Gift Chain - Is it legal

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Huge sums of money by being part of a gift chain i.e. you gift a certain amount of money to two people, and then find two people who will enter the chain by gifting you the sum. They in turn will get two more subscribers, and so on. Is this legal 

 
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Lawyer

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Gift schemes and chains are an offence under the Prize Chits and Money Circulation Schemes (Banning) Act of 1978 

 
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Advocate.

Judicial Pronouncements :

The Hon’ble Supreme Court in  Kuriachan Chacko and Ors. Vs. State of Kerla JT2008(7)SC614 has rightly observed as under:
“The promoters of the scheme very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter’ but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money.”

 

 
The Supreme Court had examined this question in State of West Bengal Vs Swapan Kumar AIR 1982 SC 949. The Hon’ble Chief Justice Chandrachud, after taking note of legislative drafting, reshaped and rearranged the definition of `Money Circulation Scheme’, for the sake of clarity as:
“any scheme, (a) for the making of quick or easy money or (b) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.” The court has clearly explained the ingredients, which need to be fulfilled for a scheme to become a money circulation scheme. Thus, any scheme for the making of quick or easy money contingent upon the enrolment of members into the scheme is a money circulation scheme. Similarly, any scheme in which money or any valuable thing is received and a promise is made to return the money on the event of enrolling members into the scheme is also a money circulation scheme.
The Constitutional Validity of the constitutionality of the provision has already been examined and upheld by the Apex Court in Srinivasa Enterprises Vs Union of India AIR 1981 504 SC Justice V.R. Krishna Iyer, observed: “Can you save moths from the fire except by putting out the fatal glow?”.
The Supreme Court has further stated that these types of schemes are prejudicial to the public interest and also adversely affect the efficacy of fiscal and monetary policy. While interpreting the definition of money circulation scheme, one has to look at the mischief, which the legislation has sought to remedy. The Study group headed by Dr. J.S. Raj constituted by the Reserve Bank of India in the year 1974 proposed the legislation. After studying the various schemes which were floated in the country during that time and taking into consideration the impact of such schemes on the economy, the Committee after extensive research and analysis have suggested for a ban on Prize chit and other schemes which were causing a great loss to the economy. A large amount of money that can be used for industrial and developmental activities are wasted on such illegal schemes. The Study group further observed that prize chits or benefit schemes benefit primarily the promoters and do not serve any social purpose. On the contrary, they are prejudicial to the public interest and also adversely affect the efficacy of fiscal and monetary policy. There has also been a public clamour for banning of such schemes; this stems largely from the malpractices indulged in by the promoters and also the possible exploitation of such schemes by unscrupulous elements to their own advantage. We are, therefore, of the view that the conduct of prize chits or benefit schemes by whatever name called should be totally banned in the larger interests of the public.
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. The Hon’ble High Court further observed that the event is enrollment of new members; the commission received is linked 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 Madras High Court 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. Apart from that, the MLM results in exploitation of personal influence of each and every distributor or his close relative. If a Superior officer or his ward involved in MLM, the subordinates are forced to become members in the chain”.

 Brief overview of the Prize Chits and Money Circulation Schemes (Banning) Act 1978:

   Section 2 is legislative dictionary and defines certain terms. The phrase `Money Circulation Scheme’ is defined in Clause (c) of Section 2.
   Section 3 bans money circulation schemes or enrolment as member to any such scheme or participation in such scheme.     
   Sections 4 and 5 are penal provisions and prescribe punishment.
   Section 6 deals with offences committed by Companies.         
Section 7 authorizes Police Officer not below the rank of officer in charge of a police station to exercise power to enter and search premises and to seize things used for such scheme. 
Section 8 provides for forfeiture of newspaper and publication containing money circulation scheme.
 Section 9 declares that no Court inferior to the Court of Chief Metropolitan Magistrate or Chief Judicial Magistrate shall try any offence punishable under the Act.
  All offences punishable under the Act have been made cognizable under Section 10.
   Section 11 grants exemption from the operation of the Act to certain money circulation schemes. From the perusal of the above provisions, it is clear that the Act prohibits `money circulation scheme’. Further, the Preamble of 1978 Act declares that it has been enacted “to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith and incidental thereto”.
 
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advocate

Dear Pankaj Sharma,

The Scheme is illegal .The case law cited by Ave.Shree is correct .The case law will sove your querry.

 
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