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Preet Singh, a homemaker living in the small town of Panchkula dreams of becoming financially independent and providing monetary support to her family. Unable to obtain a regular job, she applied for membership in a direct selling firm that requires no educational qualification or degree. "All we need is good marketing skills, and my neighbour has already managed to buy a car by selling products to her connections. You see, the commission is good if you can manage regular sales," she quips.
However, she is not alone as thousands of people, especially women, sign up for direct selling companies every year. While some people have made a fortune from this industry, others have become prey to fraudulent schemes. In the past, companies such as Ebiz.com, and Qnet have duped thousands of gullible savers by running a pyramid fraud in the guise of direct selling.
But there are several companies that work on a direct selling model and Amway is the most renowned example of it, with the brand existing in Indian markets for almost 25 years now. The other direct selling companies include Modicare, Avon, Tupperware, Oriflame, and Herbalife Nutrition, among others.
Recently, the Enforcement Directorate (ED) froze assets worth over ₹757.77 crore of Amway India for running a pyramid fraud in the guise of direct selling. But Amway said that "The action of the authorities is with regards to the investigation dating back to 2011 and since then, we have been cooperating with the department and have shared all the information sought from time to time".
How do you differentiate between a genuine direct selling firm and Ponzi schemes?
According to the Indian Direct Selling Association (IDSA) Director Rajat Banerji, "Direct selling is an operation or sales of a product through a network of sellers". Calling it a chain of human networks, Banerji said the industry's sole motive is to provide a livelihood to people from their homes. "Direct selling companies are almost similar to FMCG firms like Colgate-Palmolive, Unilever, and ITC, having common departments like manufacturing, account, finance, sales, marketing, legal, and communication). What differentiates the two is the delivery process to the consumers," he said.
Explaining about the pyramid scheme, Banerji said, it is a Ponzi scheme that focuses on the enrollment of new people and collecting money from them. "In a pyramid scheme, an initial entrant may earn a good amount of money but, as the distributors' network increases, it becomes harder for late entrants to recover their initial amount and the marketing model collapses," Banerji added.
On the other hand, a direct selling firm's focus is on sale of products and does not provide any reward for recruitment, the IDSA Director said.
Prominent direct selling companies in India such as Amway and Modicare explained to Mint their working model. Amway claimed, "We do not have any joining fee, and we never pay on recruitment," and added, "bonuses are paid only on the sales of the product". Besides, Amway said that they also have an exit policy under which, "the participants can cancel the agreement without resulting in any breach of contract or levy of penalty".
When asked about the practice of luring people to join the membership programme, Amway said they take strict actions against grifters, including termination of the contract.
According to a report released by IDSA, the direct selling industry grew 7.7% to cross the ₹18,000 crore mark during the Financial Year 2021. Besides, employment in the industry also increased during the Covid times. In FY21, the total number of direct sellers grew 6.32% to almost eight million as compared to FY 2019-20 when around 7.4 million had joined direct selling schemes. Globally, the direct selling industry is $190 billion, and in India, it is close to $3 billion.
Anamika Mehra, a top-ranked distributor in a direct selling company claims that she has recruited several unemployed women, a widow who lost her husband due to coronavirus, and several housewives who wanted to support their families after their income sources were impacted due to the pandemic. Currently, Mehra has a network of more than 5,000 people under her. Backing the direct selling industry, Mehra said, "The industry is a boon for the vulnerable population as there is no investment involved, and it is all right if you do not have formal education. All you need is marketing techniques and an ability to make new people join the business". She claims that she has managed to buy three cars and build her own house in Chandigarh by working in a multi-level marketing (MLM) company for more than 22 years. However, she denied commenting on the quality and market response of products her company sells".
On the other hand, Renuka Joshi from Dehradun who has worked in Modicare India expressed disappointment with the business model of this industry. Teaching in a Convent school, Joshi said that the industry is gradually penetrating educational institutes. She said her colleagues are selling products to parents despite their disagreement. "Parents say that we care about our children so sometimes we unwillingly purchase those pricey products," she said.
According to Joshi, the exorbitant prices of products, the recruitment of an uneducated workforce in the industry, and the selling of low-quality products are some of the practices by the direct selling companies that she finds exasperating.
"Sometimes companies give us products which may not be of good quality, so I don't give such products in my tiny network". Citing Modicare's Noni tablets, Joshi claimed that the supplement has caused sugar problems in three of her colleagues. Joshi is now planning to leave the industry.
Mint spoke to Modicare and the company in its response said, "Noni is extracted from the fruit of the Morinda citrifolia tree and according to various research reports, Noni provides multiple health benefits and helps maintain overall health". The company added that all its products are formulated after "extensive research at world-class facilities and are of high quality. All our products come with a 100% Satisfaction Guarantee and can be returned within 30 days".
Direct selling via e-commerce
Direct selling companies have cautioned customers not to buy products from e-commerce platforms due to fraudulent offers. The company recommended buying products directly from a distributor or their website. IDSA's Banerji said, "In India, close to 80 lakh people are involved in this industry. If we enter into e-commerce, the income of direct sellers will get destroyed". The direct selling companies' products that are available on e-commerce sites are unauthorized sales, he added.
Modicare shared the same sentiments regarding the sale and purchase of its company's products on online platforms. In a written statement, the company said, “We do not support listing and selling our products on the online marketplaces as it directly impacts the earning opportunity of our consultants. Besides, there is no way for us to keep a track of the products that are being sold online, wherein safeguarding consumers against spurious or expired products becomes a challenge".
How to protect yourself from a Ponzi schemes?
To shield yourself from a Ponzi scheme fraud, analyze the marketing strategy, view online if there are any reports of scams about that company, and take people's reviews about the product. Direct selling consultancy Strategy.com is also creating a distinction through its scam alerts which list pyramid operations after an investigation. It has blacklisted 3,530 companies on its website at present.
What is the government doing to curb malpractices?
The Centre last year brought amendments to the Consumer Protection (Direct Selling) Rules, 2021 to protect consumers from the direct selling companies from promoting pyramid or money circulation schemes. The government explicitly said, "Direct selling entities and direct sellers are prohibited from promoting a pyramid scheme or enrolling any person to such scheme or participating in such arrangement in any manner whatsoever in the garb of doing direct selling business". The rules direct that every direct selling company must ensure that goods and services offered by their direct sellers conform to applicable laws.
Now it remains to be seen whether the Centre's guidelines will have any bigger impact on Ponzi schemes that operate with impunity.
(All the names have been changed in the story to protect identities)