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

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