This article is written by Raslin Saluja, from KIIT School of Law, Bhubaneswar. This is an exhaustive article on direct selling companies under the Consumer Protection Rules, 2021. It covers how the rules have dealt with various entities, their responsibilities and liabilities, and the protection of customer’s interests in order to address the issues existing in the industry.
Table of Contents
Earlier in 2016, the Ministry of Consumer Affairs, Food, and Public Distribution had come out with a set of guidelines for companies that were advisory in nature. The draft rules now propose penalties for violations. These new rules will prohibit companies such as Amway, Tupperware which offer pyramid and money circulation schemes. These schemes will no longer be allowed to operate to protect the consumer’s interest in the country. This is for the first time, the Union Consumer Affairs Ministry has introduced a framework for direct selling and has sought public comments by July 21, 2021.
The Ministry of Consumer Affairs, Food, and Public Distribution issued a draft named the Consumer Protection (Direct Selling) Rules, 2021 in order to regulate direct selling activities, prevent fraud and protect the legitimate interests of the consumers. These would apply to:
(a) all bought or sold goods and services through direct selling;
(b) all models of direct selling;
(c) all direct selling entities offering goods and services to consumers in India; and
(d) all forms of unfair trade practices across all models of direct selling
These also apply to the existing direct selling entities who are required to comply with the rules within 90 days of its publication in the official gazette and are also applicable on the direct selling entity established outside India but offers goods or services to consumers in India.
According to Section 3(d), a direct seller is a person who is appointed or authorized through a legally enforceable written contract by a direct selling entity with the principal entity to undertake the direct selling business on a principal to principal basis.
Section 3(e) states the meaning of direct selling which continues to hold the same definition as under the Consumer Protection Act, 2019 which includes having a network of sellers for marketing, distribution, and sale of goods or provision of services, other than through a permanent retail location.
Section 3(f) defines a direct selling entity which means an entity not engaged in a pyramid scheme, and/or money circulation scheme, which sells or offers to sell goods or services through direct sellers.
Section 3(g) defines a direct selling network which is a network of direct sellers formed by a direct selling entity and includes a multi-layered network of direct sellers in which direct sellers introduce or sponsor further levels of direct sellers and supports them to receive in return any benefit which is solely as a result of the sale of goods or services. These networks also have to comply with some provisions such as:
- Such networks should not be entitled to receive any remuneration or incentives for recruitment/enrollment of new participants in the direct selling business except as a result of the sale of goods or services by them.
- It should not require any participant to buy goods/services for an amount higher than what is expected to be the usual price for a quantity that exceeds the amount that can be expected for selling/reselling purposes.
- It should not require the new participant to pay any registration fees or sales costs for demonstrating the equipment and materials or other participation fees.
- It should provide a written contract describing the material terms of participation to all the participants.
- It should grant the participants a reasonable period of cooling off to cancel their participation and receive a refund that was given to participate. The cooling-off period shall not be less than 30 days.
- At the request of the participant at reasonable commercial terms, it should allow them for a buyback or repurchase policy for currently marketable goods which are unpacked or services that are sold to the participant.,
- Where the cooling-off period according to Section 3(c) is a time period during which one can change his mind about an agreement that he/she has made without causing a breach of contract and or levy of penalty;
Key features of the draft rules
A) Conditions for registration of direct selling entities
All the direct selling entities and direct sellers operating in the entities network within India have to mandatorily register themselves with the Department for Promotion of Industry and Internal Trade (DPIIT) and get a registration number allotted. The time period for allotment will be notified by the DPIIT who may extend the time for sufficient reason submitted in writing. Each of these entities needs to ensure that their registration numbers are on a prominent display on its website which is clear and easily accessible by its users and that for each transaction an invoice is issued. This will certainly be a progressive step as it would identify the entities and give them validation. It will also act as a filtration process to remove the bad elements of the industry.
According to Section 6, these direct selling entities also have to maintain either manually/electronically certain following documents/records at their registered office. These include:
- Certificate of Incorporation
- MOA & AOA
- Copy of PAN & TAN
- Copy of GST
- GST returns
- Income Tax returns
- Copy balance sheet, audit report, etc.
- Record of customers and direct sellers
- Register of direct sellers
B) Conditions for the conduct of direct selling business
The draft direct selling rules set out detailed obligations, and duties for the direct sellers and direct selling entities towards consumers. These are as follows:
- The direct selling entities have a duty to be incorporated under the Companies Act, 2013/1956 or partnership firm registered under the Partnership Act, 1932 or limited liability partnership registered under the Limited Liability Partnership Act, 2008 and have a minimum of one physical registered office in India.
- They must own, hold or be the licensee of trademark, service mark, or any other identification mark identifying the direct selling entity with the selling goods or services provided and shall not give commissions, bonuses, or incentives on sale of products/services for which they are not the owner, holder, licensee of a trademark, service mark or any other identification.
- They must have maintained an updated and working website with all relevant current details, contact information, management products, product information, price, and a grievance redressal mechanism.
- They must issue proper identity cards fulfilling KYC verification documents to their direct sellers.
- Their website must be accessible and must prominently display to its users the following information:
- The legal name of the direct selling entity and the headquarters’s primary geographic address along with its branches;
- Contact details like email, fax, phone numbers of customer care as well as of grievance officer and a ticket number for each complaint lodged through which the consumer can track the status of the complaint;
- Information relating to return, refund, exchange, warranty and Information required by the consumer to make informed decisions like guarantee, delivery and shipment, modes of payment, and grievance redressal mechanism.
- Information relating to payment methods, changing those methods, their security, any fees or charges payable by users,
- Contact information of the relevant payment service provider;
- Disclosing all relevant mandatory notices and contractual information as per applicable laws.
- Total price in a single figure along with all the details and their breakup price, showing all the charges (compulsory and voluntary), for delivery, postage and handling, conveyance charges, and tax;
- Provide information, at the pre-purchase stage to every direct seller and the consumers purchasing directly from Direct Selling Entity, which shall contain —
- Purchaser and seller’s name;
- The estimated delivery date of goods or services;
- The country of origin of the product;
- Month & year in which the product is manufactured;
- The procedure for the return of the goods;
- Goods warranty; and
- Exchange or replacement of goods in case of defect.
- A prohibition from adopting any unfair trade practice in the course of business and to abide by the laws of the land.
- Their products must comply with the declarations under the Legal Metrology Act, 2009.
- They have to store the personal information provided by the consumer within the Indian jurisdiction in accordance with the laws and take all required steps to ensure the protection of such data.
- They must maintain a record of relevant information for the identification of all direct sellers who have offered defective/spurious products or deficient services and display their websites and office premises publicly.
- They are also required to maintain a record of all direct sellers under the direct selling entity including ID proof, address proof, email and other contact information.
- They have to provide information regarding the direct seller to a consumer who requests in writing after purchase of goods/services including the address, name, email and any other necessary contact information with the direct seller for effective dispute resolution.
- They have to ensure that the advertisements made regarding the goods/services are consistent with their actual characteristics, access and usage conditions. They also cannot directly/indirectly represent themselves and consumers and post reviews misrepresenting the quality/features of goods and services.
- They will have to bear appropriate liability if they explicitly/implicitly vouch/ take a guarantee for the authenticity of the goods/services sold.
- They are also obligated to monitor the practices of the direct sellers/ members in his network and ensure they comply with the rules by way of a legally binding contract and take disciplinary actions in case of non-compliance.
- All the direct selling entities have to become a partner in the convergence process of the National Consumer Helpline of the Central Government.
C) Obligations of direct selling entity and direct sellers in relation to product liability
- Both of them must ensure the terms of offer are clear and in consonance with the nature of what is being offered.
- The presentations used of direct selling must not include any illustration, expression, description which can be verified, must be capable of substantiation, and must not directly or by implication mislead the consumer.
- The demonstration offered must be accurate and complete in terms of price, and credit and payment options, cooling-off periods, return rights, guarantee terms, after-sales service, and delivery where applicable.
- Direct selling must not be represented to the consumer as a form of market research.
- It should not be misleading or deceptive and unfair trade practices must not be used.
- All promotional literature, advertisements or mailings must contain the relevant contact information including the telephone number of the direct seller.
- Direct selling in no way shall state/imply the existence of any additional guarantee/warranty which would give the consumer more rights than that has been provided by law.
- They have to ensure that the guarantee or warranty terms are included along with all the relevant contact information of the guarantor shall be easily accessible to the consumer and any other restrictions, prohibitions on rights or remedies, shall be clear and conspicuous;
- The form of order or other describing document sent along with the product should clearly state the remedial action open for consumers.
- The presentation of the offer should only refer to any other description, document, or advertisement if it is genuine, verifiable, and relevant to such additional testimonials and endorsement.
- All the service details should be included in the guarantee or stated anywhere else as stated in the offer for after-sales services and if the consumer accepts the offer, the information shall be given on easy activation access and communication with the agent of service provided.
- Samples along with products where applicable should be suitably packaged for delivery to the consumer and for a return option, in accordance with the standards pertaining to the health and safety of the consumers.
- Orders will have to be completed within the decided delivery date and if any unexpected delay arises, the consumer should be informed as soon as possible if it becomes apparent to the direct selling entity or the concerned direct seller unless otherwise stipulated in the offer. The consumer should also be granted cancellation if requested, irrespective of the fulfillment of the requirements, with a proper refund of the deposits, according to the terms proposed to the consumer at the time of purchase. In cases where it is not possible to prevent delivery, then the customer will have to be informed of the returning rights at the cost of the direct selling company or the direct seller as per the terms of returning procedure of the goods
- All information regarding the payment shall be clearly stated in the offer like whether payment is to be made in parts or full, details of any additional charges on postage, handling, taxes, etc.
- For sales by installment, details on credit plans, deposit or payment on account, periodic value, time period of such amounts, and the total price in comparison with the immediate selling price, if any, shall be clearly shown in the offer.
- The consumer shall be provided with any information needed to clarify the cost, interest, and form of credit either in the offer or when the credit is offered.
- The offer prices shall be maintained for a reasonable period of time unless the duration and specific time are stated.
- The payment procedure and debt collection method should be determined before signing any contract and should be in writing such as to not cause inconvenience to the consumer, making due allowance for delays outside the consumer’s control.
- Debtors should be approached in a reasonable manner and distinguished debt collection documents should be used that do not have the potential to create confusion.
- They must follow the provisions of the Legal Metrology Act, 2009 and the rules.
Restrictions on direct selling entities and direct sellers
A direct selling entity and direct seller shall not –
- Take part in any fraudulent activities or sales and take reasonable steps to prevent the participants from indulging in any misrepresentations or fraud, coercion, harassment, or unconscionable or unlawful means;
- Engage, cause or allow any misleading conduct or likely to mislead with regard to any substantial details relating to its direct selling business, or to the goods or services being sold by itself or by the direct seller;
- Indulge in mis-selling of products or services to consumers.
- Use, or allow to be used for, fraud, coercion, harassment, or unconscionable or unlawful means in promoting its direct selling business, or to the goods or services being sold by itself or by the direct seller;
- Deny taking back spurious goods or deficient services and give the refund amount paid for goods and services provided.
- Charge any entry fee or subscription fee
Besides, a direct selling entity and a direct seller shall act in compliance with all the relevant statutory laws including payment of taxes and deductions as per Income Tax, norms and GST etc, and not induce consumers to make a purchase based upon being able to replace/return or get a discounted price by referring prospective customers to the direct sellers for similar purchases, if such reductions or recovery are contingent upon some uncertain, future event.
Additional obligations of a direct seller
(1) A direct seller shall-
(a) truthfully and clearly give his identification, the identity of the direct selling entity, the characteristics of the goods or services sold and the purpose of the solicitation to the prospect with any request before the sales representation
(b) offer a prospect adequate and exact explanations and representations of goods and services, details such as prices, credit terms, terms of payment, return policies, terms of the guarantee, after-sales service;
(c) provide an order form to the consumer during or before the time of the initial sale, which shall contain all the relevant details such as identities of the direct selling entity and the direct seller and their basic identification and communication details such as name, address, registration number or enrollment number, identity proof and contact number of the direct seller, complete details and description of the goods or services to be supplied, their country of origin, date of the order, the total amount to be paid by the consumer, the timeline and location of inspection of the sample and delivery of goods, consumer’s rights to cancel or return the order if it’s in the prescribed saleable condition and avail full refund on sums paid and complete details regarding the complaint redressal mechanism of the direct selling entity;
(d) take adequate steps to ensure that all private information is under protection, in accordance with the laws for the time being in force, provided by a consumer.
(2) A direct seller shall not-
(a) visit a consumer’s premises without prior approval/appointment and always take his identity card
(b) provide any literature to a prospect not received approval of the parent direct selling entity
(c) require a prospect to purchase any literature or sales demonstration equipment;
(d) make any misleading claim against the claims authorized by the direct selling entity in pursuance of a sale.
Persons not to be engaged in the business of direct selling
Any convicted person or bankrupt or a person of unsound mind shall not be allowed to engage in the business of direct selling.
Sale through e-commerce platform
Any person selling, displaying, or offering to sell, including an e-commerce medium, any product or service of a Direct Selling Entity will have to get prior written consent in order to make such sell or offers.
Prohibition of Pyramid Scheme and Money Circulation Scheme
The direct selling entity or direct seller shall not promote a Pyramid Scheme or participate in a money circulation scheme, under the guise of doing direct selling business. Herein money circulation scheme as defined under the Prize Chits and Money Circulation Schemes(Banning) Act, 1978 is a scheme that assures an easy and quick way of earning money from another so as to invest the amount in a money circulation scheme.
Whereas a pyramid scheme is generally a structure in which an organizer initiates with one person representing the tip of the pyramid. One person recruits another who works under him and is required to invest some amount which is paid to the first recruiter. Since the person who was recruited by the initial recruiter has to make returns on his investment he then, in turn, recruits more investors who wish to invest a fixed sum of money and this goes on giving rise to a chain of pyramids. It is thus a multi-layer network of subscribers who in order to receive benefits enroll more and more subscribers. This practice is illegal in India, as in 2015 Reserve Bank of India even issued a statement warning investors to be cautious of these schemes that try to gain customers with promises of high returns.
Contravention of rules
If the nodal officer, Chief compliance officer, grievance officer of direct selling entity or by direct selling entity itself or by direct seller fails to comply with the rules shall be construed as ‘unfair trade practice’ as defined under Section 2(42) of the Consumer Protection Act, 2019 (35 of 2019) and their provisions shall apply for any violation of the provisions of these rules.
The grievance redressal mechanism and other key authorities
- The direct selling entity must appoint a central chief person who can be contacted or an alternate senior designated functionary who is a citizen and resident of India, to ensure compliance with the Act or the rules and face the liability for grievances arising out of the sale of products, services or business opportunities by its direct sellers.
- Direct selling entities are required to establish an adequate grievance redressal mechanism based on the count of grievances usually received by such entity from India and shall appoint a grievance officer for consumer grievance redressal with their updated and current information like name, contact details, designation put on display on their website whose URL must be printed on product information sheet or pamphlet. Further such appointed redressal officers must acknowledge the complaint filed within 48 working hours of the receipt of the complaint and normally redress it within a month which if delayed must be justified with reasons in writing and informed to the complainant.
- The Chief Compliance Officer must also be appointed by all direct selling entities who shall be a managerial personnel/ senior employee of that entity and shall be responsible for ensuring all provisions of the Act and rules are followed and shall be liable in any proceedings relating to any data or communication with respect to a direct selling entity.
- They are also obligated to appoint a nodal contact person who shall be their employee other than the chief compliance officer who is required to be available 24×7 for coordinating with the law enforcement agencies and officers to ensure compliance with their orders.
- They must also establish a mechanism for filing complaints by the consumers through its offices, branches, and direct sellers through a person, post, telephone, email and website.
The Indian Direct Selling Association (IDSA)
The IDSA is a premier association of leading direct selling entities in India, which has welcomed the draft rules and the introduction of a regulatory framework. They have been waiting for this move since the enactment of the Consumer Protection Act, 2019 and believe that this is a positive step in regulating the entities, intermediaries, and people associated with the industry. They have been closely involved with the government after the 2016 Direct Selling Guidelines and the 2019 Consumer Protection Act. They have represented the industry for 25 years now in multiple fonts and successfully managed to engage the stakeholders into dialogue regarding the concerns and issues in the direct selling business.
The industry has been vocal about the requirement of a separate regulatory framework. Even the industry players are supportive and willing to adjust to the proposed draft. According to a 2019 report called The Global Direct Selling-2019 Retail Sales by the World Federation of Direct Selling Associations (WFDSA), in 2019, the Indian direct selling industry which comprises Amway, Oriflame, and Modicare among others, reported sales of US $2.47 billion and having these guidelines will certainly bring more clarity and structure to its working.
This step was indeed long-awaited. This allows India to join the list of other countries that already have clear regulations and mechanisms for direct selling services. Earlier there have been scams such as the Amway pyramid scam in 2013 where the distributors were tempted with false promises of easy money if they enrolled more distributors. Further, the products were overpriced and therefore the distributors later lost all their money since no customer was willing to buy such products. Another such is the Qnet scam that happened in August 2020, where the firm was accused of duping investors in a pyramid scheme.
Having clear regulations is a positive step as it will help to address the various issues involved in the process of direct selling. The entities will no longer be doing as they like and the laws will have to be followed uniformly. The illegal practices that have been conducted under the guise of direct selling will no longer be accepted in the market. Since the draft rules have clearly demarcated between the pyramid schemes and direct selling network, it would create a healthy business atmosphere and will look after the rights of the customers in line with the developments in the industry.
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