Thursday, May 30, 2013

A Pyramid Called Amway

Something unusual happened a couple of days ago. The chief of Amway International, William S Pinckney, got arrested by Kerala Police, on charges of fraud and money laundering, under a little-known law called the "Prize Chits and Money Circulation Schemes (Banning) Act, 1978" (PCMCS).

Pinckney is no small fry - he heads a company that has a presence in about 60 countries. In India, Amway is the 5th largest FMCG company in terms of revenue; it has 145 offices, 65 warehouses, and a presence in 80 cities across the country. The company has 36% of the Rs.6300 Cr direct selling market in India.
Direct selling is Amway's biggest strength but the method it adopts seems to have turned it into a great weakness as well. Unlike, say, Eureka Forbes which sells vacuum cleaners to customers directly, Amway network of 1.5 million direct distributors look very much like the bricks of a pyramid scheme. In this model, customers are made the company’s agents who sell the products to other people directly. In other words, the agent-turned-customer will not get a commission directly. He has to rope in others through sales. So the network will keep growing inexorably...until somebody at the bottom of the pyramid crumbles, cries foul and takes legal action.
To be sure, the law itself (PCMCS Act) is rather vague on the issue. It does not mention anything specifically about Multi-Level Marketing or Pyramid Schemes. The closest we get is through Article 2(c) - "Money Circulation Scheme", which is defined as -

(c) " money circulation scheme" means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment 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;
In this case what seems to be 'circulating' is the huge margins that go with the company's overpriced products. 
This being a Central Government Act, it specifies (under Article 13) that each state government can make it own rules for implementing this law. So this might explain why Kerala government decided take action on the basis of locally registered complaints.

However, one things remain unclear: Does Amway have the same pyramidal set-up in other countries? Isn't the company's home country a lot tougher on anything that looks like a Ponzi scheme?


* Das, Surajit Das and Sounak Mitra (2013): Amway Surged by Converting a Multitude into Sales Agents, ET 29May13

- Amway is 5th largest FMCG company in terms of revenue - Dabur, Godrej, Marico, Colgate-Palmolive, ZGSK, Amway (R2288Cr), Emami, P&G, Gillette
- Star products - Nutrilite (50%+ of revenue) -- Glister toothpaste --SA8 liquid detergent --
- Also sells health insurance for MaxLife, Alliance and its own AmSure
- William S Pinckney + two directors - Anshu Budhraja and Sanjay Malhotra - arrested on 28May13 at Kochi -- under Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (PCMCS)

* 2013 (First Post 28May13): Amway India chief, directors get conditional bail: All you need to know ---

* 2013 (Mint, 28May13) -

* What is a Pyramid Scheme? --

* Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (PCMCS) --

* 2013 (FT, 29May) --

* 2012 (Hindu BL, 28Dec) -- Kerala Mulls Law to Curb Money Circulation Schemes ---

* India Direct Selling Association (IDSA) --

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