Karnataka High Court in Qnet case

In a landmark judgment that will change the way Direct Selling and Multi-level marketing companies are perceived, the Karnataka High Court has quashed all allegations made against QNet’s Malaysia based executive. Pronouncing the judgement in a case filed against Naresh Balasubramaniam the honourable High Court has made some very strong and relevant observations that are likely to clear the air around the business model of QNet that has been going through harried times, thanks to completely misconstrued facts about its business model.

Naresh Balasubramaniam a resident of Kuala Lumpur hadapproached the High Court for a case against him by the Cyber Crime Police(Economic Offences Division) on a complaint filed by one Ms Pragya a residentof Electronic City. 

Pronouncing the judgment the Honourable HC clearly statedthat there is no case where any over act in inducing the complainant fromparting with any money or influencing her in doing so was observed. Onlybecause Subramaniam was the Managing Consultant of Q-Net India did not in anyway provide grounds for his name to be included in the charge sheet said theorder. 

“It is not shown that the petitioner is associated with thelatter. This circumstance alone would render the proceedings initiated againstthe petitioner had in law” read the order. Another significant factor that wentin favour of Subramaniam is that he is a resident of Malaysia in the Chargesheet, “that is yet another factor that would dilute the case against thepetitioner.” the order read. 

What is more interesting are the observations that the HChas made on the overall allegations against Q-Net and its sub-franchiseeVihaan. Q–Net, is said to be engaged in multi-level marketing or directmarketing. According to the HC “the police appear to proceed on the basis thatthe activities of a multi-level marketing company is illegal and arbitrary.There is a suspicion created about the business in some circles while there areothers who vouch for it as a sound business model. The doubts and strong wordsemployed by the Bombay High court in denigrating the business itself, is a casein point.” 

The HC has very clearly stated in no uncertain terms that“it is evident that ‘Direct Selling’ has emerged as a global industry. A reportprepared by the Federation of Indian Chambers of Commerce and Industrydiscloses that direct and multi-level marketing in India is estimated to be tothe tune of several hundred crores of rupees. And that it has emerged as anindependent industry.”

The FICCI report as quoted by the Honourable HC also statesthat direct selling and multi-level marketing are forms of economic activitythat could play  a very important role ina country like India, as it envisages low transactional cost mechanisms  for sale of consumer products without theneed for large marketing infrastructure. This is a very important observationas it helps clear the pollution spread by unwanted and probably self-interestedelements around the business model of direct selling companies. 

The HC has held that business models of multi-levelmarketing companies where the benefit is a result of sale of goods or servicesfor subscribers, is not illegal. 

As per the HC “Activities of QNet and Vihan i.e., themultilevel marketing companies, do not constitute offences under the PrizeChits and Money Circulation Schemes (Banning) Act, 1978.” According to thejudgement, the activities of the company do not fall within the definition of‘Money Circulations Scheme’ under Section 2(c) of the act, nor does it fallwithin the definition of ‘Prize chit’ under Section 2(e) of the Act. 

Concluding on the applicability of the Act, the HC observedthat “when the activities of these companies do not constitute either MoneyCirculation Scheme or Prize Chit, the offences under Sections 4 and 5 of theAct, do not even remotely apply to such activities and consequently chargingthe accused for such offences is unsustainable.” 

Quoting the FICCI report the HC has observed that “absenceof a clear legislation and regulatory framework for multilevel marketingcompanies, have led to severe problems for such companies operating in thecountry. Legislation such as the Prize Chits and Money Circulation Schemes(Banning) Act, 1978, which do not even remotely apply to the activities of multilevelmarketing companies, are applied by the investigating authorities leading todisastrous results.” 

There is no way that criminal prosecution can be initiatedunder the provisions of the IPC and the best possible course of action would beto initiate proceedings under the Consumer Protection Act, 1886 in cases whichhave been filed against Q-Net or its stakeholders. 

Cases registered in the Q-Net case are typically those wherecriminal legislation which are not even remotely applicable to the circumstancesof the case have been invoked to substantiate the charges. “The dispute, if atall, is between a consumer and a direct seller and ought to be adjudicatedunder the provisions of the Consumer Protection Act, 1986.” says the HC. 

All this puts to rest the misconceptions spread around thedirect selling business models of companies like Q-Net and will go a long wayin clearing a path of sustainable growth for the sector and all thoseassociated with it. 

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