India: Multi – Level Marketing Models: Applicable Regulatory Regime

Last Updated: 27 April 2017
Article by Seema Jhingan, Neha Yadav and Saniya Kothari


1.1. Multi-level marketing ("MLM") or direct selling models, where goods are marketed/sold directly to the end user (and not through a fixed retail location), by a network of distributors at different levels of distribution is a well-established business model used by various companies.

1.2. However, there have also been various instances, of 'ponzi' or 'pyramid schemes', operating under the guise of MLM models, where income is generated through enrolment of more and more members, rather than sale of any tangible product, and which lure in the unsuspecting public through claims of quick and easy money. These schemes are regarded as a 'Money Circulation Scheme' and prohibited under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 ("Money Circulation Act").

1.3. As a result, even genuine MLM models have been struggling with regulatory challenges and operating under the fear of adverse action from authorities. An attempt has however been made by the Government, to address this issue, by introduction of the recent Direct Selling Guidelines, 2016 ("Direct Selling Guidelines"), which recognize and regulate a particular model of direct selling (and which may include MLM activities), distinguishing such model from pyramid schemes/MLM models which are in the nature of Money Circulation Schemes and are violative of the Money Circulation Act.

1.4. Given below, is a brief snapshot of the current regulatory regime applicable to the MLM activities in India.


2.1. The Money Circulation Act prohibits promotion or conduct of 'Money Circulation Scheme', which are defined as schemes "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." Promotion or conduct of a Money Circulation Scheme is punishable with imprisonment or fine, or both, and is a cognizable offence (i.e. an offence for which a person may be arrested without warrant).

2.2. In a similar vein, the Reserve Bank of India ("RBI") in its Press Release dated January 01, 2015 cautioned the public against MLM activities, after explaining the nature of MLM/Chain marketing/pyramid structure schemes which promise easy or quick money upon enrolment of members. RBI stated that acceptance of money under money circulation/MLM/Pyramid structures is a cognizable offence under the Money Circulation Act; and members of public coming across such offers should immediately lodge a complaint with the State Police.

2.3. The prohibition of Money Circulation Schemes and its ingredients were also discussed in great detail by the Andhra Pradesh High Court in the case of Amway India Enterprises vs. Union of India1, while examining the issue of whether the business activities of Amway India Enterprises ("Amway") engaged in marketing of its various manufactured products through a network of distributors, attracted the prohibition prescribed under the Money Circulation Act. The Court, viewed Amway's scheme as a Money Circulation Scheme, inter alia as a substantial part of the income which the first sponsor/distributor member of the group got depended on the event or contingency relative or applicable to the enrolment of members into the scheme. The Court also observed that by setting out of minimum level of point value (which the member will get by selling a minimum level of products) to qualify for getting commission and by holding out attractive commission on the business turned out by the downline members, sufficient inducement is caused for the members to relentlessly strive for maintaining the point value at or above the said minimum levels, and to chase the new members to make quick/easy money.

2.4. Subsequent to the aforesaid decision there were various reports regarding sealing of offices of Amway followed by arrests of Amway's officials over allegations of fraud/cheating and violation of Money Circulation Act. Investigations in these cases are ongoing.

2.5. Recently, another alleged MLM company, QNet and its Indian franchise Vihaan Direct Selling Private Limited (a company which claimed to sell cosmetics and other products), has become subject to investigations by the authorities, for conduct of a scheme, where existing members were required to bring in more members and were paid commission for it, which was allegedly in violation of the Money Circulation Act.


3.1 Since the definition of Money Circulation Scheme is wide enough to cover all direct selling/ MLM business within its purview and contains no provision to differentiate genuine direct selling business from banned pyramid/money circulation scheme, it has (and continues to) result in alleged harassment/criminal action against the direct selling industry.

3.2 Therefore, to address these concerns of the direct selling industry, the Direct Selling Guidelines were introduced in 2016 by the Ministry of Consumer Affairs, Food & Public Distribution, as guiding principles for the State Governments, to consider regulating the business of Direct Selling and MLM and strengthen the existing regulatory mechanism for preventing fraud and protecting the legitimate rights and interests of consumers.

3.3 We have listed below few of the key requirements of the Direct Selling Guidelines, which are to be followed by every entity intending to undertake Direct Selling business in India ("Direct Selling Entity"):

  1. The Direct Selling Entity should be a registered legal entity and its promoter or key management personnel should not have been convicted of any criminal offence punishable with imprisonment in last five (5) years;
  2. It should provide to every direct seller, a full refund or buy-back guarantee on reasonable commercial terms; and a cooling-off period (within which the direct seller may repudiate the agreement without any penalty) allowing for return of goods/services purchased;
  3. The remuneration system followed by a Direct Selling Entity to compensate the Direct Seller should:

    • not have any provision that a Direct Seller will receive remuneration from the recruitment to participate in such Direct Selling;
    • ensure that Direct Sellers will receive remuneration derived from the sale of goods or services; and
    • clearly disclose the method of calculation of remuneration.
  4. It should maintain proper records of the business dealings of the direct sellers, and maintain proper and updated website with prescribed details, including a complaint redressal mechanism; and
  5. It should execute a written contract with direct sellers, which should describe the material terms of participation and contain certain prescribed provisions.

3.4 The Direct Selling Guidelines, explicitly prohibit promotion of or participation in a Pyramid Scheme2 or Money Circulation Scheme (as defined under the Money Circulation Act) in the garb of Direct Selling. It however, clarifies that "Pyramid Scheme" do not include 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 certain prescribed conditions such as:

  • No direct seller will receive remuneration or incentives for the recruitment/enrolment of new participants;
  • It does not require a participant to purchase goods/services for an amount exceeding an amount for which they can be expected to be sold or resold or for a quantity that exceeds an amount that can be expected to be consumed by, or sold or resold to consumers;
  • There is no requirement of payment of any registration/entry fee or other fees relating to participation; and
  • It establishes a grievance redressal mechanism for consumers, more particularly described in the Direct Selling Guidelines.


4.1 The Direct Selling Guidelines distinguishes (prohibited) Pyramid Scheme structures, from genuine MLM activities where subscribers enroll one or more subscribers in order to receive benefits as long as the benefit are arising only as a result of sale of goods by the enrolled subscribers, and not from their recruitment or enrolment. To this extent, it seems, that the Direct Selling Guidelines, make a departure from the Money Circulation Act, which simply considers any scheme providing for making of quick or easy money on any event or contingency applicable to enrolment of new members into the scheme, as a 'Money Circulation Scheme', which is prohibited.

4.2 However, till the Money Circulation Act, is amended to exclude genuine MLM schemes complying with the requirements of Direct Selling Guidelines from its purview or clarity is brought in through judicial precedents, many MLM schemes (which by their very nature would provide for benefits contingent on enrolment of new members and to that extent arguably also offer quick and easy money) would still get covered under the wide definition of 'Money Circulation Scheme', and invite penal consequences prescribed therein.


1 2007 (4) ALT 808.

2 The "Pyramid Scheme" has been defined under the Direct Selling Guidelines, as 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.

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Seema Jhingan
Neha Yadav
Saniya Kothari
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