India: The Direct Selling Guidelines 2016

The Direct Selling Guidelines 2016 ("Guidelines") have been issued by Ministry of Consumer Affairs, Food & Public Distribution as guiding principles for State Governments to regulate the business of Direct Selling ("DS") and Multi-Level Marketing ("MLM") and strengthen the existing regulatory mechanism on DS and MLM, for preventing fraud and protecting the legitimate rights and interests of consumers.

  1. Important Definitions

"Direct Seller" means a person appointed or authorized, directly or indirectly, by a Direct Selling Entity through a legally enforceable written contract to undertake Direct Selling business on principal to principal basis.

"Network of Direct Selling" means a network of direct sellers at different levels of distribution, who may recruit or introduce or sponsor further levels of direct sellers, who they then support:

Explanation: "network of direct selling" shall mean any system of distribution or marketing adopted by a direct selling entity to undertake direct selling business and shall include the multi-level marketing method of distribution.

"Direct Selling" means marketing, distribution and sale of goods or providing of services as a part of network of DS other than under a pyramid scheme.

Provided that such sale of goods or services occurs otherwise than through a "permanent retail location" to the consumers, generally in their houses or at their workplace or through explanation and demonstration of such goods and services at a particular place.

"Direct Selling Entity" means an entity, not being engaged in a pyramid scheme, which sells or offers to sell goods or services through a direct seller. Provided that "Direct Selling Entity" does not include any entity or business notified otherwise by the Government for the said purpose from time to time.

"Saleable" shall mean, with respect to goods and / or services, unused and marketable, which has not expired, and which is not seasonal, discontinued or special promotion goods and / or services;

"Cooling-off Period" means the duration of time counted from the date when the direct seller and the direct selling entity enter into an agreement and ending with date on which the contract is to be performed and within which the direct seller may repudiate the agreement without being subject to penalty for breach of contract;

  1. Key features of the Guidelines:

B.1 Conditions for the setting up of DS business:

Every Direct Selling Entity ("DSE") intending to carry out direct selling business subsequent to the publication of the notification in the Gazette, i.e., Sept 12, 2016, shall within 90 days comply with the following conditions for the conduct of DS business:

  1. The DSE should be a registered legal entity under the laws of India;
  2. It should provide a mandatory orientation session to all prospective direct sellers giving accurate and complete information on all aspects of direct selling operations including but not limited to the remuneration system;
  3. DSE should pay all dues and make withholdings from direct sellers in a commercially reasonable manner;
  4. DSE shall notify and provide a full refund or buy-back guarantee to every direct seller;
  5. DSE is also required to notify and provide to every direct seller a cooling-off period which entitles such direct seller to return any goods /services purchased by the direct seller during the cooling-off period.
  6. The promoter or key management personnel of DSE should not have been convicted of any criminal offence punishable with imprisonment in last 5 years by any Court of competent jurisdiction.
  7. DSE shall have an office with identified jurisdiction of its operation in the State.

B.2 Conditions for conduct of DS Business

Every DSE should comply with the following conditions:

  1. It shall be the owner, holder, licensee of a trademark, service mark or any other identification mark which identifies the entity with the goods to be sold or supplied or services to be rendered.
  2. It shall issue proper identity document(s) to its Direct Sellers.
  3. It shall maintain proper records either manual or electronic of the business dealings of the Direct Sellers.
  4. It shall maintain are register of Direct Sellers wherein relevant details of Direct Sellers shall be updated and maintained.
  5. It shall maintain proper and updated website giving the prescribed information.
  6. It shall provide to all Direct Sellers their periodic account / information.
  7.  It shall monitor the value of the purchases of all its Direct Sellers/Distributors on a monthly basis and once the purchase value crosses the VAT threshold; it must intimate the Direct seller/Distributor to pay the VAT;
  8.  DSE shall not use misleading, deceptive or unfair recruiting practices, make any factual representation to a prospective direct seller that cannot be verified or make any promise that cannot be fulfilled.
  9. DSE shall not present any advantages of DS to any prospective direct seller in a false or deceptive manner, make any representation which is false or misleading, use, or cause or permit to be used, fraud, coercion, harassment, or unconscionable or unlawful means in promoting its DS practice.
  10. DSE shall not require its direct sellers to provide any benefit, including entry fees and renewal fees or to purchase any sales demonstration equipment or material in order to participate in its DS operations.
  1. Conditions for DS contract between Direct Seller/Distributor and DSE

Every DSE shall execute a contract agreement, whether directly or indirectly, with Direct Sellers before enrolment subject to the following conditions:

  1. The Agreement shall be provided in a manner consistent with Section 10 of the Indian Contract Act, 1872;
  2. In addition to the rights and obligations of parties to the agreement under these DS Guidelines or any other law in force, parties shall have rights and obligations that are coextensive with rights and obligations of parties under the Indian Contract Act, 1872;
  3. The agreement shall contain certain conditions as are prescribed under the DS Guidelines.
  1. Certain obligations of Direct Sellers
  1. Direct Seller should carry their identity card and not visit the customer's premises without prior appointment/approval;
  2. Offer a prospective consumer accurate and complete explanations and demonstrations of goods and services, prices, credit terms, terms of payment, return policies, terms of guarantee, after-sales service;
  3. Provide certain information as prescribed in the Guidelines, to the prospect/consumers at the time of sale;
  4.  A direct seller shall keep proper book of accounts stating the details of the products, price, tax and the quantity
  5.  A direct seller shall not:
    • Use misleading, deceptive and / or unfair trade practices;
    • Make any factual representation to a prospective direct seller that cannot be verified or make any promise that cannot be fulfilled;
    • Present any advantages of DS to any prospective direct seller in a false and / or a deceptive manner;
    • Knowingly make, omit, engage, or cause, or permit to be made, any representation relating to the DS operation, including remuneration system and agreement between the DS entity and the direct seller, or the goods and / or services being sold by such direct seller which is false and / or misleading;
    • Require or encourage direct sellers recruited by the first mentioned direct seller to purchase goods and / or services in unreasonably large amounts;
    • Provide any literature and / or training material not restricted to collateral issued by the DS entity, to a prospective and / or existing direct sellers both within and outside the parent DS entity, which has not been approved by the parent DS entity;
    • Require prospective or existing direct sellers to purchase any literature or training materials or sales demonstration equipment.
  1. Relationship between DSE and Direct Seller
  1. The relationship between DSE and Direct Seller shall be determined as per the written agreement between the parties;
  2. The DSE will be liable for grievances arising out of sale of products, services or business opportunity by its Direct Sellers;
  3. It will be the responsibility of the DSE to monitor and control the practices/methods adopted by the Direct Sellers;
  1. Conduct for the Protection of Consumer
  1. Direct Sellers and DSE shall take appropriate steps to ensure the protection of all private information provided by a consumer and shall be guided by the provision of the Consumer Protection Act 1986;
  2. Every DSE shall constitute a Grievance Redressal Committee, whose composition, nature of grievance shall be in accordance with the conditions prescribed in the Guidelines.
  3. DSE shall provide information to the consumer upon purchase which shall contain:
  • the name of the purchaser and seller;
  • the delivery date of goods or services;
  • procedures for returning the goods; and
  • Warranty of the goods and exchange / replacement of goods in case of defect.
  1. Any person who sells or offers for sale, including on an e-commerce platform / marketplace, any product or service of a DSE must have prior written consent from the respective DSE in order to undertake or solicit such sale or offer
  1. Prohibition of Pyramid Scheme & Money Circulation Scheme

No person or entity shall promote a Pyramid Scheme, Money Circulation Scheme in the garb of DS of Business Opportunities. The Money Circulation Scheme has been defined under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

The "pyramid scheme" has been explained in Annexure A to this memo.

ANNEXURE A

"Pyramid Scheme" means a multi layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment, action or performance of additional subscribers to the scheme.

The subscribers enrolling further subscriber(s) occupy higher position and the enrolled subscriber(s) lower position, thus, with successive enrolments, they form multi-layered network of subscribers.

Provided that the above definition of a "Pyramid Scheme" shall not apply to a multi layered network of subscribers to a scheme formed by a Direct Selling Entity, which consists of subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, where the benefit is as a result of sale of goods or services by subscribers and the scheme/financial arrangement complies with all of the following:

  1. It has no provision that a Direct Seller will receive remuneration or incentives for the recruitment / enrolment of new participants.
  2. It does not require a participant to purchase goods or services:
  • for an amount that exceeds an amount for which such goods or services can be expected to be sold or resold to consumers;
  • for a quantity of goods or services that exceeds an amount that can be expected to be consumed by, or sold or resold to consumers;
    1. It does not require a participant to pay any entry/registration fee, cost of sales demonstration equipment and materials or other fees relating to participation;
    2. It provides a participant with a written contract describing the "material terms" of participation;
    3. It allows or provides for a participant a reasonable cooling-off period to participate or cancel participation in the scheme and receive a refund of any consideration given to participate in the operations;
    4. It allows or provides for a buy-back or repurchase policy for "currently marketable" goods or services sold to the participant at the request of the participant at reasonable terms;
    5. It establishes a grievance redressal mechanism for consumers, more particularly

Explanation 1 – For the purposes of this proviso the term "material terms" shall means buy-back or repurchase policy, cooling-off period, warranty and refund policy.

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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