India: MLM Schemes v. MLM Direct Selling Entities: Peeling Off The Masquerade

Last Updated: 20 January 2017
Article by Vikrant Rana

Multi-level marketing (MLM) has been in practice for some time. However, it was not till the mid-nineties that it gained momentum in our country. Much of the zest was short lived as most people could not decipher the concept of Multi-Level Marketing and many perceived it as a wish granting well to earn quick and easy money. As a result, numerous deceitful operators jumped onto the bandwagon to take advantage of the naive public to make heaps of money.1 Not surprisingly, lack of a dedicated governing legislation or oversight in the past by any designated authority has time and again enabled the industry to face tribulations. The sole reason why multi-level marketing is always under the scanner is because people easily fall under the hex of misleading pyramid schemes which are similar to multi-level marketing models. Therefore, it is imperative to know and understand the difference between a legal multi-level marketing business and an illegal multi-level marketing pyramid scheme.

Multi-Level Network Marketing in India

MLM is an alternate form of direct sales made to end consumers to avoid the roves of retailers and conventional product distributors. This method of sales strategy in MLM structures largely depend on the "Word of Mouth" of the end users who can take on the role of distributors who are authorized to recruit or enroll others in the structure, for which they are paid a certain percentage on sales done by their recruits or enrollees in the group. MLM is relatively a new marketing method that uses a distinct distribution channel where direct selling companies sell their products to consumers. Thus, eradicating the traditional distribution waterway. As discussed, there is no primary dedicated legislation for setting up a MLM in India. However, it must be noted that the structure should not constitute a scheme (read Ponzi) of easy returns for the involved investment as that would be slammed by the Prize Chit and Money Circulation (Banning) Act, 1978 (PCMC Act).

MLM Schemes and MLM direct selling entities: Blurred Lines

MLMs may appear similar to chit fund schemes on shore due to its large pool of self-motivated associates. The business method entails an advanced advertisement strategy where business is conducted through salespeople on the ground selling and spreading the word on the products being sold. However, it must be noted that if a company underscores the work of its executives in just hiring or enrolling new members in their downline over the role that conventional salespeople play, it is probably a pyramid scheme. The Reserve Bank of India vide its press release2 dated January 1, 2015 cautioned the public against MLM investment activities and stated that the functioning of MLM investment schemes that ordained to create a chain marketing structure or a Pyramid scheme and accept money under the same shall constitute a cognizable offence under the PCMC Act. Therefore, if the money which the member at the top of marketing scheme receives depends on the number of members he or his appointees enroll then the same would fall under a "Money Circulation Scheme" under the PCMC Act.

A direct selling entity does not promise quick and bulky returns, nor does it pay any commission on recruitment. Rather, it ensures an equal income opportunity for all its affiliates through a transparent compensation plan. On the other hand, in all pyramid schemes, the incomes of those at the top of the hierarchy of distributors come from a continuous incursion of new investors at the bottom. Legitimate direct selling companies form a marketplace where they offer competitive, high-quality products and services and all their distributors conducting sales are fairly rewarded.

It would be apposite to say that Multi-level Marketing is one method of direct selling commonly known as member get member programme and affiliate marketing and that many direct sellers use these MLM business models to suit their respective business. An appropriate example at this juncture would be of Hindustan Unilever that opted for a direct selling arm which began operating in 2003 as Hindustan Lever Network for its high end cosmetic and skincare product Aviance. They took to the direct selling venture for Aviance because of the advent of global cosmetic giants such as Avon, Amway, and Oriflame into India in their direct selling/ MLM outfits and also because the high end consumer goods necessitated a better functioning selling system through direct selling. Therefore, a direct selling company following a multi-level market network model involves three parties; first is the network marketer who hires distributors as second parties to sell the network marketer's goods to the third party –the end user.

The difference between a legal marketing can be established once it is deciphered that whether the impugned entity is a Multi-Level Marketing Scheme or a Multi-Level Marketing Direct Selling Entity.

The Dangling sword on Multi-Level Marketing: MLM Schemes

MLM schemes in India are governed by the PCMC Act with an intent to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto. A MLM scheme's true constituency is not to broaden consumer base but to gather hopeful investors. These schemes promise of quick and easy returns and the deceptive marketing strategies and unethical advertisements build sandcastle dreams of wealth and ultimate happiness to lure innocent investors. The marketing thrust of MLM schemes is to garner prospective distributors, rather than product promotions to purchasers. An illegal MLM Scheme scaffolds an investment proposition for distributorship that guarantees high income in little time with meagre capital investments – all resulting in massive early success. The recently issued Direct Selling Guidelines describe an inadmissible MLM scheme as a pyramid scheme which includes 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.3

Section 2 of the PCMC Act describes a Money Circulation Scheme as any scheme that encourages making of quick or easy money. Further, 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. The same provision marks that a Prize Chit includes any transaction or arrangement under which a person collects money in lump sum or in instalments by way of contributions or subscriptions or any membership fee, or through any other scheme or arrangement by whatever name called. Further, the PCMC Act enumerates that no person shall promote or conduct any prize chit or money circulation scheme, or enroll anyone as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme.4 Interpretation of the PCMC Act therefore highlights that all MLM schemes that promise easy returns without substantial work and establish a compensation network that pays on enrolment of new members without any sales generated are illegal schemes. Saradha and SpeakAsia are best examples of MLM schemes hit by the PCMC Act.

Direct Selling Guidelines, 2016

The Ministry of Consumer Affairs, Food and Public Distribution in September 2016 formulated the Direct Selling Guidelines making direct selling structures excluding pyramid schemes acceptable as long as they are in consonance with the guidelines.

These guidelines describes a "network of direct selling"5 as 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. However, "Direct Selling"6 shall mean marketing, distribution and sale of goods or providing of services as a part of network of direct selling other than under a pyramid scheme.

As per these guidelines, any entity that conducts direct selling activities will have to submit an undertaking with the Department of Consumer Affairs stating that they are in compliance with the guidelines.7 To make enrolments fair, the guidelines prohibit direct selling entities from accepting any fee on enrolment because it resembles an investment model. Also, the entity must ensure that no direct seller receives any remuneration or incentive for recruiting new participants. The Direct selling entity should also ensure that all direct sellers receive remuneration that is derived from sale of goods and services and the method of calculation of the remuneration is also disclosed.

Conclusion

To cut the long story short, in India Multi-Level Marketing schemes like pyramid schemes are prohibited and deemed illegal. A legitimate Multi-Level Marketing Direct Selling Entities are ones where exclusive products and services are sold. To add to it, the direct sellers or the participating distributors should not be compensated for enrolling new members into the network. However, they may get bonuses and commissions provided these direct sellers or participating distributors are making individual sales and sales as a network. Therefore it is imperative for a direct seller to make sales himself to avail commissions on personal as well as network sales, they cannot sit at the helm of the network and earn without generating actual sales. For a MLM Direct Selling Entity in India it is necessary that they comply with the Direct Selling Guidelines 2016 and the PCMC Act. The Indian Direct Selling Authority (IDSA) is a private body setup by Amway India and other big network marketing companies with the objective of governing the Direct Selling Companies in India and preventing unethical and illegal MLM businesses from misusing the business route.8 IDSA maintains a code of ethics for all businesses that prescribe to it. However, an affiliation to IDSA is not mandatory nor does it impose any sanctions on defaulter businesses. The climate for MLM businesses in India remains clouded, even though the Direct Selling Guidelines, 2016 provide some respite while demarcating Direct Selling Entities and Pyramid Schemes, a dedicated legislation to govern, check, and regulate Multi-Level Marketing Direct Selling Entities will result in a better business environment.

Footnotes

1 Prem P Bhalla, A COMPLETE GUIDE TO CAREERS, (2007, Atlantic Publishers) 337, https://books.google.co.in/books?id=sR253maRik4C&pg=PA337&dq=multi+level+marketing+india&hl=en&sa=X&ved=0ahUKEwjS3r3AnbnQAhVFNY8KHT9dDsU4ChDoAQg2MAE#v=onepage&q=multi%20level%20marketing%20india&f=false

2 2014-2015/1383

3 Clause 1.11 Direct Selling Guidelines, 2016

4 Section 3, PCMC Act, 1978

5 Clause 1.5, Direct Selling Guidelines, 2016.

6 Clause 1.6, Direct Selling Guidelines, 2016.

7 Clause 9.3, Direct Selling Guidelines, 2016.

8 V. S Ramaswamy, MARKETING MANAGEMENT (Edition 5, McGraw Hill Education (India) Private Limited), https://books.google.co.in/books?id=kxF_AgAAQBAJ&printsec=frontcover#v=onepage&q&f=false

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Vikrant Rana
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.