MLMs continue to loot and scoot while police, regulators act like mute spectators

MLMs continue to loot and scoot while police, regulators act like mute spectators

 | 08/11/2012 07:36 PM |  
MLMs like SpeakAsia and NMart thrive because the police and regulators like RBI, SEBI or IRDA, instead of taking prompt action, sit on their hands waiting for a formal complaint from duped investors, which happens only after promoters vanish with crores of rupees

 

Every other day, there is news about people getting cheated through “earn-double-money” in less than a year run under the multi-level marketing (MLM) model. While the ministry of corporate affairs (MCA) appears to have woken up by the financial mess and menace created by thousands of MLM companies, the watchdogs or regulators who have the powers to stop all this, on several occasions, are found to be merely watching things as mute spectators.

 

Take for example, SpeakAsia and N-Mart. While SpeakAsia conned lakhs of people by promising multiple returns on the ‘investment’ by just filling up mundane surveys, N-Mart promised huge ‘income’ just by becoming its members and purchasing daily need items from its branded shop. The promoters of SpeakAsia are absconding, while N-Mart promoters were not so lucky. 

 

Due to prompt action by Vijaywada-based activist Shyam Sundar and his organisation Corporate Frauds Watch and the Andhra Pradesh (AP) Police, promoters and directors of NMart are cooling their heels behind bars. Last month, the AP High Court dismissed a writ petition filed by NMart promoter Gopal Singh Shekhawat. But more about Shekhawat and his N-Mart later.

 

Over the years, we at Moneylife had exposed several such fraud MLM or ponzi companies and alerted readers about these fly-by-night operators. At the same time we also informed the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory Development Authority (IRDA) about these companies. Unfortunately, except on few occasions, these regulators neither replied to our communication nor have they initiated any action against these fraudsters.

 

What is more shocking is that some of the known MLM operators are found sidelining prohibitory orders of SEBI. Take for example, despite SEBI’s order issued dated 9th July, Jaipur-based NGHI Developers neither stopped collecting money from people nor did it refund any amount. The company was collecting funds from the public for developing plots of land through its plans, terms as collective investment schemes (CIS) by SEBI.

 

The CIS, where an entity pools in money from investors for certain pre-specified purposes and later distributes the profits or income, come under the ambit of SEBI. While hundreds of companies have engaged in CIS activities in the country, just one such entity is registered with SEBI to undertake such kind of business.

 

Some of the most common CIS are related to investments for real estate properties, plantation and agriculture industry, art funds, time-sharing schemes and multi-level marketing (MLM) schemes, among others. As per SEBI data, more than one lakh investor complaints are currently pending with it in connection with such schemes, and the matter is sub-judice since long in most of the cases.

 

Moneylife first exposed the lies of SpeakAsia in October 2010 . However, due to inaction by the regulators, the company grew very rapidly. In fact, within a short span of eight months, it claimed to have enrolled over 20 lakh members. While India’s total investor population has fallen to 80 lakh, SpeakAsia managed to lure about 20 lakh people into its get-rich-quick scheme. But nobody really bothered to look into the case until some TV news channels stepped in and put pressure on the government to act.

 

Unfortunately, due to the lack of clarity in regulation and prompt and fast action, SpeakAsia officials, who were present in full force on 16 May 2011, later vanished. Except, the company’s chief operating officer Tarak Bajpai, all others including chief executive Manoj Kumar managed to escape. In fact, the SpeakAsia court cases are not being fought by the company but by some early (beneficiary) members under the banner of All India Speak Asia Panellists Association (AISPA).

 

Another such MLM company exposed by Moneylife is Kerala-based Royal Life. After keeping its shop shut for over two years, the network marketing company has again become active and is luring gullible people to invest in its schemes. Royal Life claimed to be a promotional arm of ALGA Marketing Pvt Ltd, which it said was a “unique and innovative marketing plan.”  Two years ago, Royal Life was found using the picture of Kerala chief minister Oommen Chandy. Currently, there is no image of Mr Chandy now but there are several images of people which the company claims to be some sort of “super achievers”. 

 

Coming back to NMart Retail and Gopal Shekhawat, this MLM also was able to gather over 15 lakh members in a short span. One of the reasons for this phenomenal growth was the use of popular TV stars in the company’s ad (http://www.youtube.com/watch?v=b33IERPzrf4). NMart used Jethalal and Daya, the two popular characters from TV serial ‘Tarak Mehta Ka Oolta Chashma’ in its ad. The use of popular actors from TV serials not only increased the member count for NMart, but also helped it to establish itself as ‘genuine’ retail company.

 

Unfortunately, NMart, its promoters and members fail to understand a simple thing, if it walks like a duck, talks like a duck then it is a duck. NMart seems to be collapsing under its own weight as happens with majority of ‘successful’ MLM schemes.

 

Some of the NMart members were seen claiming that its promoter Gopal Singh Shekhawat is the nephew of Pratibha Patil, former president of India. This was completely false. According to an email received by Moneylife from the President's Office, although both Ms Pati’'s nephew and the promoter of NMart share same name, they are not same person and Gopal Shekhawat, the nephew of Ms Patil is no where related with NMart. The email says, “Shri Gopal Shekhawat, nephew of the President is in Chandrapur near Nagpur. He is a School Teacher and has nothing to do with ‘NMart’. Only the names are similar.”  (http://www.moneylife.in/article/nmart-runs-cis-based-mlm-under-guise-of-a-retail-chain/18593.html )  

 

The question is when there are thousands of network marketing or MLM or ponzi or pyramid companies not only proliferating but also duping lakhs of gullible investors, why are the regulators behaving like the police from an old Bollywood movie. In any old Hindi movie, the police used to be last one to reach at the spot or climax. 

 

Last year, Moneylife Foundation, a non-governmental organisation (NGO) sent a representation to the prime minister, finance minister, finance secretary and governor of the RBI urging them to either completely ban MLM companies and schemes or bring them under the regulation of RBI or SEBI. 

 

Senior officials from investigating agencies have been saying that there are sets of people who move from one place to another floating a new MLM or Ponzi scheme. And yet neither the police nor the regulators do anything to arrest these known culprits. Earlier in February, SEBI decided to share names of over 500 MLM companies and their directors to MCA, so that necessary action can be taken to prevent these companies and persons from floating new business.

 

While the MCA has decided to the publish names of fraudulent MLM firms and the menace these companies create, the real question is why prompt action is not taken by the police and the regulators. One of the problems in this is (and told by several officials, unofficially) is the lack of a complaint. This means unless somebody files a complaint against a MLM company, the police do not initiate any action. However, this needs to be changed and instead of waiting for a formal complaint, the police and regulators like RBI, SEBI or IRDA should initiate suo moto action against MLM or companies that run unauthorised CIS schemes.!