Pyramid Schemes in india legality

This query is : Resolved 

19 November 2010

Whether Pyramid Schemes/Chain mareketiing are legal in India and Whether there are specific laws governing such schemes in india? Please enlighten on the issue.


A V Vishal (Expert)
19 November 2010

They are illegal under different laws enacted by different states in India.

Sri Vijayan.A (Expert)
19 November 2010

However, some MLMs found their existence using the loop holes in the law.

PramodKumar (Querist)
19 November 2010

My dear Vishal thanks for the enlightening on the issue. Can you provide the list of various acts/laws enacted in various states in India or at least particularly in Tamil Nadu and other Southern states? Also if you know whether there are any guidelines of RBI on such schemes particulalry where such schemes are floated in India by multinational Companies?

A V Vishal (Expert)
19 November 2010

The specific provisions under Prize Chits and Money Circulation Schemes (Banning) Act 1978 read with relevant sections under cheating Section 420 of IPC, Drugs and Cosmetics Act 1940, Drugs and Magic Remedies Objectionable (Advertisement) Act, 1954, A.P. Financial Depositors Protection Act 1999 etc, are abundantly available to be invoked and effectively check and prevent progress of such dubious floated companies. Further it is important to note that Andhra Pradesh is the first state to Ban Money Circulation Schemes in the year 1965. Much later on Central Government bought the Central Act in the year 1978 banning Money circulation Schemes in India through an act called Prize Chits and Money Circulation Schemes (Banning) Act 1978.
Recently, The Hon’ble High Court of Madras dismissing the petition filed by FMCG Marketing Pvt. Ltd. v/s Union of India, Chief Secretary and Director General of Police Govt. of Tamilnadu (Writ Petition)with reference to context observed in its landmark judgment that under promise or expectation of getting huge commission (easy or quick money) the public is lured to invest more money in such schemes and that it is only an imaginary profit. Further, the Hon’ble High Court observed that the event is enrollment of new members, the commission received is relative to such enrollment of new members into the scheme. Thus the so-called Multi-level marketing, though called by a very attractive name squarely falls within the definition of “Money Circulation Scheme” under the Act. Hence it is prohibited by the Act”. The High Court came heavily on the Pricing policy of these companies. It further observed that “this MLM scheme creates a chain of customers and the long and unbroken chain ensures a large amount of easy money. The shorter and missing links in the chain results in earning lesser commission. Secondly, the person concerned does not get the value of money he pays. Thirdly, the companies collect service charges on the sale of goods. No service charge can be collected while the goods are sold.

adv. rajeev ( rajoo ) (Expert)
20 November 2010

It is illegal or legal chain marketing is going on. So many who has invested in such schemes have lost their money.

s.subramanian (Expert)
20 November 2010

Mr.Vishal is right.

Ajay Bansal (Expert)
20 November 2010


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