Errant business

It may be difficult for governments to write laws to prevent rogue companies and individuals from rigging up “marketing” schemes to earn money from gullible investors. As the Speak Asia scam showed, a variation of such schemes can even include foreign investment, to give an additional touch of respectability to such plans. This phenomenon wreaks damage in two ways. The first is the problem of compensating the investors, as they claim the government should have been able to block the operators ab initio; the second is the impact on genuine direct selling companies that find the market is in tatters. An example of the former is the ongoing Sahara case, swinging between the Supreme Court and the Securities Appellate Tribunal, where the stakes involved amount to over Rs 17,000 crore for nearly 3 crore investors.

A far more sensible response would be to define clearly what it means to be a direct selling company. Any scheme that falls foul of the regulation can then be hauled up. A large number of companies, which plan to enter the Indian market with a range of products that will expand the choice for consumers far beyond the malls and other brick-and-mortar outlets, but are deterred by the buccaneering spirit of the sector, would derive confidence. Currently, the only law that operates here is the Prize Chits and Money Circulation Schemes Act, which is meant to ban such activities instead of promoting them. The Centre could come up with a model law, therefore, that the state governments can implement. Since the subject straddles Centre-state relations, it will require coordination. The spin-off will be a push for investment in manufacturing that will generate employment, especially among women.

A clean-up along these lines will make it far easier for the clutch of central government agencies, including CEIB, Sebi, MCA and others, to go after pyramid/Ponzi schemes. Since many of the operators demonstrate deep connections with political parties, any strong action against them is otherwise difficult. A straightforward law will block the advantage the operators have — that none of their plans fall foul of any regulatory agency. In the past decade, no agency apart from Sebi has notched any success in prosecuting errant companies. This needs to change.