Wednesday, May 29, 2013

Ponzi Vs Direct Marketing: The Amway Case

Amway Boss: William Pinckney

As a high level inter-ministry group set up by the government was mulling its way through India’s legal maze to decide which kind of multi-level marketing schemes were nothing but disguised ponzi schemes and which legal, the Kerala police arrested the heads of the best-known direct selling MNC in India – Amway.
In a classic case of strange policing, Kerala’s Wayanad district police arrested William S Pinckney, managing director of Amway India and two of his Indian directors, Anshu Budhraja and Sanjay Malhotra on a complaint by three former Amway distributors who claimed they had lost some Rs 27,000 by taking up work for the US-based giant’s business in 2002.
Pinckney and his colleagues were arrested for fraud under Section 420 of the Indian penal code as well as violation of the Prize, chits, money circulation scheme (banning) act, which bans any illegal money circulation scheme of the kind which the infamous Calcutta-based Saradha group was running. Funnily, the CEO and his two directors who were released Tuesday evening on bail, had flown down to Kerala to answer police summons on another case for which they had taken anticipatory bail, when they were arrested for an older case in which the Wayanad police had seemed uninterested after initial enquiry.
A high powered committee has been holding a series of meetings to hammer out exactly what is allowed in multi-level marketing schemes and what is not ever since the Speak Asia scam broke last year. Its meetings ended last month and its report as well as a report prepared by Dr Bibek Debroy for Ficci on direct selling which calls for defining direct selling properly to allow firms like Amway to function while tackling frauds, are currently being mulled over by another committee within the department of financial services in the ministry of finance.
Amway says it runs a direct selling business through a chain of distributors. Amway appoints a distributor who sells its products directly to those who want to buy it. The distributor in turn can appoint other distributors with permission and training from Amway who could also sell Amway goods. Any commissions the first distributor makes is his. Out of commissions the next level of distributors make, they have to pass on a small amount to the man who roped them in. Commissions vary according to what is sold and in what quantities but range from 6-21 per cent.
“What the Wayanad  police are contending is that this is a disguised money circulation scheme … which it is not. It’s direct selling through a chain of distributors. Something which is perfectly legal in India as in the rest of the world,” pointed out Sudip Sengupta, spokesperson for Amway India. Ironically, the Indian Direct Selling Association, of which Amway, Avon, Oriflame and Tuuperware along with Hindustan Lever, Max Life Insurance and Modicare are members have been warning that their members may be harassed with such punitive arrests arising from mis-reading of the law, ever since a rash of ponzi schemes were reported by the media.  
The PCMC (banning) act was promulgated to stop firms from running illegal money circulation schemes including `disguised money circulation schemes’ which mis-use marketing of products to run illegal fund flows. The test of whether a pyramid marketing scheme is legal or not, say legal experts are two basic premises – that the scheme should not “rob Paul to pay Peter” and it should not allure people with promises of abnormally high returns. “These principals were established by the Supreme Court  in the Kuriachan Chacko vs State of Kerala case in 2008, and implies to be legal a scheme should not depend on recruiting new members to pay older members but on actual selling of products and that this should not involve promising abnormally high returns which are unsustainable,” said Parijat Sinha, Senior Supreme Court advocate.
Ponzi Wizards !

Saradha and Speak Asia failed on both count – they depended solely on earnings paid by new members to pay older members and they promised extraordinarily high returns of upto 500 per cent. They were in essence scams designed to be scams.
Amway, Tuperware, Avon etc., have for some time been contending that they are not in the same league as Speak Asia or Saradha and demanding that the law differentiate between frauds and real marketers. The IDSA has been particularly anxious that this be done through a proper legislation and by the police cracking down on fraudulent schemes.
Said Chavi Hemanth, Secretary General of the IDSA  “There is a crying need for a proper regulatory framework to facilitate direct selling which will also prevent unscrupulous elements operating under the garb of direct selling business … this would protect public at large.”

Tuesday, May 21, 2013

Chinese Bug-bear in India's Telecom Story

China's Li Keqiang - on a woo India trip

Chinese Premier Li Keqiang may have chosen India as his first foreign destination, but for India, China remains a bug-bear.
Security issues surrounding Chinese telecom equipment remain a major concern even as Beijing signals its intention for closer ties with its neighbour, seeking greater market integration.
India is working on setting up a testing lab in Bangalore in collaboration with the Indian Institute of Science to check imported telecom gear for bugs.
India imports telecom gear worth about $10 billion annually, much of which is from Chinese firms such as ZTE, Huawei, Dongfang and Cosco. Overall, electronics are the third top import item for India.
The idea of the lab, which the department of telecom says is necessary but not enough to check bugs planted in equipment, comes from a note prepared by the National Security Council (NSC) last month. The note raised concerns over the Chinese firms’ links with the People’s Liberation Army and security establishments, and the fact that some of the firms sold the same devices to Pakistan.
New Delhi decided to act after alerts from local intelligence agencies as well as security experts from the US, Australia and the UK about the possibility of malicious bugs or malwares in telecom gear. A few years back, India had virtually banned the import of Chinese gear but relented after some domestic telecom companies contended that China-made equipment reduced costs and that bugs could come with equipment made by rival European manufacturers, too.
However, India would also like to encourage domestic manufacturing. The government has been mooting the idea of developing a “made-in-India” telecom equipment park. The idea has not got off the ground for want of takers. This is being done to stem the huge drain of forex resources every year in buying costly telecom equipment and even basic mobile sets and components from abroad.
Telecom : the new frontier

The NSC note, too, specifically calls upon the government to step up “efforts to set up manufacturing and fabrication facilities” for telecom gear, including micro-chips, through sops, cheap financing and tax breaks.
Chinese companies already have facilities in India. Most of the Chinese telecom gear makers, including Huawei and ZTE, have set up local units where value addition is done.
India’s preferential market access policy for government procurement, which the cabinet cleared in February this year, does not discriminate between local or foreign firms; it only stipulates that at least 25 per cent value addition should be done locally, which should gradually go up to 45 per cent by 2018.
Chinese firms want to take advantage of this policy. In January, the Cellular Operators Association of India forwarded a representation from Huawei Telecommunications (India), which has become a member of the telecom lobbying body, to the government requesting it to recognise Huawei as a domestic telecom manufacturer and include its name in the lists of local firms circulated by the department of telecom.
The Chinese have already shown eagerness to invest in the domestic telecom market, which is one of their largest markets overseas. Premier Li is expected to take up Chinese firms’ desire to set up industrial parks in India to feed the market locally.
However, security experts point out that this does not necessarily preclude the chances of bugs being implanted in equipment. Bugs could be planted in any key component, whether made in China or India, or even while the gear is being put in place.

Monday, May 13, 2013

Pakistan Elections - Ethnic Divide Widens

Pakistan’s successful general elections which has brought the business tycoon and 1990s ousted prime minister Nawaz Sharief, back to power, has also shown up the deep ethnic divide that besets that nation.

Nawaz Sharief's PMLN wins
Sharief’s Pakistan Muslim League(N) will rule over Pakistan on the basis of the overwhelming votes it managed to garner in Punjab. Out of the 126 seats it won in the Pakistan national assembly, 118 came from Punjab.  In all other provinces it managed to get but marginal vote shares - in Sindh it managed a mere 1 seat out of 59 National Assembly constituencies, in Khyber-Pakhtunkhwa 4 out of 39, none in Balochistan and 2 out of  11 in Federally Adminitered Tribal Areas (see table at end of blog ). In the eyes of most Pakistanis, Sharief’s party, it seems, will continue to remain identified as a `Punjabi’ party.

In line with national results, the PMLN gained an overwhelming 212 seats in the Punjab assembly, while most other Pakistani parties found themselves without much luck in the province which accounts for 60 per cent of Pakistan's electorate.

In Sindh, the Bhutto family led Pakistan People’s Party and Karachi based Muttahida Quami Movement (which represents poor Bihari and eastern UP Muslim refugees) have swept in, with PMLN nowhere in sight. But then the PMLN was always derided by its opponents as a Punjabi party and that is its biggest problem. For long, Sindhis, Baloch and Mohajirs (poorer refugees from India) complained that Pakistan is ruled by a combination of Punjabis and Pathans who rule the roost in politics, bureaucracy and the army.

Conversely, the PPP which used to boast of a sizable following in Punjab several decades back, was virtually wiped out there in the national elections. PPP which had started out as a pan-Western Pakistan party, is increasingly turning into a Sindhi party, with the mesmeric hold that the Bhutto dynasty had over voters elsewhere dying out.  

While Zulfikar Bhutto and his daughter were seen as symbols of a new movement which could lead Pakistan to some kind of a Islamic socialist democracy ideal, their inheritor – Benazir’s widow Asif Ali Zardari seems to be viewed by voters as just another Sindhi leader. The son, Bilawal Bhutto who was missing during the polls after a spat with Zardari, is yet to prove himself.

Sindh has had separatist movements in the past but these always took a backseat when the Bhuttos ruled over Pakistan. However, with the Bhutto and allied Sindhi feudal clans denied power, the province may well prove to be a headache for Islamabad.
PPP swept rural Sindh to win the most National Assembly seats from that province as also cross the half-way mark in the coastal province’s own assembly. However, the port megapolis of Karachi went to the MQM, with the party winning 18 of the 20 National Assembly seats in the city, the largest and richest in Pakistan.

In Pakhtunkhwa and Fata wildlands, Imran Khan’s Pakistan Tehrik-I-Insaf has done well but done equally badly in all other provinces. Whether Imran won because his Pathan lineage (Mianwali Pathan or Pathans from Punjab’s Mianwali district) struck a chord with Highlander Pathans or because he advocated a zero tolerance policy towards unpopular drone strikes, the Tsunami of youth power he predicted, never went beyond the Pathan provinces.  

In Balochistan where, voter turnout in Baloch areas was as low as 2-3 per cent and about 40 per cent in Pashtun areas, again the story is one of ethnicity – the biggest chunk of seats having been cornered by a local Pashtun party.

The few Baloch parties which fought elections had little to show for themselves as they were targeted by both Baloch separatists who don’t want polls in the restive province and by the `establishment’ (a term used by Pakistanis for the Army-ISI combine) which did not want them to do too well.

The day the results were announced was marked by Baloch rebels with a suicide attack on a convoy carrying the police chief of that province, spelling troubled days ahead for the gas and mineral rich province which has seen separatist movements rearing their head since 1948, with the most serious being in the 1970s.  

Baloch Rebels Wall Writing Against Elections

The 1970 factor

PML’s rise to power is in ways similar to the 1970 elections in Pakistan when Mujibber Rahman’s Awami League emerged as the undisputed single largest majority party in Pakistan based on its performance in Bengali-speaking East Pakistan. In 1970, Awami League managed to win 160 seats in east Pakistan and nil seats in West Pakistan.

Zulfikar Ali Bhutto and his PPP which in 1970 garnered 62 seats in Punjab, 18 in Sindh and none in Balochistan and East Pakistan, refused to accept Mujib and his `Bengali’ party as rulers of Pakistan, a refusal which contributed to the break-up of Pakistan.

Nothing as drastic or dramatic will happen in 2013. Sharief’s ascent to power will not be challenged, but it may well reinforce existing ethnic divides, unless he is willing to share power with other ethnic parties.

Already the fissures are creating fresh divides. MQM chief Altaf Hussein, reacting to Imran Khan’s calls for re-poll in Karachi which the `Establishment’ seems to be favouring, has threatened to “detach Karachi from Pakistan” if the `Establishment’ does not like the results which favour his party.  The Dawn newspaper quoted Hussein threatening to break the arms of those who are “hatching conspiracies against MQM”. Hussein, was also quoted as stating : “I am about to set free my enraged followers if opposition against our party is not stopped.” While this is certainly much more sound and fury than substance, MQM’s stand on `Pakistaniyat’ (the idea of Pakistan) is not exactly to the liking of the `Establishment’ which is believed to have been backing Imran Khan and his PTI as the best way to keep Pakistan intact for their continued rule through proxy.

MQM's Altaf Hussein - `Ruler' of Karachi


Pakistan National Assembly Results (province-wise)

PML N12611810421
PML Q2200000
JUI F11004610
PML F5050000
PML Z1100000
Result Awaited1

Elections Postponed4

Thursday, May 9, 2013

Chinese Chequers

The Disputed Region
“It’s summer and the Chinese, like us Europeans, probably like camping in your beautiful Himalayas,” quipped a Western diplomat whom I met during the tense few days when a Chinese platoon squatted 19 km deep in Ladakh’s Daulat Beg Oldie sector beyond what both sides tacitly agree as the line of control, raising alarm not only within the country but among a host of nations with which China shares a land or maritime border and has a dispute.

The Chinese eventually walked back but not before wrangling a deal from India that it would do away with observation bunkers (which were later described by Indian foreign ministry officials as sheds) at Chumar which overlooks the strategic Karakoram highway. As one commentator said the Chinese move was an enigma within a mystery.

Intriguingly, the move came weeks before India’s foreign minister Salman Khurshid was to travel to Beijing to be followed by a visit by Chinese Premier Li Keqiang to India. Normally, most nations would try to be on their best behaviour before such high profile visits.

However, the Chinese decided to do just the opposite. Many old China hands say this is typical of the Chinese. They send in probes to test responses ahead of talks, to see how much they can extract from their opponents in any negotiations.

India’s initial response was timid. It planted a platoon of Indo-Tibetan Border Police in front of the Chinese troops and waved flags with Chinese lettering asking them to go back. The Chinese responded by waving their own banners which said in English that Indians have strayed into Chinese territory !

The border between India and China has always been tense ever since a border war in 1962, which saw the Chinese getting the better of India before withdrawing to what is perceived to be the border, though not officially accepted as one by the Chinese. The conflict over the line stems from a border pact negotiated and signed in 1912 by three powers -  British India, Tibet and China which claimed nominal suzerainity over the otherwise independent hermit kingdom. However  Beijing soon rejected the pact as undue British interferencein its affairs. **

Chinese obduracy would not have mattered had not China invaded Tibet in 1949 bringing its troops near India’s and then driven out the Dalai Lama and several tens of thousands of Tibetan into India ten years later. India’s grant of refuge brought the two sides face to face against each other and a series of moves by China nibbling away at the border ended with a full-scale border war in the winter of 1962. Since then there have been many tense face-offs in the Himalayas, some known  to the world, some not so well known.

The recent face off between ITBP border guards and Chinese People’s Liberation Army troopers,  was initially not publicised by either side. However, when Chinese troops simply dug in and attempts through normal diplomatic and military channels did not succeed, someone in India’s Army headquarters quietly broke the story to the Press Trust of India, India’s leading news agency.  The story was quickly picked up by the rest of the media, embarrassing the government of the day into more vigorous attempts to settle the dispute.

Salman Khrshid : Chinese "...acne ..."
Predictably India’s foreign ministry tried to play down the whole affair. Minister Khurshid famously said “One little spot is acne which cannot force you to say that this is not a beautiful face,” while describing the Chinese intrusion into Ladakh, to chagrin of many. However, that stance changed after opposition parties, the Jammu & Kashmir chief minister and even ruling party MPs started demanding the government take some kind of acceptable action.

A deal was eventually hammered through – some claim helped along the way by a prominent Mumbai based industrialist who buys his telecom and power equipment from India’s northern neighbour – which saw both lose some face. The Chinese walked back and Indians agreed to dismantle a couple of strategic bunkers on land which has been de facto Indian for several centuries now.

Which leads to the question – why did it happen at all? What did China gain from it all?

Chinese Take-away !
Some claim the whole brouhaha was a localised affair where a PLA Commander decided to test his Indian counterpart, without letting his masters in Beijing know. Possible,  but difficult given the tight control political commissars exercise over Chinese troops. With the recent change in guard at the top in Beijing, troop commanders would be even more desperate now to prove their loyalty to the new masters, rather than risk their ire with any display of independent thinking.

The Indian bunkers at Chumar, with their spy cameras trained on the Karakorams must have irked the Chinese considerably, but with spy satellites and drones buzzing all over, were a few bunkers and a few cameras enough to endanger the peace in the Himalayas at a time when China is caught up in a raft of border disputes? Partly because of shrewd calculations and partly  fuelled by xenophobia, China is in visible conflict over islands in South China Seas with no less than half-a-dozen nations including military powers Japan, Korea and Vietnam. These islands ranging from tiny islets under Japanese and Korean control to Taiwan and the Spratleys form a girdle around China’s coast and have the potential to be used as bases to choke China’s trade and energy supply lines in wartime.  China wants these islands and the energy rich seas they are in, to be its own.

India wants the seas free to navigate in as it needs to use them to carry on its burgeoning trade with China, Japan and Korea (trade with China alone is slated to go up to $ 100 billion a year within the next two years) and to access its leased oilfields in the Sakhalin in Russian Siberia. This is taken to imply that India supports Japan, Korea and Vietnam in their dispute with China, which it certainly does.  Part of China’s angst is perhaps because of this tacit support that India has been giving to its enemies.

In the Tibetan highlands, China continues to face resistance from a brave and desperate people who refuse to accept their suzerainty excercised through brute military strength. Monks continue to burn themselves and poets continue to write songs dreaming of an independent Tibet. A young prime minister in exile of the Tibetans operating out of Dharmashala,  seems to be slowly filling into the shoes of the Dalai Lama, the God-King and undisputed leader of the Tibetan people till now.

Tibet continues to simmer
Perhaps someone in Beijing (and the new leadership has many minds with experience of running Tibet) shrewdly calculated that a show of strength in the high Himalayas could possibly also help douse some fires in Tibet and squash ideas that India could come to the Tibetans' help, a fond hope that most of China’s oppressed races including Uighurs and Mongols,  nurture.  

For Prime Minister Manmohan Singh, unfortunately, the stand-off could not  have come at a worse time. Except for a resounding win for his party in Karnataka, the news for the PMO and the Congress party has been quite bleak. A Bansal-gate in the railways, Supreme Court’s strictures on the way CBI’s reports were “re-written”, the killing and mutilation of an alleged Indian spy in Pakistan, following beheading of Indian soldiers by Pakistani troops gave people a perception that the  government was perhaps indecisive and worse.

Khurshid's comments on the Daulat Beg Oldie incident did not help either. It showed Singh's cabinet as weak not only before the Indian people, whom the Prime Minister has to face in general elections early next year but also to India’s neighbours who look towards the Asian power for protection from an increasingly aggressive China.  

People contrast his timid response to Indira Gandhi’s handling of China in two incidents – Nathu La in 1967 and Siachen in 1980s. At Nathu La, Indian troops held their ground in the face of Chinese demands that India vacates the pass which leads into Sikkim, then  an Indian protectorate. In the ensuing artillery duel which followed, India extracted a heavy price on the Chinese eventually forcing them to agree to a ceasefire.

In the 1980s, in the face of Pakistani attempts at establishing before the international community, that Siachen, a glacier bounded on three sides by India’s Ladakh, Pakistan-held Kashmir  and Chinese-held Karakoram ranges, was part of its territory, Indian troops quietly moved in. Some in her cabinet at that time had tried to dissuade her by pointing out that China may get involved in the conflict which must ensue. However, those in the know say she did not flinch and stuck to her stand that India should own the high ground.
 ** Note on Ladakh Border

Ladakh was actually conquered by Gen Zorawar Singh in 1835-36, for the Maharaja of Kashmir Gulab Singh from Tsepal Namgyal, the Gyalpo (King) of Ladakh, a tributary of Tibet till then. This was recognised in treaties signed in 1842 and 1853 by the Tibetan government and recognised by the Chinese who had nominal authority over Tibet. The boundaries of the region were well defined at Panghyong lake on the east and Karokaram range in the north-west and remain so till this date.

Aksai Chin, the icy desert north east of Ladakh, which the Chinese surreptiously annexed in the 1950s was however not part of this treaty, its status lay undefined. Though the Maharaja of Kashmir nominally claimed it in the 19th century after W.H.Johnson, a British officer of the survey of India drew a border in 1865 which placed Aksai Chin within the Maharaja's territory