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Monday,
November 25, 2002, Chandigarh, India  
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Multi-level marketing writes new rules of retailing
PREPARING FOR
RETIREMENT Correction seems imminent
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Airlines can be sued for agent’s negligence
Adlabs future is bright
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Multi-level marketing writes new rules of retailing The breath-taking success of the companies like Amway India, Oriflame India and Tupperware India in direct selling and multi-level marketing, has changed the paradigms of Indian consumer market. While almost all the FMCG companies are complaining of slow pace of growth in domestic market, these companies have shown exponential growth in sale and profits. They have created a new class of distributors with monthly income of millions, but at the same time have also deprived lakhs of persons in the middle class from their hard money, by selling ‘dream’ products at an astronomical price. Direct selling As per Indian Direct Selling Association (IDSA), it is the marketing of consumer goods and services directly sold to the consumers. According to one estimate, out of total Rs 1,90,000 crore annual retail market, direct selling constitutes of about Rs 2,000 crore, and is growing at a rate of over 25 per cent annually. The product categories have expanded from basic products like home care, personal care, education, weight management and kitchenware to more sophisticated categories like software products, online/offline jobs, banking and other services. Says Mr Kalyan Ranjan, Manager, Corporate Communications, Amway India Ltd, ‘‘The direct selling system adopts methods of door-to-door selling, group meetings, and networking marketing. It is definitely different from pyramid schemes flouted by some easy money making groups, to cheat public. Pyramid schemes are illegal scams, which encourage participants to invest huge amounts to get a chance to earn lakhs, simply by recruiting more members.’’ He claims that as per the code of ethics of the IDSA, these companies share profit margins with distributors to sell high quality products, usually not available in the retail market. Regarding Amway, he says, ‘‘At present, there are over three lakh distributors of the company in India, including 75,000 in Northern India, who are engaged in selling of a range of personal and home care products. By depositing an entry fee of Rs 4,400, any educated youth can become our distributor. He would would earn profit margins between 3 to 21 per cent, depending upon the volume of business.’’ Commenting upon the success of multi-level marketing companies, Dr Manoj Sharma from the University Business School, Panjab University, here says, ‘‘It is business strategy successfully adopted by various MNCs in the USA and Europe to directly sell their products to consumers, thus saving time, transaction and retailing costs, which are shared with the distributors. They have a tremendous potential in the vast domestic market, and would severely affect the retailing community in the near future.’’ Dr Sharma warns that unemployed youth and gullible consumers must be cautious about those fraud companies, who promise to make them millionaires, by simply recruiting other members. Like lotteries, they would benefit only a selected lot at the top, and would cheat the low rung distributors. Majority of the members are left high and dry after paying up to Rs 1 lakh in the name of simple mattresses and other products. Mr Jaswinder Singh, a graduate from Ludhiana, who was recently promised a job of internet work by Artexecom, a Sector 34 firm here said, ‘‘I was thrilled when the company offered me thousands of rupees as monthly commission, once I paid Rs 16,500 as registration fee. My work was simply to recruit other members and two-hour daily computer work. However, later I came to know that the company had already collected more than Rs 3 crore by recruiting over 2000 youths, but the newly recruited youth were unable to earn even Rs 1000 per month.’’ Japan Life India Ltd, which is not a member of the IDSA, is another player in the region. It is engaged in selling of herbal products and mattresses, claimed to based on magnetic system. Says Mr Ravider Pal Singh, MD of the company: ‘‘Unlike door-to-selling, we organise group meetings, typically called by our area distributors. Participants are encouraged to become distributors of the company, by investing Rs 95,000 as an initial fee. They would earn profit margin of 10 per cent (Rs 9,500) if they recruit another member by selling a special imported mattress at a cost of Rs 95,000 again. The second member can also earn the same amount by recruiting another member. The first member would gain additional commission up to 42 per cent on further sale by his recruited members.’’ He says the company’s annual turnover has already reached Rs 380 crore during the past year and the target is to increase the business by at least 20 per cent. Regarding the allegations of exploitation of consumers and members, he says, ‘‘We do not force anyone to join our scheme. The company has already recruited over 5,000 members in the region.’’ Regarding the genuineness of their operations, Dr L M Sharma, DGM, RBI, says, ‘‘Most of the companies may have got sanction by the Foreign Investment Promotion Board (FIPB) under the Ministry of Finance, but the state governments and the administration of the UT can take action against them if they violate the provisions of the Prize Chits and Money Circulation Schemes ( Banking ) Act, 1978 by exploiting the agents and consumers. He agrees that nothing is wrong in their operations, provided they sell products at a market price and share the profits with distributors. However, one cannot justify the sale of a product at an astronomical price, and using the balance money as an incentive for recruiting agents, he adds.
These are illegal schemes banned under Prize Chits and Money Circulation Schemes (Banking ) Act, 1978. Lakhs of people have already lost crores of rupees in India in these scheme. Here the company encourages the potential members, generally by organising a party meet, to join as a distributors by paying hefty amount. They are offered to earn lakhs per month by simply recruiting other members and earn a share up to 49 per cent of the membership fee. The company would get the money for running the scheme and for offering a product/service of much lower price to the members. In fact, large number of people at the bottom of pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from the payment of others who might join later. The members at the top would earn till the membership grows. Later the officials of the company may run away after collecting crores of rupees. As per Section 3 of the Prize Chits and Money Circulation Schemes (Banking) Act, no person shall promote or conduct any prize, chit or money circulation scheme, or enroll a member to any such chit or scheme promising remittance of money in pursuance of the scheme. They can be punished with imprisonment for a term up to three years.
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PREPARING FOR RETIREMENT Social changes in India coupled with the lack of a social security system is fast multiplying the number of people in the country who are strongly feeling the need for a safe post-retirement income. The growing insecurity among the Indian middle class stems from several facts such as the growing insecurities both at work and at home, emergence of nuclear families and its fallout, rising trend of seeking an early retirement and intensifying health risks. Almost every insurance company in the country has come out with pension plans which are selling like hot cakes with people mainly in their 30’s and 40’s being their main targets. Many people do not understand the difference between insurance and a pension plan and in the process lose out the advantages of a pension plan over a simple insurance. A pension plan is insurance-linked but at the same time besides giving you a life cover offers a good pension for retired life, besides providing a reasonable tax saving. Since a pension plan is coordinated to mature with the drop in income at retirement, the maturity benefits can really come in handy for expenses such as children’s education and Medicare. Some pension schemes even extend the pension to spouses in the event of death of the assured person. What’s a good age to start? Various plans are available from companies like ICICI Prudential offers LifeTime Pension, LifeLink Pension and ForeverLife, LIC Jeevan Suraksha, Jeevan Dhara and Jeevan Akshay. Similarly, HDFC Standard Life and other companies have their own pension plans, etc that cater to most age groups. But financial experts recommend “sooner the better” purely from the mathematical point of view — the longer the money stays in the plan, higher the return. People in their 30’s must make a start and if they are still thinking when they turn 40, the returns keeping in mind the inflation are going to be negligible. An investment of Rs 10,000 a year for a person at 40 till he turns 55 will fetch him a pension of around Rs 1,030 a month, besides the lump sum and bonus on the paid premium. Converting to annuity On maturity the insured gets a lumpsum, which the insured must consider converting into an annuity at a rate offered by the company. (Annuities mean splitting money into a series of payments to the insured during their lifetime, usually during the post-retirement period.) Most companies offer an open market option that give the policyholder to convert to a annuity of another company that offers better returns. Options available With growing competition, most insurance companies are trying to pack their pension plans with lot of incentives to lure clients. From a single Life Insurance Corporation (LIC) about a year ago, there are 12 companies in the Indian insurance business at present. However, most companies offer, on an average, four annuity options that include the life annuity, life annuity with return of purchase price, life annuity guaranteed for 5 or 10 or 15 years or joint life and last survivor with return of purchase price. To protect the policyholders from growing inflation, many companies also offer what is called a variable payout. Such policies however have some degree of risk, as they are market related. Risk linked higher returns For all those people who are not solely banking on returns from an annuity for their post-retirement expenses, a smarter option is available in the form of market-linked pension plans such as the LifeTime Pension and LifeLink Pension from ICICI Pru. Under such plans the companies invest part of the premium in capital market instruments. They work like mutual funds and, at a given time, the value of the units determines the appreciation (or depreciation) in one’s investment. Though there is some risk involved in such policies, but market-linked pension plans offer higher returns. Options for corporates’ Many good employers prefer to go in for group insurance in addition to the individual insurance available to the employees. Looking at the need of the corporate world, companies like the Tata AIG are now licensed to launch group pension plans for the corporate houses. Tata AIG would soon come out with three products-comprehensive gratuity schemes, comprehensive superannuation scheme (with defined benefit) and comprehensive superannuation scheme (with defined contribution). Such schemes can easily fulfil the employers’ pension obligations. Payment mode Most pension linked plans offer the option to either go in for a single single-premium policy or a regular premium policy. In the first category, it’s a one-time payment, which is returned along with bonuses and a terminal bonus at around 8 per cent. This sum can then be converted into an annuity for a lifetime pension. While under the second option, annual premium is paid till the time of maturity. Currently the pension policies carry tax benefits under Section 80CCC of the Income-Tax Act for an investment of up to Rs 10,000. This may, however, change if the recommendations of the Kelkar Committee on direct taxes are implemented. |
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Correction seems imminent All around buying in IT, telecom, automobiles, banking, steel and cement lifted the 30-share Bombay Stock Exchange (BSE) Sensex by 107.70 points at 3,141.61. The S&P Nifty rose by 29.80 points to close at 1,020.15. Rumours of fresh contracts bagged by software majors, foreign institutional investors (FIIs) stepping up their purchases and the passing of a Bill in the Lok Sabha aimed at reining in the burgeoning non-performing assets of the banking sector led the market rally last week. A possible upgrade in the credit rating of the country by Moody’s Investor Services and a slight increase in India’s weightage in the Morgan Stanley Capital International (MSCI) helped to lift the sentiment in the market. Infosys Infosys Technologies surged by 6.6 per cent during the week to settle at Rs 4,619. The rally on the counter was fuelled by market rumour that the company has bagged new orders. Buying in the stock was also witnessed on the back of upward revision of future earnings by a leading FII. The stock has gained over 33 per cent since October 7, 2002. Investors are advised to book profit as the stock is ripe for a correction. L&T The L&T stock surged on expectations of a revision in the open offer price by Grasim. There were reports that Grasim was willing to pay a substantial higher price that the open offer price of Rs 190 per share, provided Financial Institutions (FIs) agree to give the Birla group flagship management control L&T. But the market regulator, SEBI has asked Grasim not to proceed with the open offer as it has decided to launch a formal investigation into whether there was any change in management control at L&T after Grasim acquired a 10.05 per cent stake in the company from Reliance Industries in November 2001 at a price of Rs 306.6 per share. L&T closed the week at Rs 202.45. Shipping Corpn In the PSU segment, SCI was the worst hit after G.E. Shipping announced that it was withdrawing from bidding for SCI. SCI lost 11 per cent for the week to close at Rs 53.95. G.E. Shipping has blamed the uncertainty surrounding SCI’s privatisation for quitting the race. Banking A rally was set off in bank stocks after the Lower House of Parliament, on Thursday, passed a key bill which will allow banks to seize defaulters’ assets. The Securitisation Bill will help speedy recovery of defaulting borrowers’ loans without additional court procedures. The Bill also paves the way for setting up asset reconstruction companies. The banking sector is plagued by huge non-performing assets which are estimated at over Rs 1,00,000 crore. Public sector banks in particular, with huge non-performing assets would be the key beneficiaries. Coming Fortnight The Sensex has opened with a positive gap in three of the last five trading sessions, which indicates strength in the market. Next week the market could see some correction since the index would be in overbought territory at higher levels. The sensex may move up to test 40WMA at 3161. The index is likely to make an attempt to cross this level on Monday. A cross above 3161 could see the index heading for 3215. But as already said correction then seems imminent as the index would be in overbought territory. |
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by Pushpa Girimaji Airlines can be sued for agent’s negligence There have been any number of cases where the consumer has suffered the consequences of a travel agent’s negligence. There have been instances where passengers have missed their scheduled flights only because the travel agent gave them the wrong departure time. There have also been cases of passengers being stranded in foreign countries, thanks to the mistake in ticketing committed by the travel agent. There are also complaints of travel agents showing wait-listed tickets as confirmed, resulting in untold hardship to the passenger. But worse, in all such cases, the apex consumer court or the National Consumer Disputes Redressal Commission had held that the airline was not liable for the negligence of its agents, thereby denying the consumer, compensation for the suffering undergone on account of such mistakes of travel agents. Take the case of M.J. Kamdar and his friends, who were stranded in Russia without a valid visa, foreign exchange or accommodation, thanks to the travel agent who gave them a confirmed ticket to return to India on the sixth day of their travel, while according to the rules governing the excursion ticket, they had to stay in Moscow for a minimum of 10 days to utilise their return ticket. Similarly, in the case of P. Lalchand, he missed his flight only because the travel agent through whom he booked his flight on the Ahmedabad-Mumbai-Chennai sector indicated the old departure time, while the airline had revised the timings. And in both these cases, the apex consumer court had held that the principal or the airline could not be held liable for the wrongful act of an agent and dismissed the complaints. But all that is now history and consumers can now sue the airlines for the negligence of their agents and get compensation from consumer courts for any consequential loss or hardship. This welcome turnaround is the result of an order of the apex consumer court wherein it has corrected the principle of law laid down by it in its earlier orders. It is indeed very rare for the commission to make a major departure from its earlier decisions, whether right or wrong. But in this case, the national commission took the step of deviating from its own earlier orders on the ground that those were contrary to the law as laid down by the Supreme Court. The brief facts of this case are that Mr S.N. Seth purchased in 1995 a return ticket from Delhi to Lucknow of Indian Airlines through its authorised agent., Continental Travel Service for Rs 3,024. He travelled to Lucknow as planned but on his return journey, when he reached Lucknow airport, he was told that I-A did not fly Lucknow-Delhi on Thursdays at all. And instead of helping him, the IA staff apparently laughed at his plight. Upset and angry, Mr Seth wrote to the IA, which apologised, offered him and his wife two complimentary return tickets from Lucknow to Delhi. Mr Seth, however, refused the offer and filed a complaint before the Uttar Pradesh State Commission, claiming Rs 5 lakh as damages. The airline argued before the commission that in issuing a wrong ticket, the agent had acted contrary to the instructions of the airline and in such circumstances, the airline could not be held responsible for any consequential loss to the passenger. Besides, the travel agent first of all acted as an agent of the complainant and secondly to a limited extent as a ticketing agent of IA. The state commission, however, did not accept the defense of the airline and held Continental Travel Service as well as the Indian Airlines guilty of providing negligent service. And it awarded Mr Seth, Rs 10,000 as compensation, besides refund of the ticket amount (Rs 1,210) with 18 per cent interest and Rs 500 as costs. The airline filed an appeal before the national commission on the ground that the state commission’s order went against the law laid down by the national commission in all its earlier orders and therefore cannot stand. This time the national commission decided to deviate from its earlier decisions on the ground that those decisions now ran contrary to the law as laid down by the Supreme Court in the case of Marine Container Services vs Go Go Garments. Pointing out that here the apex court had said the Contract Act applied to complaints filed under the Consumer Protection Act and that an agent could invoke Section 230 of the Act, the commission said in a number of cases, it had taken decisions based on the law of Contract and contractual terms that no liability could lay on the agent who could neither sue nor be sued and it was the principal (for whom he is acting as an agent) who was answerable. And in this case, it was a clear case of deficiency in service for which Indian Airlines, the principal was liable, the commission held. This order (Indian Airlines vs S.N. Seth, FA no 495 of 1997) of the national commission finally gives the consumer the right to haul up an airline before the consumer court for the negligence of its agents. |
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Adlabs future is bright Last week we had zeroed in on why the Adlabs stock has dipped from its IPO price level. Let us now zoom in to see whether there is enough steam in it for a bounce-back. Film processing and theatre operations are the company’s major lines of business. The company has decided to enter film production as well as theatre management. This will expand its activities to most key areas of the films business — production, processing and exhibition. The foray into the film production business will be through its stake in the production company ‘Entertainment One’, for which it has earmarked Rs 25 crore. The management expects returns in excess of 20 per cent on its investment in the film production segment. Theatre management is the other business on the company’s priority list. While this can be a risky proposition, as it involves sharing operational and business risk with the theatre owners, the management is confident of its ability to identify movies that could do well and also negotiate with distributors to acquire movie rights at reasonable rates. This will be helped by the fact that the larger number of screens (including its own multiplexes) under its belt will provide the company the requisite bargaining power. Adlabs has grown to become the market leader in film processing, in terms of both quality and market share. With a market-share in excess of 70 per cent in Western India, the film processing business remains a cash cow for the company. With many media companies getting corporatised, film production business will increase, which will led to solid growth in Adlabs’ film processing revenues. Besides, with the number of theaters going up, the company benefits directly, as that finally increases the number of copies per film. The company is likely to benefit immensely from the current entertainment policy in Maharashtra, whereby newly-constructed multiplex theatres are exempt from entertainment tax for the first three years, and only 25 per cent tax will be levied for the next two years. Hence, all the entertainment collection will directly accrue to the company’s bottomline. Even at 40 per cent capacity utilisation, the company can save up to Rs 2 crore annually. The film industry has seen an increasing demand from non-resident Indians representing booming overseas market, simultaneous release of films at most of the places requiring more number of prints leading to higher revenue for the processing business. Besides, in India, demand for more cinemas with quality viewing facilities of international standards has resulted in the birth of multiplexes, which has opened a new revenue stream. Adlabs main business is film processing, but it is expanding into the areas of film exhibition, film production and theatre management. It is targeting only 60 per cent revenues from its processing business in the next few years, while the remaining 40 per cent will be contributed by its other businesses. The processing business is expected to continue to do well in the near future with Bollywood lining up a string of new films. This fiscal can also see revenues from the multiplexes stabilising, but returns from film production will only come next year. Overall, the business outlook for this media dark horse appears encouraging for the current year, and perhaps even better for the next FY. Hence, sooner rather than later, a price bounce-back can well be in the offing. |
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by R.N. Lakhotia Interest on FDR Q:
I have raised loan against Bank F.D.R. from the bank for my personal use. Kindly advise me whether the interest paid on loan for the above purpose will be deducted from the gross interest income. It was advised by you on 31.12.2001 in the Tribune that the interest payment on loan against F.D.R. will be deducted from gross interest income from fixed deposit interest & only net amount of interest will quality for deduction under Section 80-L. — Radha K. Singla, Abohar Ans: The net interest from bank alone be subject to income tax and consequently the benefit of deduction u/s 80L. The relevant section is section 57 of the Income-tax Act, 1961.
Capital gain Q:
My uncle (NRI) sold his house two months back. Please guide me about the Capital gain tax: 1) What is the rate of Capital gain tax and how it is calculated? 2) Can it be saved, if yes how? — Mohendra., Jalandhar Ans: The calculation of long-term Capital gains is to be done by deducting from the sale price of the property the cost of the purchase of the property. In arriving at the cost price or purchase price the benefit of cost inflation index is to be taken into account. The rate of long-term Capital gain is @ 20 per cent plus surcharge of 5 per cent thereon. Yes, it is possible to save Capital gains by investing in another residential property within a specified period or by investing the gain amount in designated Capital Gains Bonds under section 54EC. of the Income-Tax Act, 1961 within six months from the date of sale. |
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