Audit of chain mkting company

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This query is : Open

Mukesh Kumar Tiwari (Querist)

11 August 2009 The main business of the company is making members by accepting subsciption under any sheme of Rs. 5000,or 10000 or 150000 against which one suitlength (One Pent Pc.) say of Rs. 250 is given by the Co.and instruct them to prepare down chain link of three member under them. Co. gives commission to initial member and further commission when down chain link is completed by initial members.
My Questions are :
1.Whether the nature of activity being carried out is legal or contravenes any statutory laws in India. As according to me this is neither trading nor any service providing activity.
2. If it is legal, what should be the Object in the memorandum of assocation ?
3. What should be the appropriate accounting treatment for such transactions ?
4. How the huge amount of profit earned by the Company is absorbed ?
Pl. guide us on the above mentioned matters.
Thnaking You.
Mukesh Tiwari.

UMA SHANKER SHARDA

UMA SHANKER SHARDA (Expert)

17 August 2009 Chain marketing companies are banned by RBI. Hence it is not legal.
The company can not directly have an object clause stating making members on chain marketing basis. But it can have the object to promote all kind of products and for than it can make associates, who will be paid commission for their services. It might be a sort of chit fund, where operator is retaining 5% of chit amount and balance is paid to highest bidder to take amount once during the continuance of a particular scheme.

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