Kerala High Court
D.Gunasekar vs State Of Kerala on 17 December, 2012
Author: P.Bhavadasan
Bench: P.Bhavadasan
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR.JUSTICE P.BHAVADASAN
MONDAY, THE 17TH DAY OF DECEMBER 2012/26TH AGRAHAYANA 1934
Bail Appl..No. 8128 of 2012 ()
------------------------------
FIR NO.730/CR/EOW-II/11/9/12, EOW-II, CBCID, PALAGAT, KERALA.
...............
PETITIONER/ACCUSED:
------------------------------------
D.GUNASEKAR, SON OF DEIVENAYAGAM,
AGED ABOUT 48 YEARS, DIRECTOR,
MONA VIE INDIA ENTERPRISES PRIVATE LIMITED,
2/41 RESOLUTE TOWERS, M.C. NICHOLS ROAD,
2ND LANE, CHETPET, CHENNAI - 600 031.
BY SRI.M.K.DAMODARAN, SENIOR ADVOCATE.
ADV. SRI.MADHU RADHAKRISHNAN.
RESPONDENTS/STATE AND COMPLAINANT:
-----------------------------------------------------------------
1. STATE OF KERALA,
REPRESENTED BY THE PUBLIC PROSECUTOR,
HIGH COURT OF KERALA, ERNAKULAM, COCHIN - 31.
2. MADHU NAIR,
DY. SUPERINTENDENT OF POLICE,
EOW- II, CBCID, PALAGAT - 678 001, KERALA.
R1 BY SRI.K.I. ABDUL RASHEED, ADDL. DGP.
THIS BAIL APPLICATION HAVING COME UP FOR ADMISSION
ON 19-11-2012, ALONG WITH BA. 8134 OF 2012, THE COURT
ON 17-12-2012 PASSED THE FOLLOWING:
rs.
P. BHAVADASAN, J.
- - - - - - - - - - - - - - - - - - - - - - - - -
B.A. Nos. 8128 & 8134 of 2012
- - - - - - - - - - - - - - - - - - - - - - - - -
Dated this the 17th day of December, 2012.
ORDER
Jittered, jolted and panic-stricken by the registration of the two crimes, namely, Crime No. 577 of 2012 of Kozhikode Kasba Police Station and Crime No.730/CR/EOW-II/9/12, EOW-II,CBCID, Palaghat against Mona Vie India Enterprises Private Limited for offence under Section 420 I.P.C. and for the offences punishable under Sections 4, 5 and 6 of the Prize Chits and Money Circulation Scheme (Banning) Act 1978, the Director of the said concern has sought pre-arrest bail from this court.
2. According to the petitioner, he is the Director of Board of Directors of Mona Vie India Enterprises Private Limited, hereinafter referred to as the 'Company'. It is a subsidiary of Mona Vie LLC, incorporated in U.S.A. The Company stationed at U.S.A. thought of extending its market to India also. That was in the year 2007. The B.A.8128 & 8134/2012. 2 Company therefore proceeded to obtain necessary sanction from the concerned authorities and they did obtain the necessary license, registration etc. In India, the Company markets food supplements under the trade name Mona Vie. According to the petitioner, the Company conducts sale of goods through relationship marketing or Multi Level Marking Method, which falls outside the ambit of Money Circulation Scheme as defined under Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act (hereinafter referred to as Act 43 of 1978). Annexure A1 guidelines have been issued by the authorities concerned under which any company or concern as the case may be can carry on business through direct selling following the norms laid down therein. Annexure A2 is the permission issued by the first respondent to the Company to carry on the business in accordance with the guidelines in pursuance to an application preferred by the Company enclosing the complete details of the mode of sale of commodities in India. Currently, the Company has its Head Office in B.A.8128 & 8134/2012. 3 Chennai. It is claimed that the Company employs more than 100 employees directly and 500 indirectly and has 1.5 Lakhs of distributors in India and the turn over is nearly Rs.75 Crores.
3. It is claimed that the Company focuses on vast personal relationship wherein individuals apply for distributorship and on getting distributorship, they are entitled to get the goods for wholesale price and sell them at retail price. Any bonus or commission paid to such distributors depend upon the volume of sales and is not dependent upon the recruitment of distributors either by the Company or based on the sponsorship of the distributor concerned. Of course, the Company also adopts a policy whereby a distributor can sponsor other persons as distributors and if the Company accepts the application of the latter to be appointed as distributor, for the sales carried on by that person also the distributor who sponsored him gets benefit out of such sales. But it is emphasized that any additional benefit given to a B.A.8128 & 8134/2012. 4 distributor would depend upon the sales turn over and nothing else.
4. Referring to the FIR in the two cases, it is contended that the allegations are totally insufficient to constitute offence under Section 420 I.P.C. or Sections 4, 5 and 6 of Act 43 of 1978 and the attempt of the authority is to simply harass and humiliate the Company with ulterior motive. It is also contended that since the Company had filed applications before the authorities concerned enclosing its mode of business and method of sales of products in India and the said authority having accepted the applications of the Company and having given permission to carry on business in India in accordance with the guidelines, unless it is shown that the guidelines are violated, registration of the crimes against the Company is quite unwarranted and illegal. The ingredients necessary to attract the definition under Section 2(c) of Act 43 of 1978 are conspicuously absent and there is no allegation in the FIS registered that the Company has deliberately or B.A.8128 & 8134/2012. 5 wilfully violated any of the guidelines shown in Annexure A. When police authorities sought to interfere with the day to day functioning of the Company by freezing its Bank accounts etc., the Company was constrained to approach this court by way of W.P.(C) No.24979 of 2012 seeking necessary reliefs. In B.A. 8134 of 2012, it is pointed out that as on the date of the filing of the petition, though the petitioner has not been made an accused, he apprehends that the Company and he would be made accused soon in the crime and therefore he is constrained to approach this court.
5. It is finally pointed out that the Company is functioning strictly in terms of the law and the guidelines produced as Annexure A and it is asserted that the commission or bonus paid to the distributors in addition to the benefit they get out of direct sales is based on the sales turn over and not on the basis of recruitment of distributors. Therefore, it is contended that the registration B.A.8128 & 8134/2012. 6 of crime is illegal and at any rate, the petitioner is entitled to pre-arrest bail.
6. Learned Additional D.G.P. appearing for the respondents on the other hand contended that it is clear from a close reading of the brochure brought out by the company and the speeches in the classes conducted by its distributors that the Company is resorting to a money chain scheme in a disguised form. Though apparently it would appear that the bonus and commissions are paid to the distributors appointed by the Company is out of the sale proceeds, on a close scrutiny, it can be seen that the payment of bonus or commission is based on recruitment of distributors. It is not strictly multi level marketing that is being done, but the system followed is an objectionable pyramid scheme, which is admittedly an illegal method falling within the ambit of Act 43 of 1978. At any rate, affairs of the Company needs to be probed into and the Company cannot say that it shall not be proceeded against. B.A.8128 & 8134/2012. 7
7. Learned Senior Counsel Shri.M.K.Damodaran, appearing for the petitioner in these two applications very vehemently contended that the norms having been issued by the State and its authorities having permitted the petitioner to conduct business in terms of the application filed before the authorities enclosing the method of marketing followed by the Company, if at all there is any violation of the conditions, it is only the State which can initiate action and the police force cannot on its own register a crime. Learned Senior Counsel went on to point out that the two crimes have been registered on the basis of information gathered from the internet You Tube and the other is based on a newspaper report. It is significant, according to the learned Senior Counsel, to notice that no complaints as such have been filed before the police which would indicate that the Company is doing an illegal act. According to the learned counsel, in order to attract the definition under Section 2(c), two conditions will have to be satisfied. They are, (i) making of quick and easy money and B.A.8128 & 8134/2012. 8
(ii) it is dependent upon an event or contingency relative or applicable to the enrollment of members to the scheme. Relying on the decision reported in Sanchita Investments v. State of W.B. (AIR 1981 Calcutta 157), which was approved by the Apex Court in the decision reported in State of West Bengal v. Swapan Kumar Guha ((1982) 1 SCC 561), learned counsel contended that making of quick or easy money using one's own potential and ability is no crime. It becomes a crime only when such amassment of wealth is dependent upon the contingencies made mention of in Section 2(c) of Act 43 of 1978.
8. Learned Senior Counsel went on to contend that the Company is conducting its business in India strictly in terms of Annexure A1 guidelines and in either of the crimes, there is nothing to show that any particular Clause in the guideline produced as Annexure A1 has been violated, whereby proceedings could be initiated against the Company and the petitioner. According to the learned Senior Counsel, it is a gross misuse of the powers conferred B.A.8128 & 8134/2012. 9 on police and it needs to be deprecated. At any rate, according to the learned counsel, in the writ petition filed by the Company for relief, there was an undertaking by the Government Pleader on behalf of the respondents that there will be no interference with the business activities of Mona Vie India Pvt. Ltd. Since the petitioner apprehends arrest, it is pointed out that he may be granted pre-arrest bail.
9. Shri. K.I. Abdul Rasheed, learned Additional D.G.P., very vehemently opposed the petitions. He referred to the brochure brought out by the Company and pointed out that the Company engages in two types of sales. One method is whereby a person applies for distributorship and on acceptance of his application by the Company and appointing him as a distributor, he is entitled to buy products of the Company at wholesale price and sell it at retail price. The difference belongs to him. That method of sale may not be objectionable. But the learned Addl.D.G.P. contended that the matter does not stop there. The Company offers various types of incentives to the B.A.8128 & 8134/2012. 10 distributors prompting them to sponsor distributors under them and a close scrutiny of the scheme envisaged by the Company would clearly show that the distributor at the top under whom a team works gets benefits based on the recruitment and not on the volume of sales. The claim of the Company that bonus, commission and additional financial benefits are conferred on the distributors out of the sale proceeds is incorrect. In order to remain as an active distributor, the person concerned will have to periodically buy products of the company irrespective of whether he is able to sell it or not. His earning of bonus and other financial benefits offered by the Company, as would be clear from the tree depicted in the brochure issued by the Company, would depend upon the distributors recruited by him. This is the essential ingredient of Section 2(c) of Act 43 of 1978 and the mode of activity of the Company is clearly illegal.
10. Well, this court has to remind itself that it is dealing with applications for pre-arrest bail. The scope of B.A.8128 & 8134/2012. 11 enquiry is considerably limited. It may not be possible to embark upon an in depth enquiry as to whether the activities carried on by the company are illegal or in total violation of Annexure A1 guidelines. What this court at this point of time concerned with is only whether there are prima facie materials to show that the Company and its directors have indulged in such activities which would attract penal provisions.
11. On going through the petitions and after hearing the learned counsel for the petitioner and the learned Addl.D.G.P., the issue appears to be that while the petitioner's counsel would contend that the sales conducted by the Company through its distributors and the earnings made by the distributors are perfectly legal, the Addl.D.G.P. would say otherwise.
12. Multi Level Marketing has become popular. It has been viewed as a way in which sales force earns commission not only for sale of the products they personally generate, but also for the sales of other people they recruit B.A.8128 & 8134/2012. 12 and bring into the business, which create a down line of distributors and a hierarchy of multiple levels of compensation. When a distributor who manages to have another distributor appointed or recruited through him, the latter person is said to be down line. So long as the earnings as commission or bonus or whatever form it may be is depended upon the volume of sales effected by the sales force, there is nothing wrong with the activity. But when the earnings or commission is dependent upon the recruitment of personnel and not on the basis of business generated, then it takes a different colour and forms as an activity which attracts the provisions of Act 43 of 1978.
13. According to the scheme of the Company in the instant case, the distributor at the first level sponsors distributors below him, who in turn sponsors distributors forming a multi level system for the sale of the products of the Company. In doing so, it is claimed by the Company that in assessing the sales effected by each distributor at different levels, they are divided into two teams for the B.A.8128 & 8134/2012. 13 purpose of calculating the level of sales effected for the purpose of earning their income. The Company however ensures that the distributors have to do a minimum business and they cannot earn income only by virtue of them being team members. The Company does not levy any fees or remuneration or any charges for appointment of distributors. An independent distributor appointed by Mona Vie is expected to buy and sell goods worth Rs.4,150/- within a span of four weeks. Those who fail to achieve this target ceased to be distributors. There is no obligation for a distributor to sponsor distributors under him. It is purely voluntary and by virtue of the mere recruitment of distributors under sponsorship by a distributor, the sponsor does not benefit thereby unless of course sales are effected by the persons who are sponsored by the sponsorer.
14. While multi level marketing system is accepted as legal, what is treated illegal is what is usually known as a pyramid scheme. Off late, the Companies have devised methods to conceal the real nature of activity B.A.8128 & 8134/2012. 14 carried on by them and they would make every attempt to give their system of marketing a multi level marketing label. It is often difficult to distinguish between a multi level marketing scheme and a pyramid scheme. Useful material is available from the guide from NCL's Fraud Center, which shows the difference as follows:
Multi-Level Marketing Plan Pyramid Scheme Business Focus Sales of products and services to Recruiting new members.
end-users (NOT other distributors) Profits Primarily based on the sales of Primarily membership fees paid products and services by the by new recruits or "bonuses" for distributor. Perhaps some meeting recruitment goals. percentage of income from sales by downline recruits.
Products or Household goods or services that Often a thinly-veiled and Services for sale consumers typically use in poorly-made "miracle" product everyday life. Goods and Services or service that few consumers are priced competitively with want or need. Merchandise is traditional retail outlets. typically priced well above comparable products sold in retail stores.
Start-up Costs Low or none at all. Substantial, often involving recurring "membership" fees or expensive "educational", "training", or "advertising"
materials that can easily be found free of charge elsewhere.
Support System Low-pressure, eager to answer High pressure, with a constant questions about the business and focus on recruiting new members provide detailed information in of the Scheme. Hard to reach writing upon request, such as a when questions arise. business and marketing plan.
B.A.8128 & 8134/2012. 15 Multi-Level Marketing Plan Pyramid Scheme Employee/Custo Eager to provide references who Unwilling or unable to provide mer References provide honest evaluations of the references who themselves viability of the MLM plan and the attempt to recruit a caller. work necessary to succeed.
Sales Pitch Provides detailed information Involves promises of large profits about the work involved. Offers with minimal work, often in no promise of easy riches. Does high-pressure seminal not use high-pressure sales tactics. environments. Uses phrases like "limited time offer." "can.t miss opportunity," and "guaranteed income."
Info Available? Has a good report with the Better Not registered with the BBB or Business Bureau (BBB) and local Chamber of Commerce. consumer protection agencies and Information about the company is registered with the local is scarce or limited to a Web site.
Chamber of Commerce. Provides
detailed information on their Wes
site AND provides hard copies of
annual or quarterly reports,
business plans, and marketing
materials on demand, for little or
no charge.
Merchandise Buys back unsold merchandise at Refuses to buy back merchandise
Buy-Back 90% or more of purchase price. at all or buys back at
significantly less than the
wholesale price.
Getting out of Easily accomplished and Difficult, with high-pressure
the Business accompanied by a reasonable tactics used to keep participants
merchandise buy-back program. in the scheme, possibly
accompanied by pitches to spend
more money on "training" to
improve performance.
How Long the Sustainable, based on repeat sales Doomed to collapse Business Will of products and service Last How Likely Profits are based on time and effort The vast majority of participants you'll Profit devoted to selling goods or lose money.
services to consumers.
B.A.8128 & 8134/2012. 16
Multi-Level Marketing Plan Pyramid Scheme
The Bottom It's a legal business opportunity Its illegal. Don't waste your
Line that may or may not be a good money.
fit for you.
Useful material is also available from the article "Illegal Pyramid love" by Stanley Tan. The author makes use of two types of pyramids to explain the position. According to the author, pyramid schemes as such are not objectionable. But the way in which those pyramid schemes are designed, implemented and operated make all the difference. For easy understanding, the author depicts two pyramids, which are as follows:
B.A.8128 & 8134/2012. 17
In both the systems, according to the learned author, the price paid by the consumer goes up the pyramid. In both the systems, the value for the money spent by the consumer travels downwards. In the pyramid shown on the right side where the value for the money spend percolate down, and reaches the ultimate consumer, that system is good and legal. On the other hand when the products of the Company are priced so high and the consumer purchasing the commodity does not get the value for his money, it becomes an illegal transaction which is typical of illegal pyramid. In the illegal pyramid, according to the learned author, though money flows upwards, the value benefits does not go down to the people at the lowest level. In such a kind of scheme, people at the top receive huge amount of money from the membership recruitment below and those at the bottom receive almost nothing.
15. According to Jeff Ernsthausen, writing in Harpers' Magazine, such companies can "create incentives for sales reps to focus on inventory sales to these recruits, B.A.8128 & 8134/2012. 18 rather than on sales to end consumers....the distinction between a legitimate business and pyramid scheme hinges on whether these commissions come mainly from retail sales to final consumers or inventory sales to other distributors." It has been noticed that Companies may resort to such methods of MLM, ostensibly to sell over priced goods and has a thin cloak of legitimacy, while their members are driven to recruit even more people to the MLM, effectively turning these programs into pyramid schemes. The article "10 Big Lies of Multi-Level Marketing"
by Robert Fitz Patrick says that MLM Business model as it is practiced by most companies is a marketplace hoax. In those cases, the business is primarily a scheme to continuously enroll distributors and little product is ever retailed to consumers who are not also enrolled as distributors. According to the author, for everyone who invests in MLM turns out to be a losing proposition. According to the author most of the sales volume is accounted for by the purchases of hopeful new distributors B.A.8128 & 8134/2012. 19 who are actually paying the price of admission to a business they will soon abandon.
"MLM assumes infinite market and virgin market neither of which in fact exits. The MLM with its endless chain of recruitment is inherently flawed, unfair and deceptive. It is beneficial to the people at the top but detrimental to new recruits.
16. Bearing the above factors in mind, the claim of the company in the present case may be looked into. The brochure issued by the company is available in the CD submitted by the Additional D.G.P. It makes mention of 8 ways for making their income. They are :
i) Direct sales.
ii) Top Retailers Bonus.
iii) First Order Bonuses
iv) Star Maker Bonus
v) Rank Advancement Bonus
vi) Team Bonus
vii) Growth Bonus
viii) Executive Check Match Bonus.
B.A.8128 & 8134/2012. 20
17. As per the brochure, a distributor would become a top retailer depending upon the PV he earns. The brochure also shows distributionship tree.
18. It is true that the Company does not levy any fee or remuneration for granting distributorship of its products. But that may not by itself decisive. One may have to see as to what happens in reality.
19. The products of the Company are exorbitantly priced. Normally, the products are not within the common man's reach. One may remember that the Company engages in the sale of nutritional products. Of course, the Company may say that there is no compulsion for anyone to purchase the product and it is purely voluntary. But, if one finds that the scheme adopted is the illegal pyramid scheme, price of the product may have relevance. One of the criterion to determine an illegal pyramid scheme is to see whether the benefits reaches the customer lower down and whether the products are customer oriented. If on the other hand, the product is attractive only for the distributor, B.A.8128 & 8134/2012. 21 the scheme becomes an illegal pyramid. As long as a single distributor carries on the business, there may not be much of an issue. But when by sponsorship, independent distributors are appointed, they are usually called down line.
20. In a legally run MLM Scheme, compensation and bonus etc., is generated from the sales by the persons in the line. But then the last person in the line is also benefited. In a perfect system, the possibility of a down line man going up the hierarchy cannot be ruled out. It may not be so in the case of illegal pyramid scheme. There the chunk of the benefits is taken by the person at the top and a pittance is thrown down line and there may be instances when the last person may not receive anything at all.
21. It is sarcastically said that in a typical MLM system, the more you invest, the more you lose and the most fortunate are those who do not join at all.
22. Quite a few of the MLM schemes may look attractive and compel one to join the scheme. But hidden B.A.8128 & 8134/2012. 22 behind them may be a pyramid scheme, which is not only illegal but detrimental to the person who joins the scheme. In fact, in each case it will be useful to tear the veil and see the actual modus operandi.
23. The question as to how one is to distinguish between a genuine MLM and pyramid scheme is a vexed one. Some hints have already been referred to. Ostensibly the scheme of the Company may look innocuous and may appear as being carried on through the accepted norms of marketing and earning income. But applying the guidelines already mentioned, it may be possible to ascertain the true nature of the scheme. A true and genuine MLM is a customer oriented scheme. It is based on the quantum of sales. There is no recruitment compulsion to gain bonus or compensation. Usually, goods marketed are common household ones and in common usage with competitive pricing. In such cases, the result is to be generated by sales or the benefits depend upon sales. In such case, the products are repeatedly used by the customers. B.A.8128 & 8134/2012. 23
24. In a pyramid scheme, there is a great emphasis on recruitment down line and the returns depend upon to a large extent the size of the down line. In an illegal pyramid scheme, the man at the top stands to benefit on the efforts put in by the persons below him. It can so happen as has already been stated that the person at the lower level may be at the receiving end. Most of the benefits are taken by people at the top.
25. In most of the pyramid schemes one can see the necessity of the distributor to buy products periodically or for certain price and even if he is unable to sell the same, the Company does not take it back.
26. Modern illegal pyramid scheme ensure that they do not on the face of it appear to pay bonus or commission on the basis of recruitment to camouflage those payments as if they are generated from sales. In pyramid scheme, it is so modulated that commissions are funded from the purchases made by persons who need to have a B.A.8128 & 8134/2012. 24 right to participate in the scheme. Thus, payments are infact made by a person to make his own profit.
27. Another test usually applied is to see whether the ultimate customer gets value for the price he pays for the product. In a perfect system, price is modulated keeping in view the customer and trying to ensure that the public should purchase the commodity. On the other hand, in a pyramid scheme, commodity is high priced, and the distributors concerned are compelled to purchase the products to stay in the system. In such a system, there is no customer oriented sales and ultimately the system has necessarily to collapse.
28. Keeping in view the above aspects, one may now look at the scheme envisaged by the Mona Vie company. Ostensibly there is no necessity or compulsion to pay any fee or subscription to obtain distributorship of the company. All that one has to do is one has to apply for distributorship with necessary documents. Once the Company accepts his application and appoints him as B.A.8128 & 8134/2012. 25 distributor, he has necessarily to buy products worth a minimum value within a specified time and he has to continue to do so to stay in the business. Such a distributor gets commodities at a wholesale price and he can sell sell it at retail price. So long as it is confined to this single level, there may not be any objection. But the real issue comes to light in multi level marketing system. Going by the norms of the Company, on actual analysis the bonus and commission to be earned by a distributor to a great extent is dependent upon the recruitment of distributors. Even though no remuneration or fee is payable at the time of admission, one has to remember that such sponsored distributor will have to buy the products at minimum value within a specified period. In order to gain benefit, a distributor necessarily has to find out and sponsor and ensure appointment of distributors under him so as to benefit from the scheme. As soon as a distributor is sponsored and appointed and he buys products worth minimum value enabling the sponsorer to earn PV which is B.A.8128 & 8134/2012. 26 the basis for calculating bonus or commission and benefits to the distributor begin to accrue. In fact it would appear that it is the purchase by the distributor under a person that qualifies him to get additional benefits. In order to remain active, a distributor has to periodically purchase articles. Thus, in order to get benefits and other facilities from the Company, it becomes necessary for a person who is appointed as a distributor to sponsor and get appointed other persons as distributors. On a look at the literature issued by the Company, it becomes clear that in order to get benefits, recruitment is necessary and the downline army has to keep on increasing, and remember, each person down the line has to purchase commodities worth minimum price within a specified period to continue as a distributor.
29. If one looks at the price of the commodities, one cannot say that it is customer oriented. It does not appear that due regard has been given to the customers. The price of the commodities are as follows: B.A.8128 & 8134/2012. 27
1) Monavie Essential Juice, 750 ML, 1 Bottle, MRP Rs.2175/-.
2) Monavie Pulse Juice, 750 ML, 1 Bottle, MRP Rs.2275/-.
3) EMV Energy Drink, 250 ML, 1 Bottle, MRP Rs.240/-
4) M.nun Powder, 28 Sticky Packets, 1 Box, MRP Rs.4900/-
5) RVL Shake Mix, 53 Gms, 1 Packet, MRP Rs.200/-
6) RVL Protein Powder, 500 Gms., 1 Bottle, MRP Rs.1725/-
7) One Oat Meal, 1 Packet, MRP Rs.199/-.
30. In fact, a close scrutiny of the Scheme would indicate that the distributor of Mona Vie involves auto shopping and a distributor can remain active only by buying products from the Company periodically. Therefore, the claim of the Company that the bonus and commission etc. are generated out of the sales turn over of the Company to general public may not wholly true.
31. It will not be out of place at this juncture to refer to the writ petition filed by the Company before this court. In W.P.(C)24979 of 2012, the petitioner had tabulated the provisions of the guidelines and also the mode adopted by the petitioner Company, thereby contending for B.A.8128 & 8134/2012. 28 the position that the business that is being carried on by the Company is purely in accordance with the guidelines and in accordance with law. Finally, the reliefs sought for, so far as relevant read as follows:
"a) Restrain the 2nd, 3rd, and 4th respondents from in any manner by themselves or through others, from interfering with the lawful business activities of the petitioner Company during the pendency of the writ petition;
b) stay operation of letter dated 4.12.2012 freezing the Bank account of the petitioner viz., Bank Account No.138-099338 - 003 (IFSO Code HSBC06000043) with the Honkong and Shanghai Banking Corporation Limited) Rajalakshmi Palace, No.43, 1 Main Road, Adyar Branch, Account Chennai and other bank accounts of the petitioner.
c) Permit the petitioner to operate Account No. 138-099338 - 003 (IFSO Code HSBC06000043) with the Honkong and Shanghai Banking Corporation Limited) Rajalakshmi Palace, No.43, 1 Main Road, Adyar Branch, Account Chennai, for the purpose of (1) Payment of all taxes, including Income Tax, Service Tax, Customs duty, CST and B.A.8128 & 8134/2012. 29 VAT, (2) Salary and other incentives/benefits to employees of the petitioner including Provident Fund, Gratuity etc., (3) Lease Rentals for offices/warehouses etc. taken on lease by the petitioner, and (4) payment to suppliers/vendors during the pendency of the writ petition."
Going by the allegations and the nature of the reliefs sought for in the writ petition, it is evident that the issue as to whether the Company is conducting its business in terms of the guidelines or on the basis of an illegal pyramid scheme will necessarily arise for consideration. Since the said issue directly arises for consideration in the writ petition, a further probe into this aspect of the matter is not being resorted to in this proceedings where scope of enquiry is limited.
32. True, the Company does not insist that a distributor appointed should sponsor distributors. The allurement offered by the Company through its advertisements and other means makes it extremely B.A.8128 & 8134/2012. 30 difficult for the gullible public to resist. Carried away by the claim of the Company that money making is easy, people flock for joining as distributors.
33. Modern pyramid scheme generally do not blatantly base commission on outright payment of fees, but instead try to disguise those payments as if they are based on sales of goods or service. While sale of goods or service normally generate commission in a system primarily funded by such purchases, in fact those commissions are funded by purchases made to obtain certain rights to participate in the scheme. Each individual who profits therefore does so primarily from the payments of others who are themselves making payment in order to obtain their own profit. The most common means employed to achieve this goal is to require a certain level of minimum purchase to qualify for commission.
34. In the case of the Company on hand also, distributors in the upline earn commission of purchase or sales by the distributors below. As already noticed, each B.A.8128 & 8134/2012. 31 distributor in order to remain active, will have to buy products of minimum value periodically. The claims made by the Company regarding its products are not clinically or otherwise established.
35. This court is not forgetting the fact that the Scheme was presented for approval to certain authorities and they have all granted permission to do business in accordance with the issued guidelines. It is significant to notice that none of the authorities have actually approved the scheme or given consent to the same. But they have only observed that the Company can carry on its business in terms of the guidelines. Going by the allegations found in the FIR in these cases, it would appear that the investigating agency is of the view that there is violation of Clause 5 of the guidelines. Going by the manner in which the commission and bonus are distributed and the basis on which commission and bonus are quantified, it cannot be said that the method is above board. At any rate, recruitment of distributors had a significant role to play in B.A.8128 & 8134/2012. 32 the said exercise. Under such circumstances, if the investigating agency has formed an opinion that illegal activity is being carried on and decides to probe into the issue, they cannot be found fault with.
36. Learned Addl.D.G.P. relied on a decisions reported in Kuriachan Chacko v. State of Kerala (2008 (3) KHC 155) and also the decision reported in Dr.Harish Babu Maddineni v. State of Kerala (2011(4) K.HC 771) and contended that the procedure adopted by the Company in quantifying the distributor's commission and bonus and other such incentives squarely fall within the definition of money circulation scheme.
37. In the decision reported Kuriachan Chacko's case (supra), reliance was placed on the following observation of the Apex Court:
"The scheme provides of (i) making of quick or easy money, and (ii) it is dependent upon an event or contingency relative or applicable to the enrolment of members into the scheme. As observed by us, a member would be entitled to B.A.8128 & 8134/2012. 33 doubt amount only after his enrolment, additional 14 members are enrolled in the scheme. The second ingredient, namely, such payment of money is dependent on the "event or contingency relative or applicable to the enrolment of members into the scheme" is thus very much present. Swapan Kumar Guha, therefore, in our considered opinion, does not apply and carry the case of the accused further. It was next contended that there is no obligation on the part of the unit holder to enlist/enroll more members into the scheme and, therefore, the scheme does not attract S.2(c). The contention has no force. S.2(c) no where provides that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the Act would apply. The second does not provide for positive or dominant role to be played by a member of the scheme. In our opinion, the requirement of law is "an event or contingency relative or applicable to the enrolment of members into the scheme" and nothing more. The plain language of the section does not insist that such enrolment of members must be by the members already enrolled. It is impossible to B.A.8128 & 8134/2012. 34 read into the statutory provision such requirement which is not stipulated by Parliament. Upholding of the argument of the learned counsel would result in rewriting of the section, which is certainly not permissible in our constitutional system. The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrolment of the members into the scheme. It is immaterial by whom such emembers are enrolled. It may be by members, by promoters or their agents or by gullible sections of the society suo motu (by themselves). The sole consideration is that payment of money must be dependent on an even or contingency relative or applicable to the enrolment of more persons into the scheme, nothing more, though nothing less. In the present case, the second ingredient is very much present."
38. In the decision reported in Dr.Harish Babu Maddineni's case (supra) reliance was placed on the following passage:
B.A.8128 & 8134/2012. 35
"In the transaction or scheme involved in the present case, a person becomes a member or purchasing certain products supplied by the company. On such purchase, the purchaser becomes a member. In other persons are enrolled at the instance of a member, he gets commission. It acts as a chain. The company makes quick or easy money. Likewise, the members enrolled by the company also make quick or easy money. Making of quick or easy money by the Company or the members is referable to an event or contingency relative or applicable to the enrollment of members into the scheme. That the company supplies products while receiving money, by itself, would not take a scheme out of the definition of "money circulation scheme." It is not a simple sale and purchase. The process of sale and purchase does not end with that event. The relationship between the seller and purchaser continues and the purchaser continued to get commission from the seller, provided the purchaser is instrumental to the enrollment of new members in the scheme. The liability of the seller of the products does not end with the delivery of the said products. The B.A.8128 & 8134/2012. 36 liability of the seller to pay commission to the purchaser continues even after delivery of the products. The rights and the liabilities are created not by the sale of the products alone, but by enrolling the purchaser as a member and the purchaser continuing to be instrumental for enrolling new members. May be, a particular purchaser may not enroll new members. He may not get commission also. That by itself is not decisive in considering whether the scheme is a money circulation scheme or not. For the aforesaid reasons and in the light of the decisions mentioned above, I am of the view that the ingredients of the definition of "money circulation scheme" are satisfied in the present case."
39. It may be possible to say that a distributor appointed by the Company may be in the position of an independent contractor. But his association with the Company is much more than a mere contractor. As initially noted, a distributor can remain satisfied by purchasing the products of the Company at whole sale price and selling it himself for retail price and continues to do that exercise B.A.8128 & 8134/2012. 37 only. But it takes a different turn once he sponsors distributors and the Company appoints them and in which case he makes benefit of the sales effected by the sponsored distributor of the nature already referred to. Applying the varied tests already made mention of to ascertain whether the scheme so devised by the Company amounts to an illegal pyramid scheme, it cannot be said that the allegations are unfounded or baseless. The registration of the crime is seen appropriate and justified. The company cannot say its affairs cannot be enquired or looked into.
40. The following facts emerge from a close scrutiny of the scheme followed by the Company.
(1) Multi Level distributorship.
(2) To earn bonus or commission or to reach different levels, necessarily a distributor will have to sponsor other distributors.
(3) Each distributor has to periodically buy products of the Company to serve as a distributor.
(4) No product unsold will be taken back.
B.A.8128 & 8134/2012. 38 (5) The products are exorbitantly priced with little or no concern for consumers.
(6) There is no relationship between the price paid for products and value for the price paid by customers. (7) No authentication of nutritional value for the products as claimed by the Company.
(8) A downline distributor can never come up the chain above a distributor who sponsored him. (9) The scheme infact consists of self purchase to earn profits.
(10) It can happen that person up be continued to earn by efforts of downline people and there may arise occasions when people downline are left without anything.
Thus the scheme of Company prima facie compare well with those of illegal pyramid schemes.
41. The next question that arises for consideration is whether the petitioner can be granted anticipatory bail in these cases. This court specifically B.A.8128 & 8134/2012. 39 asked the Addl.D.G.P. whether the petitioner has been made an accused in both the cases, and the reply was in the affirmative.
42. Learned counsel appearing for the petitioner pointed out that this court by an interim order in the writ petition already referred to has allowed the Company to carry on its business, and therefore the petitioner may be granted pre-arrest bail as he is willing to abide by any conditions.
43. One has to apply the accepted criteria for determining whether the petitioner is entitled to pre-arrest bail. Before going into that aspect, one contention raised by the learned counsel appearing for the petitioner needs to be taken note of. It was very vehemently contended that the present crimes have been registered on the basis of a clip in the You Tube and on a newspaper item. Criticism was levelled that those items cannot form the basis of a complaint and therefore there is no proper registration of the crime.
B.A.8128 & 8134/2012. 40
44. One finds it difficult to accept the above proposition. The clip in the You Tube and the news item were noticed by the police officers and they made a preliminary enquiry and they found that the activity carried on by the Company in fact involves money chain collection and therefore they have registered a crime. Anybody can set the criminal law in motion. The investigation has only just begun. The argument that sanction or approval of Government is necessary cannot be countenanced.
45. Normally the findings, namely, (1) Registration of crime is valid, and (2) There are materials sufficient to prima facie form the opinion that company is following illegal pyramid scheme, would be sufficient to reject the plea of the petitioner. Necessarily in such cases custodial interrogation may be necessary.
46. But one has to remember a crucial aspect. The very same issue in a wider canvass is occupying the B.A.8128 & 8134/2012. 41 attention of this court. In the writ petition referred to above, a detailed probe of the same issue will have to be made.
47. It is keeping in view that contingency that the plea for pre-arrest bail by the petitioner is being considered.
48. As far as the petitioner is concerned, he is a man of standing in the society and it is pointed out that he is willing to abide by any condition imposed by this court and he is willing to co-operate with the investigation. As already stated it may be necessary to resort to custodial interrogation. But that can be taken care of by imposing adequate conditions. In order to consider the question as to whether the petitioner can be granted pre-arrest bail, reference may be made to the decision reported in Siddharam Satlingappa Mhetre v. State of Maharashtra (AIR 2011 SC 312).
49. Drawing inspiration from the above decision and considering the fact that the matter is to be probed into B.A.8128 & 8134/2012. 42 in depth by this court in another proceedings and since only a prima facie view is being formed by this court in these proceedings, the plea of pre-arrest bail is being viewed from those angles.
50. There is no apprehension expressed by the investigating agency that if released on bail, the petitioner will abscond. This court is aware of the fact that investigation is at an infant stage. More details and materials need to be collected. Arrest is not a must. In the case on hand, there is nothing to suggest that the petitioner will not co-operate with the investigation or that he will abscond.
Thus, while holding that the registration of the crime is not improper and illegal, and that there is a strong prima facie case to be probed into, the petitioner is granted pre-arrest bail on the following conditions.
i) Petitioner shall surrender before the Investigating Officer in each of these cases on or B.A.8128 & 8134/2012. 43 before 21.12.2012, who, after interrogation, shall produce him before the JFCM concerned.
ii) The investigating officer will be at liberty to seek custodial interrogation of the petitioner and apply for the same, in which case, the JFCM court concerned, shall pass appropriate orders thereon imposing such conditions as it deems fit.
iii) After considering the application for custodial interrogation, if any, the JFCM court, on applications for bail being moved by the petitioner, shall release him on bail on his executing a bond for a sum of Rs.5,00,000/- (Rupees Five Lakhs only) with two solvent sureties each for the like sum each in each of these cases to the satisfaction of the JFCM concerned.
iv) The learned Magistrate may ensure the identity of the sureties and the veracity of the tax B.A.8128 & 8134/2012. 44 receipts produced by the sureties for the purpose of executing the bond.
v) Petitioner shall make himself available for interrogation as and when required by the Investigating Officer and shall report before the Investigating Officer in Crime No. 577 of 2012 Kozhikode Kasba Police Station on every Wednesday between 9 a.m. and 10 a.m. and before the Investigating Officer in Crime No.730/CR/EOW-11/11/9/12, EOW-11, CBCID, Palghat on every Thursday between 9 a.m. and 10 a.m. until further orders.
vi) Petitioner shall surrender his passport before the JFCM court concerned.
vii) Petitioner shall not leave India without the prior sanction of the JFCM court concerned.
viii) Petitioner shall not tamper or attempt to tamper with the evidence or influence or try to influence the witnesses.
B.A.8128 & 8134/2012. 45
ix) If any condition is violated, pre-arrest bail granted to the petitioner shall stand cancelled, and the JFCM court concerned may take such steps as are available to him in law.
P. BHAVADASAN, JUDGE sb.