In this blog post, Aniket Piyush, pursuing M.A. in business law from NUJS, Kolkata, discusses the concept of multi-level marketing, and direct selling and the direct selling laws prevalent in India.
The world without consumer is unrealistic. A consumer is not only a salient backer to the industrialists but also the very backbone of the financial structure of society. There are two different channels by which products and services are distributed to consumers. One is the traditional and the most practised channel which includes
“Manufacturer – The third party carrying and moving agents – Redistribution stockist – Wholesaler – Distributor – Retailer – Consumer ”
Now, this model is widely accepted and practised in India. The second model is Direct Selling most popularly known as MLM [Multi Level Marketing] in which the manufacturers distributes the product and service directly to the consumers via distribution centres across the country. This model is often under a false presumption by the society and body of law as a Ponzi or pyramid scheme or chit fund.The present paper will delve into the market norms, modus operandi of MLMs in the light of MODEL GUIDELINES ON DIRECT SELLING formulated by Ministry of Consumer Affairs, Food & Public Distribution on 16th of September 2016.
HISTORY OF MULTI-LEVEL MARKETING
The roots of MLM lies in America, in early 1800s various travelling salespersons [also known as canvassers, peddlers, hawkers and drummers] started creating their own trained sales organizations for e.g. Asa Candler a peddler bought the formula of Coca-Cola syrup from pharmacist John Pemberton for$ 2300 in 1886 and built a sales team to sell the syrup in restaurant and other beverage junctions. The hardships of Great Depression provoked the former vice president (sales) of Fuller Bush Company Mr. Frank Stanely Beveridge and Catherine L ‘O’ Brien to start Stanley Home Products. They offered daily used household products. Few of the sellers from their company started giving demonstrations to clubs and organisations rather than individuals this, gave birth to the so-called “PARTY PLANS”. In a party plan, a seller invites friends, families and other acquaintances to their house and give demonstrations.
In 1934 Carl Rehnborg started selling vitamins supplement under California Vitamin Corporation, five years later he changed the name to Nutrilite Products Company, Inc. In 1945 Mytinger & Casselberry who were the exclusive distributor for Nutrilite products in America drafted the first MLM compensation plan. The plan offered 35% discount to the distributor on Nutrilite products so that he could sell the product on MRP with a profit margin of 35%. It was a quota based system in which the one who sells higher volume will receive higher profit share. In 1959 Rich DeVos and Jay Van Andel founded Amway Corporation. In 1972 Amway acquired Nutrilite.
WHAT IS DIRECT SELLING AND MULTILEVEL MARKETING
A direct selling company distributes and provides its products and services to the consumer without (involving) the participation of intermediaries involved in the traditional channel of sale. Since this model eradicates the intermediaries, it allows the manufacturers to distribute a certain amount (commission) to the independent agents (also known as members, distributors, agents) depending upon their sales volume. It is often that a direct selling company does not do traditional advertisement and primarily depends on the mouth to mouth publicity by its users. This no advertising agenda not only does a cost cutting for the company but also equips it for making payments of commission to its member.
Direct selling is of two types:-
- Single Level Marketing [SLM]
- Multi-Level Marketing [MLM]
BASIC PLAN OF DIRECT SELLING AND MULTILEVEL MARKETING
The manufacturers offer their products and services to their members at a price which is lower than the printed MRP of the product.This offered price is called distributor price or member price. The margin or we can call it retail profit from MRP and member price usually varies from 10-20%. Each direct selling company has their personal set of equations for calculating sales volume, i.e.; the company will decide that on the sale of product worth of 1000 Rs by a member the volume generated will be 700 points. It means that 100 Rs. = 70 points. The companies usually offer cash back on these points or sales volume generated in a month.The degree or percentage of cash back is directly proportional to the sales volume. On achieving a certain cumulative sales volume, a member escalates his cash back scale. Let’s assume that below cumulative sale of 5000 points a member will get cash back of 3%, on reaching 10000 points he will get 6% and so on.
LEGAL ASPECTS OF DIRECT SELLING CO. & MULTI LEVEL MARKETING
THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978
Conventional chit means a transaction whether called chit, chit fund, Kuri or by any other name by or under which a person responsible for the conduct of the chit enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or certain quantity of grain instead) by way of periodical instalments for a definite period and that each such sub- scriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the chit agreement, be entitled to a prize amount. Explanation.-In this clause “prize amount” shall mean the amount, by whatever name called, arrived at by deducting from out of the total amount paid or payable at each installment by all the subscribers
Money Circulation Scheme means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.
A direct selling company or MLM is often treated as a chit fund or money circulation scheme by the layman. It had happened because there was no law to regulate the direct selling companies in India. The major difference between an MLM and chit funds/money circulation scheme is that an MLM do not pay for a recruitment/ referral of a new member it only pays on sales volume whether the other two pay on referrals/recruitment of new members.
The IDSAwas incorporated in Mumbai in 1996 and moved to its registered office to New Delhi in 1998. It is a self-regulatory body which acts as an interface between the industry and policy-making bodies of the Government facilitating the cause of Direct Selling Industry in India. Before the inception of MODEL GUIDELINES ON DIRECT SELLING, it was IDSA that was maintaining the legal & ethical standards in the direct selling. Since at the moment we only have a guideline and don’t have an ACT which can regulate the direct selling operations in India it is still the IDSA that prescribes standard and procedure for incorporating a direct selling company.
HOW TO INCORPORATE A DIRECT SELLING COMPANY IN INDIA [Foreign Co. Perspective ]
- AS A FOREIGN COMPANY – An International Co. can do direct selling in India through followings:-
- Liaison Office/Representative Office
- Project Office
- Branch Office
- LIAISON OFFICE –
- The opening & operation of such office is regulated by FEMA and RBI approval.
- Expenses of such offices are to be met through inward remittances of foreign exchange from the Head Office abroad only.
- Such offices should not undertake any trading or commercial activities, and their activities should be limited to collecting and transmitting information between the overseas Head Office and potential Indian customers.
- Such offices should not charge any commission or receive other income from Indian customers for providing liaison services.
- Through a CA such offices have to file an annual activity certificate to RBI.
- The permission to hold such office is given for three years’ subject to renewal.
- PROJECT OFFICE: A Foreign Co. can set up a project office in India if they are planning to execute a specific project. RBI allow companies to set up offices but, any such offices cannot carry any activity except those which are related and incidental to the execution of said project.
- BRANCH OFFICE: Its role will be broader in respect of liaison and branch office but will be limited: –
- To represent the parent company/ other foreign companies in various matters in India
- To conduct research work in the area in which the parent company is engaged
- To undertake export and import trading activities
- To promote possible technical and financial collaborations between the Indian companies and parent or overseas group companies.
The branch office is not allowed to carry on manufacturing activities. It has to submit annual activity certificate to RBI. For granting the approval, RBI considers the history of the applicant company.
- AS AN INDIAN COMPANY – A foreign Co. can incorporate an Indian Co. as prescribed by the Indian Companies Act:
- The foreign equity in such companies can be 100% depending on the requirements of the foreign investor and the FDI rules.
- For registration, an application has to be filed with Registrar of Companies.
- A foreign company can also do a joint venture with an existing Indian company and enjoy the established distribution channels of its partner.
HIGHLIGHTS OF MODEL GUIDELINES ON DIRECT SELLING (Ministry of Consumer Affairs, Food & Public Distribution)
Conditions For The Setting Up Of Direct Selling Business:
Each & every direct selling entity is given 90 days time for compliance as per the conditions of the model guideline from 16th of September 2016.Following are the salient provision:
- It shall have an office with identified jurisdiction of its operation in the State to enable the consumers and direct seller to acquaint themselves with: –
- No promoter or key management personnel should have been convicted of any criminal offense punishable by imprisonment in last five
- The company must notify and provide to every direct seller a cooling-off period which entitles such a direct seller to return any goods /services purchased by the direct seller during the cooling-off period.
- The company must notify and provide a full refund or buy-back guarantee to every direct seller on reasonable commercial terms which can be exercised within a period of 30 days, from the date of the distribution of the goods or services to the direct seller.
- The company must provide precise and complete information to new and existing direct sellers regarding the fair and approachable remuneration opportunity, and related rights and obligations.
The company must conduct a mandatory orientation session for all of its members, providing precise and accurate information on all aspects of the direct selling operations, including the remuneration system and expected remuneration for newly recruited direct sellers.
- The direct selling company must be a registered legal entity under the laws of India.
- The price of products
- Return or replacement of products
- Efficient delivery of goods and services
- Post-sale redressal of grievances
Conditions For Conduct of Direct Selling Business
Every Direct Selling entity has to comply with the following conditions:
- A well-updated website must be maintained, and it must have following information: –
- A register named “Register of Direct Sellers” has to be maintained which will contain wherein relevant details of each enrolled Direct Seller i.e. verified proof of address, identity proof, and PAN. It must be updated time to time.
- The Licensee of a trademark, service mark or any other identification mark related to the goods to be sold or supplied must be owned and held by it.
- Terms of contract
- Income plan
- Details of direct seller
- Direct Sellers must have an identity card issued by the company.
- A proper manual/electronic record must be maintained regarding business dealing, with complete details of
- All relevant details of the entity
- Contact information of its management
- Products and its information
- Product quality certificate
- Complete income plan
- Terms of contract with direct seller
- Complaint redressal mechanism for direct sellers and consumers.
- The grievances must be addressed within 45 days of making such complaints.
A direct selling company must monitor the value of the purchases of all its Direct Sellers on a monthly basis, and once the purchase value crosses the VAT threshold, it must intimate the Direct Seller to pay the VAT.
DON’TS FOR DIRECT SELLING
- Using misleading, deceptive or unfair recruiting practices, including misrepresentation of actual or potential sales or earnings.
- Making any factual representation to a non-member that cannot be verified or making any promise that cannot be fulfilled.
- Presenting any advantages of direct selling to a non-member in a false or deceptive manner.
- Making or permitting to make, any representation related to its direct selling business, which is false or misleading.
- Asking direct sellers to provide any benefit such as entry fees and renewal fees, or to purchase any sales demonstration equipment or material to participate in its direct selling operations.
- Providing any benefit to any person for the introduction or recruitment of one or more persons as direct sellers.
- Asking the direct sellers to pay any money by way of minimum monthly subscription or renewal charges.
Conditions For Direct Selling Contract Between Direct Seller & Direct Selling Entity
An agreement is mandatory for every direct selling company and a new member at the time of his enrolment
- The Agreement has to be in accordance with section 10 of the Indian Contract Act, 1872.
- The agreement must be in writing, describing the material terms of participation and shall:
- Not force the direct sellers to buy such amount of products that cannot be sold to the consumer in reasonable time.
- Provide the direct seller a reasonable cooling-off period in which he can cancel his participation and receive a refund for goods or services purchased.
- Provide for a buy-back or repurchase policy for currently marketable goods or services sold to the direct seller.
Certain Obligations For Direct Sellers
- Accurate and complete explanations and demonstrations of the following must be given to a new and prospective customer: –
- During the demonstration, a direct seller on without any request and on his own should truthfully identify himself as well as the identity of direct selling company and the nature of good.
- A direct seller should always carry his identity card while visiting a customer.
- No direct seller shall visit the customer’s premise without prior appointment.
- Credit terms
- Terms of payment
- Return policies
- Terms of guarantee
- After-sales service
- Goods and services
- A new member or a prospect consumer at the time of sale must be provided with the following information:
- Name, address, registration number or enrollment number, identity proof and telephone number of the direct seller and details of the direct selling entity.
- A description of the goods or services to be supplied.
- Explain to the consumer about the goods return policy of the company in the details before the transaction.
- The Order date, the total amount to be paid by the consumer along with the bill and receipt.
- Time and place for inspection of the sample and delivery of the goods.
- Information about his/her rights to cancel the order and/or to return the product in saleable condition and avail full refund on sums paid.
- Details regarding the complaint redressal mechanism.
APPOINTMENT OF MONITORING AUTHORITY
- Consumer Affairs Department will deal with the issue arising in direct selling at the Union and the respective State Governments in the States;
- Each and every State Governments have to set up a mechanism to monitor/supervise the activities of direct sellers, direct selling company regarding compliance of the guidelines for direct selling.
- Every direct selling entity conducting direct selling activities must submit an undertaking to the Department of Consumer Affairs, stating that it is in compliance with the prescribed guidelines.
Not many are aware that direct selling is of two types
- Single Level Marketing [SLM]
- Multi – Level Marketing [MLM]
This single level marketing is hugely practiced in e- commerce. The sellers are rewarded on their sole purchase, and they cannot refer anyone nor can enjoy rewards on their purchase. On the other hand, MLM offers rewards on both types of sales. That’s the basic and sole difference between the two. People are often confused between MLM and Pyramid Scheme. Earlier they were unable to differentiate between the two but, now thanks to the guidelines presented by Shri Ram Vilas Paswan one can easily draw the line among the two. No legit MLM entity will pay on mere referrals or registration of new people. An MLM will only pay on the sale of products and volume of sales. It was obvious that in the absence of any law people were scared to put their hands in MLM.
16 years ago no one believed that one could watch movies on phone sets or can work or perform a computer’s functions through mobile, but the android did revolutionize the globe. No one visualized that on a single click, products and service would be delivered at their doorsteps, but e- commerce did happen. The future of consumerism lies in direct selling and that also MLM. Gone are the days when a consumer can be fooled by misleading advertisements, people understand that the celebrities who are endorsing the products do not use them but are paid for it.
The model guideline introduced last September is just beginning, and soon we can expect an ACT which will be a relief for the IDSA as it was alone acting as a legal backbone in the lawless society of direct selling. So, next time before judging a particular direct selling company as a pyramid scheme or cheat scam one must do a checklist as per the model guidelines.
 Section 2(a) of THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978
 Section 2(c) of THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978
 Indian Direct Selling Association
 IDSA- How to do business in India< http://idsa.co.in/how-to-do-business-in-india ><accessed on 27/12/2016>
 Foreign Exchange Management Act 1999
 Reserve Bank Of India
 This article has been prepared on the following works of Sourav Gosh which can be accessed at
< http://www.souravghosh.com/blog/direct-selling-guidelines-2016/#idsa >
< http://www.souravghosh.com/blog/direct-selling-mlm-network-marketing-legality/ >