Alarmed by the rising number of fraudulent multi-level marketing and pyramid schemes, which have caused loss of thousands of crores of rupees to ordinary investors, the Government plans to add more teeth to the laws regulating such ventures.
In a bid to prevent Saradha Group-like scams from recurring, it is proposed to significantly increase the punishment for such offences. Offenders, if convicted, could now face up to 10 years in prison, as well as pay fines up to twice the amount collected.
It is also proposed to make launching of any ‘collective investment’ scheme without the approval of the Securities and Exchange Board of India a punishable offence under general laws. The local police is likely to be empowered to take note of such an offence.
A collective investment scheme is officially defined as any arrangement where contributions or payments made by the investors are pooled together and utilised for investment in any produce or property (movable or immovable) with a view to receiving profits or earning income from the property.
The changes will be made possible by suitably amending the Prize Chits and Circulation Schemes (Banning) Act of 1978.
“The aim is to curb multi-level marketing schemes for goods and services, which are also known as pyramid schemes or Ponzi schemes,” a senior government official told Business Line .
The proposal is to introduce a new section in the Act to include pyramid schemes within its ambit. This will make the act of offering incentives to persons to join pyramid marketing schemes an offence. At present, violation of the Act’s provisions is punishable by imprisonment up to three years. Though the Act covers prize chits and money circulation schemes, there is no specific reference to multi-level marketing schemes for goods and services. The modus operandi of such a scheme starts with appointing selling agents. These agents pay a certain registration amount. They further appoint more people and collect fees from them.
Agent remuneration
The remuneration paid to the selling agents consists of a share in the registration fees collected from the newer ones. Such schemes are known as pyramid schemes, where only select promoters at the top of the pyramid derive the benefit.
The problem begins when the chain of creating new agents breaks. A large number of selling agents at the bottom of the pyramid suffer losses and lose their money. Normally, promoters of such schemes get away from the ambit of the Prize Chits and Money Circulation (Banning) Act simply by saying that these schemes are for selling goods and not for money circulation.
There are many multi-level marketing schemes and collective investment schemes operating in different States. According to the official, the Serious Fraud Investigation Office may be assigned the task of collecting information about multi-level marketing activities in different States, and empowered to issue show-cause notices, lead co-ordinated efforts and lodge information with the State police.