The direct selling industry is in the doldrums.
By Rajiv Theodore
NEW DELHI: The Chairman and CEO of Amway India Enterprises Pvt. Ltd, William S. Pinckney, has been arrested once again, after being booked just a year back on charges of financial bungling.
This time, the arrest was triggered by a consumer complaint alleging unethical circulation of money through Amway’s operations in Andhra Pradesh. He was arrested by the police under the Prize Chits and Money Circulation Schemes (Banning) Act (PCMCS). Last time, Pinckney and two other Amway executives got onto the wrong side of the law while doing business in Kerala where they were charged with financial irregularities.
In a quick rebuttal, Amway India termed the arrest as an “unwarranted act” on “frivolous” charges that gave “a misleading impression” about its business.
“We are aggrieved and shocked at the sudden and unwarranted act of detention of our official,” Amway India said in a statement. The case in which the action has been taken was filed in December, but the company said that it had no prior information on it.
They said, “due to the lack of a legal framework for the direct selling industry, any case filed is being misinterpreted and booked under PCMCS, which is otherwise intended to regulate financial schemes”.
The direct selling industry has been repeatedly seeking an amendment to the PCMCS Act and has been working along with various industry bodies and government for the same, Amway pointed out.
Of late, the direct selling companies in India have been dogged by an uncertain regulatory regime and hounded by authorities. These companies are now facing a bleak future and as of now staring at an almost impossible choice of either to quit or perish.
Recently, leading direct selling US headquartered brand Mary Kay had quit India citing regulatory concerns and poor sales. The company had entered India in 2007 and has invested close to $20 million in its venture in categories such as skincare, fragrances and cosmetics.
Other firms in the business like Modicare, K-Link and DXN are slashing their business, shrinking their operations and even mulling to pack their bags in Kerala, stating police harassment ever since the arrest of Pinckney in May.
Direct selling refers to a business model where sales personnel engage in network marketing, direct selling or referral marketing. Their plight has been worsened by a string of events in the recent past that had created a lot of negativity. Some of them were charged with unscrupulous activities too. In the recent past several cases have surfaced to reveal sleaze, slime and even suicides in the industry. While most run legitimate businesses, the industry has been tainted by the alleged wrongdoing of a few.
In another case, the Saradha scam that unfolded in West Bengal had wiped out the savings of an estimated 400,000, driving many to commit suicide. Saradha’s chits like ‘chain letters’ promise impossibly high returns on the assumption that investors would indefinitely multiply at geometric rates. But the scheme collapsed along with the break- up of the chain.
Speak Asia, another multi-level marketing firm, is currently being probed by multiple agencies such as the Enforcement Directorate (ED), the income-tax department and the Serious Frauds Investigation Office (SFIO), for offences including money laundering, violation of foreign exchange laws, tax evasion and not making payments to investors. It was accused of defrauding people amounting to a whopping Rs. 2,400 crore by the police in 2010.
Such kind of business activities had a bumpy ride in China too, where the direct selling companies had set foot almost 20 years back. It may be recalled that direct selling companies in China were accused of operating sophisticated pyramid schemes and other sales swindles. They have also been accused of manipulating and misleading sales recruits.
Because of such concerns, China banned direct selling in 1998. Big direct-selling companies disputed those claims, saying regulators simply misunderstood their business model. And in 2006, after heavy lobbying from American companies, China lifted its ban. And since then, direct selling, with some modifications, has flourished in China, growing into an $8 billion industry that now markets products as diverse as health supplements, cosmetics, toothpaste and dishwashing liquid.
In India, these firms work outside the ambit of a regulator. Over the past few decades, companies such as Modicare, Tupperware, Quantum, Oriflame, Amway, Herbalife, Forever Living and Free India did taste success, but have since then come under an investigative scanner.
A finance ministry official here in New Delhi told The American Bazaar that a single key regulator is required to regulate them, and help identify those entities which may have violated collective investment scheme (CIS) norms. India is still working on a set of draft regulations for Multi Layered Marketing companies which is expected to be out in a couple of months. The legitimate direct selling industry alone, all of which comes under MLMs, is estimated at Rs. 6,000 crore, according to the Indian Direct Selling Association (IDSA).
The US-headquartered Amway Corp had reported a turnover of Rs. 22.88 billion in calendar year 2012, and aims to cross the $1 billion mark by 2020. It employs nearly 2,500 people directly (including vendors) and has around 800,000 active distributors in India. Amway sells its products through direct marketing to avoid spending on large advertising campaigns but many customers allege that this, however, has not translated into lower prices for them.
Last month, Amway announced setting up a greenfield manufacturing facility at Nilakottai, near Madurai in Tamil Nadu at a cost of Rs.5 billion. The company has invested about Rs.1.51 billion ($35 million) in India, of which Rs.220 million have come as foreign direct investment.Amway has done business worth Rs.21.69 billion last year (2013) in India.
In China, the company claims to have reinvented its business model to suit the laws there.
“After the Chinese government outlawed direct selling, Amway repeatedly revised its business model to build a reputation as an honorable corporate citizen. In 2006 it received a new license, and China is now its largest market,” Amway’s President Dough DeVos says in an article in Harvard Business Review in April 2013 issue.
He describes the efforts the company made to stay true to the essence of its business, yet worked side-by-side with local officials to make significant shifts in the way it did business in that market.
This post first appeared in americanbazaaronline.com