In this article, Shivani Singh discusses How to structure an MLM company legally in India.
Direct Selling / Network Marketing / Multi-level Marketing (MLM) industry
An MLM or a Multilevel Marketing is a system of marketing in which selling of goods and services takes place through a network of distributors. A Multilevel Marketing system is adopted by various companies whether private or public to increase the sale of their produced goods and services. A company prefers Multilevel Marketing system over establishing showrooms in different parts of different countries which is a long process, both time and money consuming. The distribution process under Multilevel Marketing takes place at more than one level and due to a large number of distributors, it helps to reach maximum customers of the market.
How do a Multilevel Marketing works?
Recruitment is the common element of all the Multilevel Marketing systems. People are offered to become a distributor or a consultant of the company either through advertisements or through another distributor of the products of the same company. A Multilevel Marketing system has different types and is also known as Network Marketing, Direct Sales, Pyramid Selling, or Referral Sale but there is a minute difference among all these strategies.
- Network Marketing: Network marketing is a flexible business strategy in which a distributing network is required to set up in the business. It has the features of multilevel marketing in which a transaction takes place at more than one level.
- Referral Selling: Sales Referral is a strategy in which an existing customer provides contact information of a customer or a client to the sales representative. It’s a general process in which a sale representative ask the existing customer for sale referrals through connections which would result in a successful sale.
- Pyramid Selling: In this system, the selling of goods and services when each salesperson recruits further salespeople thus a hierarchy is formed in which each person receives returns made by salespeople in the chain below them. The current position of Pyramid selling is that it is not legally allowed for a company in India under Direct Selling Guidelines, 2016.
- Direct Sale: Direct selling is a business strategy which includes both Single-level Marketing and Multilevel Marketing. In Single Level Marketing system a direct seller generates income by buying goods and services from the parent company and selling them to customers directly. In Multilevel Marketing system a direct seller has a double source of income- one is through selling directly to customers and second is by sponsoring new direct sellers and charging good commission from them.
Some big companies in the MLM market
There are various prominent companies who have adopted Multilevel Marketing and a few of them are:
- Amway is an MLM company which was founded by Richard DeVos and Jay Van Andel in 1959. The annual sale of Amway is around $10.9 Billion and the number of sales associates are approx. 3 Million. Amway company deals in products like- cosmetics, wellness, food, and beverages products.
- Amsoil Inc. is also a corporation based in America primarily dealt in Synthetic Lubricants and Filters. The company adopted the Multilevel Marketing system to cover a maximum number of customers. The company’s slogan for advertising their products was The First in Synthetics. Amsoil Inc. was founded by Albert J. Amatujio in 1972.
- Oriflame is a Swedish company founded by Jonas and Robert Af Jochnick in 1967. This company deals in cosmetics, personal care, lip balm, and dietary supplements and has also adopted the Multilevel Marketing system for selling their products on a large scale.
Why is a Multilevel Marketing so prominent?
A Multilevel Marketing is a very easy formula for money making, there is no limit to how much money you could make. Multilevel Marketing is generally less expensive than other forms of marketing. It is very economical to become a distributor than to start a business of your own which involves the element of risk. A Multilevel Marketing programme attracts various distributors due to their lucrative rewarding schemes. Companies like Amway offers cash bonuses on performance basis every month, the distributing staff of Avon company is offered various trip packages to different destinations.
Legality of Multilevel Marketing system
The system of Multilevel Marketing is generally less regulated or laws for it are very vague. Multilevel Marketing is legal in the United States of America and In Canada also until and unless it contravenes The Competition Act. Federal Trade Commission (FTC) regulates Multilevel Marketing in the USA. The Multilevel Marketing plan is legal in India and hit the business industry of India in 1995 when a global MLM company Oriflame first introduced network marketing in India. After this Tupperware introduced Multilevel Marketing to Indian Markets and opened doors for other MLM companies in India. The renowned MLM companies in India include MaryKay, Avon, Forever Living. Multilevel Marketing is governed by The Consumer Protection Act, 1986.
Procedure to structure an MLM Company legally in India
A. Formation of Company
The first step is to establish a company which can be a Ltd. or Pvt. Ltd. company and Firm or an SSI firm to set up a Multilevel Marketing plan which does not involve more risk.
B. Documents for incorporation
The second step is proper documentation required for incorporation of a company and the documents required are: Registration/CIN number, Bank Account number, PAN Number, Tan Number, Labour Licence etc.
C. Incorporation of Company
At the time of incorporation of a company, it is very important to prepare a layout plan which includes working, non-working plan, repurchase plan, RD/Fd return plan.
D. Selection of Product
The fourth step is finalizing the type of product to be manufactured or to be dealt with. It is the stage to decide whether to produce physical and virtual goods or consumable and one-time purchase goods or taxable products, insurance, and FMCG products.
E. Product Launching
This stage is known as product launching stage. At this stage, the company attracts a large number of customers by providing pre-launch offers, permanent and monthly offers which would help to create goodwill in the market.
F. MLM Software for the Company
At this stage, a company should approach an MLM software making company which has the best software at low cost. It must be an online software which is easily accessible by general consumers. The software should include facilities like user login, join now option, latest updates, festival/celebration notifications, achievers list, ePin, eWallet etc.
G. Legal Policies
H. Requirement of other documents
It is the last stage of structuring a company for MLM business form. Other documents that are required by the company includes company logo, physical form, printed materials for distributors like pamphlets etc. and media packages.
Fundamental guidelines by the government for MLM companies
These are the model framework guidelines for Direct selling or Multilevel Marketing which acts as an advisory for all the states and Union Territories to protect legitimate rights and interest of consumer by preventing fraudulent activities. These guidelines are known as Direct Selling Guidelines, 2016.
Kerala was the first Indian state that had formed MLM guidelines for MLM companies in India.
- ‘Act’ means Consumer Protection Act, 1986.
- ‘Consumer’ is the person who buys goods and services for his personal use and not for resale or manufacturing and it means the same as defined under The Consumer Protection Act, 1986.
- ‘Prospect’ is the person who is offered to join the Direct selling opportunity.
- ‘Direct Seller’ is the authorized person appointed by direct selling organization through a legally binding contract who undertakes direct selling business on principal to principal basis.
- ‘Network of Direct Selling’ this includes Multilevel Marketing distribution method. In this, there is a network of direct sellers at different levels of distribution who further recruit or sponsor direct seller for other levels of distribution.
- ‘Direct Selling’ includes marketing, distribution, selling of goods and services as apart of direct selling network excluding the Pyramid Scheme.
- ‘Pyramid Scheme’ is a network of multiple layers formed by subscribers enrolling one or more for the purpose of receiving direct or indirect benefits resulted from enrolment, action or performance of additional subscribers to the scheme. ‘Pyramid Scheme’ is not applicable to the multi-layered network of subscribers to a scheme formed by Direct Selling entity. The policies of Direct Selling entities must comply with the provisions that are:
- A direct seller will not receive any remuneration or incentives for the recruitment of new subscribers.
- No participant is required to purchase goods or services exceeding the expected amount for sale or resale to customers and for a number of goods and services that exceeds an expected amount to be consumed by, or sold, or resold to consumers.
- No participant is required to pay/registration fee, cost of samples sold, equipment and material or other fees related to participation.
- “ remuneration System” for every direct selling entity shall not have any remuneration clause for the direct seller to participate in direct selling; To ensure the remuneration for direct sellers must derive from the sale of goods and services; Clearly mention the method of calculating remuneration.
- ‘State’ includes all the Union Territories of the country.
2) Terms and condition for setting up an MLM or a direct selling Business :
Every direct selling entity or an MLM company must comply following conditions within 90 days of the publication of the notification in Gazette: It shall
- Be a registered legal entity under the laws of India.
- Conduct an orientation programme for all the anticipated direct sellers informing them about all the aspects of direct and Multilevel Marketing including selling operations, remuneration system, anticipatory remuneration for prospective direct sellers.
- The promoter or the important personnel of the management of MLM company should not have been convicted for any criminal offence of imprisonment in the last 5 years by any court of competent jurisdiction.
- Inform about the provisions of full-refund or buyback guarantee to every direct seller on reasonable conditions to be exercised within 30 days of the date of distribution of goods and services to the direct seller.
- Notify about the cooling off period which entitles a direct seller to return goods and services purchased from a direct seller during a cooling off period.
- Have an office identified jurisdiction and operations in the state so that the consumers and direct seller get easily acquainted with the price of products, return, replacement and delivery policy, after sale related grievances redressal.
3) conditions for the conduct of direct sales and an MLM Business:
- Direct selling or an MLM entity must have all the document like sales tax/VAT, Income tax, TDS and other document required by law of land of business.
- Should have a bank account with at least one nationalised bank.
- Nature of business must be clearly stated in Partnership deed or memorandum of association. (if the ‘nature of business’ clause is not included in partnership deed or MOA then it must be ratified within 2 months of the date of publication of these guidelines.)
- incentives on Pay sale basis at an agreed rate within an agreed time period.
- The official website should display names and identification number of authorised direct sellers and must provide consumer complaint redressal mechanism in an easily accessible format on the website.
4) conditions of the contract between an MLM business entity and MLM sellers:
- There is always an agreement between MLM business entity and MLM sellers which must comply with section 10 of The Indian Contract Act, 1872 also the rights and duties of parties must be coextensive with the rights and duties as provided under the Act.
- The agreement shall be in writing and containing all the material facts or information regarding participation.
- Termination of contract on a reasonable notice on instances where a direct seller has not sold any goods and services up to 2 years since the contract was entered into or last sale transaction by a direct seller.
- An MLM or Direct selling entity shall appoint/authorise direct seller on an application in prescribed format and must not contravene provisions of The Indian Contract Act, 1872.
5) Restrictions or Prohibitions:
- Distribution of goods and services after being known of its inferior quality or the product have crossed the expiry date of manufacturing.
- Direct selling or MLM entity/Direct seller must not indulge in money circulation or any other activity that is barred by Prize Chits and Money Circulation Scheme (Banning) Act, 1978.
6) General terms under MLM Business:
- MRP of products must be clearly visible on the package, guarantee/warranty of the manufacturer and consumer must be given reasonable opportunity to return/exchange the product purchase within 30 days due to any defect in the manufacturing of product or the product is not useful for the desired purpose provided that the seal/protection of product is not broken.
7) Consequences of breach of guidelines:
- If the sale activities are in contravention with the above-mentioned guidelines then it will not be considered as direct selling and would be dealt with according to the relevant provisions of existing law.