EAS Sarma, former power and finance secretary in his letter to the MCA secretary appealed to set up an inter-departmental group to collectively tackle MLM and pyramid schemes without any delay

EAS Sarma, former secretary to the Government of India (GoI) has appealed the ministry of corporate affairs (MCA) to set up an inter-departmental group to identify and curb pyramid or multi-level marketing (MLM) companies and schemes.

Mr Sarma, in a letter to Naved Masood, secretary of MCA, said the ministry of finance, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and the investigating agencies should collectively tackle this problem without any delay, as every day of procrastination will only result in thousands of hapless families cheated by the promoters of these schemes.

Earlier, in February, Mr Sarma wrote a letter to prime minister Manmohan Singh requesting to set up the inter-departmental group for prohibiting MLM and pyramid money circulation companies from operating in the country.

According to the former secretary of power and finance, the inter-departmental group should quickly identify the existing companies who are in this unethical business and proceed against them in a systematic manner. “The group should lay down the criteria for identifying such companies at an early stage so that they may not be allowed to get registered as companies under the Companies Act. If necessary, the existing laws should be suitably strengthened and the penalties sufficiently deterrent,” he added.

In several states, public-spirited officers have gathered fairly comprehensive data on such (MLM and pyramid) companies, investigated them thoroughly and brought them to book. Some of these states have enacted their own laws to pre-empt the activities of such companies. “MCA should take inputs from them and proceed effectively against the business of MLM and pyramid money circulation companies,” Mr Sarma said in the letter.

The MCA, in a recent study, said that such (MLM and pyramid) schemes are inherently money circulation schemes and sale of products is only a camouflage... (and) voilative of the Prize Chits and Money Circulation Schemes (Banning Act), 1978.

According to the study, the products by multi-level marketing companies are “over-priced” to pay huge commissions to people sitting at the top of pyramid and earn exorbitant profits for the company.

“Such schemes enrich the company and the top of the pyramid participants at the cost of 90% of the participants who are at the bottom two levels,” it said.

In a reply to Mr Sarma, the MCA admitted that another strategy adopted by these (MLM) companies is to use sale of ‘goods’ only as a camouflage whereas the real aim is to cheat the people lower down the chain. Unwary subscribers are lured to join such selling expeditions. They make deposits in the hope of getting huge returns. They are ultimately left high and dry,” the MCA admitted.

Even the study added that in the pyramid or multi-level marketing schemes ‘product’ “is only a way to disguise the real intention” and such schemes are primarily “a variant of the earlier money circulation schemes” without any products.

The main difference, it added, between direct sales ad pyramid sales is that in direct sales the person making the sales gets the maximum commission, while in pyramidal scheme the person at the top of the pyramid gets maximum commission.

“Such a compensation plan rewards enrolling more members down line rather than give incentives to sell directly to the consumers who are not interested in becoming members. The deceptive and fraudulent nature of such scheme is because very soon saturation is reached and more members cannot be enrolled,” it said.

Earlier, in April, corporate affairs minister Veerappa Moily had said he has suggested to the home ministry to set up an SFIO-type special body to probe frauds by the multi-level marketing companies and chit funds in a time-bound manner.