Analysts say lack of legislation over 'direct selling' leaves people, particularly lower income workers, vulnerable to businesses that have no products.
Millions of Indians caught up in company's alleged fraud
NEW DELHI // Tripta Chandrashekhar trusted the man who asked her to invest her savings in Speak Asia Online. Their mothers were friends.
He insisted she pay cash to become a member of the online survey business. Investors recoup their investment partly by taking the surveys. However, members can make significant money only by signing up new members themselves.
"It struck me that he did not even give a receipt for that much money. It is a lot of money for Indians to invest but I trusted him. We know his whole family," she said in a telephone interview.
Two weeks ago, Ms Chandrashekhar asked for a refund of the $250 she invested and the agent refused. "He showed no remorse. I felt so cheated."
Authorities say about two million Indians have invested the same amount to join Speak Asia.
She complained to the local consumer forum but did not withdraw her membership. For the next few months, she will continue taking surveys so she can salvage some of her investment.
In the latest financial scandal to hit India, Speak Asia Online, a Singapore-based company, is being investigated by Indian authorities for alleged financial fraud and operating without a licence.
The company has also been accused of lying about representing several multinational companies - from telecoms to shoes to banks - to attract members. Manoj Kumar, the chief operating officer of Speak Asia, apologised to the companies.
"I apologise to those brands whose names were taken out of context by my management team or my sales team. I am sure it would have caused them anguish. We owe them an unconditional apology," he said during a press conference in Mumbai last week.
The company claims to have attracted two million members in India since it started operations in January 2010. It pays members up to $11 to take an online survey and refer people to the website. A company statement says it has paid out more than $50 million to survey takers and reported revenue of $80.5 million in the past three quarters.
Complaints about the scheme have come mostly from small-town businessmen and professionals, who said they bought into the scheme after agents promised returns of up to $88 (Rs4,000) a month.
Ms Chandrashekhar, 45, a town planner, lives in Silvassa, the capital of the Indian union territory Dadra and Nager Haveli. She recalled when she realised how widespread the Speak Asia phenomenon had spread.
She was sitting at a computer in her brother's house filling out a Speak Asia survey and a friend of her niece recognised the survey on the screen. The girl said her father was also a Speak Asia member.
"This is what creates a sort of confidence among people, but those who have taken the money are not saying anything. They are sitting quietly hoping more people will continue investing," she said.
Looking to emulate the Indian middle class, less affluent people are vulnerable to financial schemes, said Chavi Hemnath, the secretary general of the Indian Direct Selling Association (IDSA).
"These are different levels of consumers, including the semi-literate, like a taxi driver or a scrap dealer," Ms Hemanth said. "Because of the lack of education, these people cannot be members of a higher investment group so they want to be a member of something. This is very common in India.
"It is the aspiration of status."
A report released by Ernst and Young India in 2010 on direct selling companies noted that smaller towns had "emerged as key markets for the industry".
Direct selling companies such as Amway and Avon have been operating in India fewer than two decades. The Indian consumer is still getting used to the idea.
"This concept is not known to Indian people at all. People are still trying to understand what this concept is all about," Ms Hemanth said. "It means you have to sell products. That is the reason they become more vulnerable."
The lack of legislation has analysts worried. The IDSA has asked the government to come up with a regulatory framework that will define direct selling, stipulate how it should operate and pass laws to protect consumers. Ms Hemanth worries that when scams are exposed, it discourages international companies from investing in India.
Pinakiranjan Mishra, an analyst with Ernst and Young India, noted in the firm's report that "lack of barriers to entry, coupled with absence of a robust regulatory mechanism, have made the direct selling space in India vulnerable to fly-by-night operators whose sole purpose is to maximise their revenues through membership fees without generating actual product sale".
At the press conference in Mumbai last week, Mr Kumar struggled to define exactly what his business does. He denied being a direct seller or a company that makes money based on referrals.
"We are not a company which is an investment company. We are not a company which multiplies the money of the people," he said, before adding, "we are here to empower the consumer."