a prize chit or money circulation scheme
(e) Uses or permits to use any premises for the purpose of selling, distributing or
advertising prize chit or money circulation scheme

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 (f)Procures or attempt to procure any person for this purpose,
Can be punished with a imprisonment extending up to two years or a fine
extending up to three thousand rupees.

 Offenses by companies: If this offense is committed by a company then the

person who at the time when the offense was committed was in charge or was
responsible to conduct the business will be considered guilty and will be liable to
be proceeded against.
 Power to try offenses: The lowest court that can try this offenses is that of a Chief
Metropolitan Magistrate.

 Direct Selling Guidelines 2016 :

Key features of the Act:-

 Conditions for the setting up of Direct Selling business: Every Direct selling entity
intending to carry out direct selling business shall comply with the following set of
conditions within 90 days:
o Provide accurate and complete information to prospective and existing direct
sellers regarding the amount of remuneration opportunity, and related rights
and obligations
o Notify and provide a full refund or buy-back guarantee to every direct seller
on reasonable commercial terms which can be availed within a period of 30
days, from the date of the distribution of the goods or services to the direct
seller;
o There should be no criminal offense punishable with imprisonment in the last
5 years by any Court of competent jurisdiction against the promoter or key
management personnel
o It shall have an office with identified jurisdiction of its operation in the State to
enable the consumers and direct seller for the purpose of acquainting
themselves with the price of products, return or replacement of products and
efficient delivery of goods and services, and post-sale dealing of grievances;
o “Pyramid Scheme” means: A multi layered network of subscribers to a
scheme formed by subscribers enrolling one or more subscribers in order to
receive any benefit, directly or indirectly, as a result of enrolment, action or
performance of additional subscribers to the scheme. The subscribers
enrolling further subscriber(s) occupy higher position and the enrolled
subscriber(s) lower position, thus, with successive enrolments, they form
multi-layered network of subscriber
The condition relating to the above definition is that a “Pyramid Scheme” shall not
apply to a multi layered network of subscribers to a scheme formed by a Direct
Selling Entity, which consists of subscribers enrolling one or more subscribers in
order to receive any benefit, directly or indirectly, where the benefit is as a result
of sale of goods or services by subscribers and the scheme/financial
arrangement complies with all of the following: a) It has no provision that a Direct
Seller will receive remuneration or incentives for the recruitment / enrolment of
new participants. b) It does not require a participant to purchase goods or
services: i. for an amount that exceeds an amount for which such goods or
services can be expected to be sold or resold to consumers; ii. for a quantity of
goods or services that exceeds an amount that can be expected to be consumed
by, or sold or resold to consumers; c) It does not require a participant to pay any
entry/registration fee, cost of sales demonstration equipment and materials or

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 other fees relating to participation; d) It provides a participant with a written
contract describing the “material terms” of participation; e) It allows or provides
for a participant a reasonable cooling-off period to participate or cancel
participation in the scheme and receive a refund of any consideration given to
participate in the operations; f) It allows or provides for a buy-back or repurchase
policy for “currently marketable” goods or services sold to the participant at the
request of the participant at reasonable terms; g) It establishes a grievance
redressal mechanism for consumers

 Conduct for the protection of consumer:

o Direct Sellers and Direct Selling Entity shall take appropriate steps to ensure the
protection of all private information provided by a consumer;
o Direct Sellers and Direct Selling Entity shall be guided by the provision of the
Consumer Protection Act 1986;
o All complaints received over phone, email, website, post and walk-in should have
a complaint number for tracing and tracking the complaint and record time taken
for redressal;
o The direct selling entity shall provide information to the consumer upon purchase
which shall contain: (a) the name of the purchaser and seller; (b) the delivery
date of goods or services; (c) procedures for returning the goods; and (d)
warranty of the goods and exchange / replacement of goods in case of defect.
Provided that no Direct Seller shall make any claim that is not consistent with
claims authorized by the Direct Selling Entity
o Any person who sells or offers for sale, including on an e-commerce platform /
marketplace, any product or service of a Direct Selling Entity must have prior
written consent from the respective Direct Selling Entity in order to undertake or
solicit such sale or offer

 Prohibition of Pyramid Scheme & Money Circulation Scheme

No person or entity shall promote a Pyramid Scheme, enrol any person to such scheme
or participate in such an arrangement in any manner whatsoever in the garb of doing
Direct Selling business

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Case Studies

1. The Amway Judgment

Amway Corporation of USA obtained permission from the Government of India to set up
a wholly-owned subsidiary in India, to establish and develop direct selling business in
respect of products sourced from local independent manufacturers. The company relied
on a system of enrolling members on the payment of a small fees of around Rs. 4000 to
5000, with the opportunity to earn huge sums of money on the enrolment of new
members and subsequent sales by them. It was alleged by the petitioner that such a
scheme attracted the definition of a ‘Money Circulation Scheme’, which was banned
under section 3 of the Act. Amway, however, argued that none of the ingredients of
section 2(c) of the Act were attracted in the present case, since there was neither quick
nor easy money involved in the scheme, nor was the money received by the sponsor
member or promoter dependant on any event or contingency, relative to the enrolment
of new members in the scheme. Furthermore, the scheme did not provide for the
payment of money upon the mere enrolment of new members.

The Court did not agree with the contention of Amway and held that the money that the
sponsor member at the top got was dependent upon the members that were enrolled by
her, or upon the members enrolled by the members enrolled by her, which was a mere
contingency. The Court also observed that setting out a minimum level of products that
the members had to sell to qualify for obtaining a commission, and by offering attractive
commission on the business carried out by the downline members, there was sufficient
inducement caused for the members to maintain their sales above a minimum level, and
also to chase new members to make quick/ easy money.

Amway India filed a Special Leave Petition in the Supreme Court of India; the Supreme
Court however refused to disturb the decision of the Andhra Pradesh High Court.

This was followed by a barrage of other MLM Companies being classified as ‘money
circulation schemes’ and ‘pyramid schemes’ under the neither, thereby making these
schemes illegal in effect.

2. Online Job Work Com. Private Limited

UT police had registered a case in November, 2002, against directors of Sector-26

based Online Job Work Com. Private Limited, Jasdeep Singh Bains, Jaspal Sohi,
Amandeep Bains, Jagdish Arora, Vivek Arora and Narinder. All of them were booked for
cheating and under various sections of Prize Chits and Money Circulation Schemes
(Banning) Act.

A case was registered on the complaint of Reserve Bank of India (RBI) accusing the
company violating the Prize, Chit and Money Circulation Banning Act.

As per the complaint, Online Job Work Com. Private Limited was enrolling members for
the purpose of marketing products or services of some foreign concerns and companies.
Alleging cheating by the company, the complaint also mentioned that it was ‘misleading
and deceiving’ gullible public.

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 RESULT

As per allegations, the company was running a pyramid scheme in which a business
associate had to enroll further business associates under him against a payment of
16,500 per enrolment being the product cost, training and registration charges.
For each business associate being enrolled, the business associate got a commission of
5,500 from the company and the incentive kept increasing.

The company was neither rendering any worthwhile service, nor selling any product for
the hefty amount of incentive for enrolling new members. It was mainly alluring people
by offering hefty commission and enrolling members by running some pyramid scheme
with some camouflages, the complaint had alleged.

Future of MLM regulations

Developing nations like India is welcoming MLM with open hand and want to be a part of it. The
scenario seems very promising here as network marketing has already took stains by the scams
running away with hard earned money of people. The worst part is that law enforcement related
to network marketing is lacking in India which makes the situation even worse. However, the
fact is that if you are looking to venture into a MLM business in India you have a great future
ahead.

Surprisingly it is not the products, compensation plan or the company which plays an important
role in the creation of the MLM business but it is the people. The people, the prospects and the
distributors are considered to be the most important commodity in MLM business.

Unfortunately, pyramid schemes are likely to continue to proliferate both here and abroad in the
near future. However, we can all help stem the tide by working together. Members in the
banking or financial sector can help law enforcement agencies in several ways. First, if your
country does not have a law that makes pyramid schemes illegal, you should encourage your
government to enact the necessary legislation and provide sufficient resources for enforcers to
pursue pyramid schemes. Associations of reputable bankers or insurers, whose businesses can
be jeopardized by the illicit schemes of unlicensed insurers or securities dealers, can be
effective allies. Recent history in Eastern Europe makes it only too clear that pyramid schemes
exploit the absence of a fully-functioning market, adequate supervision, and/or an effective legal
infrastructure. Second, you can report any suspect investment programs or potential pyramid
schemes. Any information can help, and you may be able to provide valuable insight into who is
operating a pyramid, how it works, and whom it victimizes. In the Cano case, it was the
substantial assistance of financial fraud investigators at VISA that enabled the Commission to
develop and bring its case. Third, help us and others foreign enforcers to identify and freeze
defendants' assets located in your countries. Understandably, banks must observe their privacy
laws, but to the extent it is legally possible for you to provide assistance in tracing and freezing
the assets of pyramid operators, you will benefit all our citizens. This is often the only way to halt
an illegal scheme and return money to victims. We hope that the Fortuna Alliance case signals
the beginning of a trend in obtaining valuable help from foreign courts and banks.
Finally, you can encourage the relevant officials in your countries to combat pyramid schemes
by educating consumers and businesses about how to recognize and avoid this type of fraud.

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This can be particularly important in emerging markets, where experience with investment
opportunities may be scarce.

Here are some tips that consumers and business might find helpful.

1. Beware of any plan that makes exaggerated earnings claims, especially when there
seems to be no real underlying product sales or investment profits. The plan could be a
Ponzi scheme where money from later recruits pays off earlier ones. Eventually this
program will collapse, causing substantial injury to most participants.
2. Beware of any plan that offers commissions for recruiting new distributors, particularly
when there is no product involved or when there is a separate, up-front membership fee.
At the same time, do not assume that the presence of a purported product or service
removes all danger. The Commission has seen pyramids operating behind the apparent
offer of investment opportunities, charity benefits, off-shore credit cards, jewelry,
women's underwear, cosmetics, cleaning supplies, and even electricity.
3. If a plan purports to sell a product or service, check to see whether its price is inflated,
whether new members must buy costly inventory, or whether members make most
"sales" to other members rather than the general public. If any of these conditions exist,
the purported "sale" of the product or service may just mask a pyramid scheme that
promotes an endless chain of recruiting and inventory loading.
4. Beware of any program that claims to have a secret plan, overseas connection or
special relationship that is difficult to verify. Charles Ponzi claimed that he had a secret
method of trading and redeeming millions of postal reply coupons. The real secret was
that he stopped redeeming them. Likewise, CDI allegedly represented that it had the
backing of a special overseas bank when no such relationship existed.
5. Beware of any plan that delays meeting its commitments while asking members to "keep
the faith." Many pyramid schemes advertise that they are in the "pre-launch" stage, yet
they never can and never do launch. By definition pyramid schemes can never fulfill their
obligations to a majority of their participants. To survive, pyramids need to keep and
attract as many members as possible. Thus, promoters try to appeal to a sense of
community or solidarity, while chastising outsiders or skeptics. Often the government is
the target of the pyramid's collective wrath, particularly when the scheme is about to be
dismantled. Commission attorneys now know to expect picketers and a packed
courtroom when they file suit to halt a pyramid scheme. Half of the pyramid's recruits
may see themselves as victims of a scam that we took too long to stop; the other half
may view themselves as victims of government meddling that ruined their chance to
make millions. Government officials in Albania have also experienced this reaction in the
recent past.
6. Finally, beware of programs that attempt to capitalize on the public's interest in hi-tech or
newly deregulated markets. Every investor fantasizes about becoming wealthy
overnight, but in fact, most hi-tech ventures are risky and yield substantial profits only
after years of hard work. Similarly, deregulated markets can offer substantial benefits to
investors and consumers, but deregulation seldom means that "everything goes," that no
rules apply, and that pyramid or Ponzi schemes are suddenly legitimate.

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Conclusion

There is no scepticism regarding the benefits of the direct selling guidelines on the interest of
the consumers in prevention of the frauds against them, however comprehending the
applicability of these directions is a hard nut to crack for various entities who are in a dilemma to
comply with these guidelines. The guidelines do not specifically state the extent of the
applicability; however, they do give certain apparent indications to the entities to whom these
guidelines shall be applicable.

Thus, any company desirous of increasing their distribution base for selling wide range of
products or services and who intend to do it by creating a hierarchical distribution that requires
further outsourcing and recruitment shall be required to comply with the guidelines. Further the
outsourcing agreement between the DSA and the service provider shall clearly state the
provisions regarding contracting and the sub-contracting, subsequent to which only a network of
distributors could be created.

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 References

https://blog.ipleaders.in/mlm-india/
https://www.ftc.gov/public-statements/1998/05/pyramid-schemes
https://www.investopedia.com/insights/what-is-a-pyramid-scheme/
https://scroll.in/article/603226/5-pyramid-schemes-india-fell-for
https://www.souravghosh.com/blog/direct-selling-mlm-network-marketing-legality/

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