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Introduction
The Faridabad Civil Court is currently hearing a defamation suit in the case titled M/s Bada Business Private Limited v. Sandeep Maheswari. Bada Business is a company started by the entrepreneur Vivek Bindra which has allegedly engaged in operating an illegal multi-level marketing (“MLM”) scheme, also known as a pyramid scheme. The defamation case has arisen because of the allegations made by Sandeep Maheswari, a youtuber, accusing Vivek Bindra of running a prohibited pyramid scheme which has fraudulently usurped money from lakhs of people over the course of several years. The suit filed contests the allegations made, terming them as baseless and futile. It further demands an injunction to be granted under Sections 38 and 39 of the Specific Relief Act, 1963.
Section 3(i) of the Consumer Protection (Direct Selling) Rules 2021 (“Direct Selling Rules”) defines a pyramid scheme. It is a prohibited and unsustainable business model where participants make money primarily by recruiting others into the scheme, rather than from legitimate product sales or investments. The newly recruited members have to pay a certain membership fee to become a part of this scheme, in return for which they are promised high returns. However, these returns are contingent upon them recruiting other members. The scheme is cyclical and continues endlessly with the people at the top constantly accumulating wealth. This is done at the cost of the people present at the bottom of the pyramid who are denied the returns initially guaranteed to them. It is similar to a money circulation scheme which has been defined in Section 2(c) of The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“Prize Chits Act”).
The objective of this paper is to analyse the relevant provisions in light of the recent occurrences, identifying the potential problems and putting forward certain suggestions in order to curb such malpractices.
Analysis of Relevant Legislative Provisions
Section 3 of the Prize chits Act builds on the definition given in Section 2(c) and bans the promotion/conduct of such schemes and also the participation therein. A conjunctive reading of both the provisions makes it clear that any scheme intended to make quick or easy money on “any event or contingency relative or applicable to the enrolment of members into the scheme” would count as a money circulation scheme and is thus prohibited. In the case of Kuriachan Chacko v. State of Kerala, the Supreme Court went further to break the definition of money circulation scheme enshrined in the Prize Chits Act by laying out twin conditions. It was held that making of quick or easy money is not the sole condition to identify pyramid/MLM structures. The operative condition in addition to the former one is that the making of quick or easy money should be contingent upon the enrolment of more members. If making of easy/quick money was the sole criterion, a lawyer charging hefty fees on an hourly basis in the exercise of his creative faculties would also get covered which is clearly absurd and unintended.
A direct selling entity is defined in Section 3(d) of the Direct Selling Rules to mean any entity which sells goods or services through direct sellers. It excludes entities engaged in pyramid schemes and money circulation schemes. Importantly, the direct sellers undertake the business on a principal-to-principal basis. Therefore, direct selling is a legitimate form of undertaking business in India. The emphasis is on selling the products by increasing the distributor base. This creates some semblance of a structure akin to the pyramid/money circulation schemes. Consequently, the consumers are often unable to decide as to whether a particular business entity is legitimate or not. This ambiguity is exploited by the unscrupulous parties who loot the common public in the garb of selling a product.
What allows the illegal structures to come up and flourish is the lack of ability on consumer’s part to distinguish between legal and illegal businesses. There are both systemic and behavioral reasons for the same. On the systemic front, the law has to be culled out from multiple sources in order to become aware of the entire regulatory framework governing such business structures. The money circulation schemes are defined in the Prize Chits Act whereas the definitions of pyramid schemes and direct selling entities are found in the direct selling rules. Moreover, there is no single regulatory authority which issues directives on this subject. For instance, the Reserve Bank of India (“RBI”) had issued a press release dated January 1, 2015 cautioning the public against the promises of high returns offered by the Multi-Level marketing/Chain marketing/Pyramid structures schemes. On the other hand, the direct selling rules were enacted by the Ministry of Consumer Affairs, Food and Public Distribution in exercise of the powers conferred by Section 101(2)(zg) r/w Section 94 of the Consumer Protection Act, 2019. On the behavioural front, the prospect of high returns in the future clouds the rational decision-making ability of the consumers. Therefore, there is a need for consumer awareness on this front in order to tackle the problem in a sustainable manner.
This becomes even more important in cases of mis-selling. It is defined u/s 3(g) of the Direct Selling Rules to mean an act of misrepresentation done in order to complete a sale. The product is made to appear to be something which it is not. This is exactly what was done in the Bada Business case wherein the public was enticed to purchase the courses on the assurance that they would be able to earn 10 Lakhs per month at the end of the course.
The direct selling structure involves a legally enforceable written contract between the direct selling entity (“DSE”) and direct seller undertaking to do the business on a “principal to principal” basis. This implies that the direct seller only sells real products as a principal and his earnings are not contingent on enrolling more direct sellers. A typical direct selling business would therefore involve the DSE at the top and various direct sellers branching out from the same. It would not resemble a pyramid. On the contrary, the very foundation of the pyramid/money circulation schemes is based upon the enrolment of more and more members. In the instant case, the Independent Business Consultants (“IBCs”) were enrolled into the business courses in order to equip them to further pitch the courses to business persons. Thereafter, these IBCs were denied refund of their investments and consequently, they sold these courses even to persons not having any business background. The sale of business courses was just a bait to attract customers to invest money. This case is representative of the numerous instances of fraudulent schemes that deceptively lure people into pooling their hard-earned funds. In light of such increasing occurrences, few solutions have been proposed below.
Proposed Solutions
Addressing the proliferation of illegal business structures such as pyramid schemes requires a multi-faceted approach. Firstly, as mentioned above, prioritising consumer awareness initiatives is paramount. Educational programs and campaigns should be designed to impart clear understanding of the fundamental disparities between legitimate business models and fraudulent schemes. By empowering individuals with knowledge about unscrupulous strategies and deceptive tactics, they can confidently discern and avoid falling prey to dubious ventures. Moreover, consolidating and simplifying regulatory frameworks is imperative for effective enforcement. A streamlined approach to regulation, under the auspices of a centralised authority with clear jurisdiction over pertinent sectors like direct selling, pyramid schemes, and similar business models, would facilitate cohesive oversight and regulation with enhanced coordination and consistency.
Further, enforcement mechanisms should be bolstered with strict penalties for violators. This would serve as a strong deterrent against illicit and fraudulent activities. Additionally, a culture of accountability should be fostered and promoted through transparent business practices and ethical conduct. This can be achieved through stringent monitoring of business activities, encouraging whistleblowers to come forward with information, and ensuring their protection against retaliation. Implementing this is essential in safeguarding consumers and preserving the integrity of the marketplace. Creating an environment conducive to fair and equitable economic practices requires collective commitment from all stakeholders. By implementing these measures in concert, we can mitigate the prevalence of illicit business practices and upkeep the authenticity of the business environment, thereby safeguarding the interests of consumers and promoting sustainable economic growth.
Future Prospects and Conclusion
Tackling illegal business structures like pyramid schemes requires ongoing vigilance and adaptive strategies on part of the stakeholders. The continuing advancements in technology offer opportunities to enhance regulatory mechanisms and consumer protection measures. Implementing digital solutions for monitoring and reporting suspicious activities can improve enforcement efficiency. Additionally, fostering a culture of financial literacy and consumer empowerment through digital platforms can further mitigate the risk of exploitation. By embracing innovation and collaboration across sectors, stakeholders can navigate emerging challenges and uphold market reliability, ensuring a fair and equitable economic landscape for future generations.