The e-commerce market in India is expected to be the third largest by a scale with an annual Gross Merchandise Value (GMV) of $350 by the year 2030. The booming e-commerce sector in India got a significant boost during the Covid-19 pandemic as most people opted for online shopping for the sake of safety and convenience. The direct to customer ("D2C") segment provided brands with an easy solution to survive and enabled brands to discard middlemen from buying and selling and reach their customers directly and the market flourished. By April 2021, more than 800 brands shifted to this model. According to Inc42 estimates, this opportunity is set to grow consistently and go past $100 Bn by 20251. However, until recently, direct selling was largely unregulated and did not offer any means of protection for the consumers of such direct sales.
Keeping in mind the rising D2C segment, there is a need to regulate the D2C segment. Accordingly, the Ministry of Consumer Affairs, Food and Public Distribution, through the Department of Consumer Affairs had enacted the Consumer Protection (Direct Selling) Rules, 2021("Rules") which was notified on 28th December 2021.
Section 2(13) of The Consumer Protection Act, 2019, defines 'direct selling' as 'marketing, distribution and sale of goods or provision of services through a network of sellers, other than through permanent retail.
The key provisions of the Rules are as follows:
The Rules apply to2:
- all goods and services bought or sold through direct selling;
- all models of direct selling;
- all direct selling entities offering goods and services to consumers in India;
- all forms of unfair trade practices across all models of direct selling; and
- to a direct selling entity that is not established in India but offers goods or services to consumers in India.
Rule 3(d) of the Rules defines "direct selling entity" as the principal entity which sells or offers to sell goods or services through direct sellers but does not include an entity that is engaged in a Pyramid Scheme3 or money circulation scheme.
It is pertinent to note that the Rules are also applicable to direct selling entities that are not established in India but offer goods and services to consumers in India. Thus, the compliance requirements under the Rules would apply to foreign direct entities which do not have an organised presence in India but operate a network of direct sellers in India.
The direct selling entities ("DSE") are required to comply with the Rules within 90 days from the date of publication of the rules in the Official Gazette.
II. Mandatory Maintenance of records
Every direct selling entity is mandatorily required to maintain at its registered office, either manually or electronically, all the records of inter alia certificate of incorporation, constitutional documents, permanent account number, registrations and licenses required to be procured under applicable laws and a register of its direct sellers at its registered office4.
III. Obligations of Direct Selling Entities
The Rules provides for a detailed description of the obligations of the entities engaged in direct selling. Some of the key obligations of the DSEs which inter alia include5:-
- Incorporation and Registered office: Every DSE should be appropriately incorporated as a company under the (Indian) Companies Act, 2013, or a partnership firm under the Partnership Act, 1932, or a limited liability partnership firm under the Limited Liability Partnership Act, 2008. DSEs shall also be required to have a minimum of one physical location as their registered office in India.
- Trademark license: The DSE should be the owner, holder or licensee of the trademark, service mark or identification mark which identifies the DSE with the goods or services to be sold or supplied. Further, the DSEs should not provide any bonus, commissions, or incentives with respect to any goods or services for which the DSE is not the owner, holder or licensee of the trademark, service mark or identification marks.
- Information support to Consumers: Provide correct and complete information at the pre-purchase stage to enable buyers to make informed purchase decisions,
- No unfair trade practice: No DSE shall adopt any unfair trade practice in the course of its business or otherwise and shall abide by the requirements specified in any law for the time being in force6.
- Compliance: All products of a direct selling entity to comply with the declarations to be made under the Legal Metrology Act, 20097.
- Storage of sensitive personal data: Every DSE is required to store sensitive personal data within the jurisdiction of India in accordance with applicable law for the time being in force and ensure the protection of such data provided by the consumers8.
- Grievance Redressal and mechanism9: Every DSE is required to appoint a consumer grievance redressal officer (or more than 1 (one) grievance redressal officer, having regard to the number of grievances ordinarily received) and set up a grievance redressal mechanism for filing of complaints by the consumers. The consumers can approach the grievance redressal officer including through contact numbers displayed on the website of the DSE and partnerships of the DSEs with a dedicated national helpline. Once a complaint is received, the consumer grievance redressal officer is required to acknowledge the receipt of complaints within 48 working hours and resolve the grievance within 1 (one) month from the date of receipt of the complaint.
- Written Contract: the DSE is required to monitor the practices adopted by its direct sellers and ensure that the direct sellers comply with the Rules by entering into a legally binding contract with such direct sellers10.
IV. Obligation of a direct seller
The Direct Selling Rules provides detailed responsibilities on the direct sellers, specifically towards the consumers11. These responsibilities include making disclosures regarding the direct sellers and DSEs' identity and information, provision of full and accurate details with respect to the price, credit terms, return policies and complete demonstrations of goods and services to the consumers. The direct sellers should provide unambiguous terms of sale prior to the sale, by way of an order form, to enable consumers to make an informed decision. The direct sellers are required to ensure that all sensitive personal information provided by the consumer is protected appropriately.
Rule 3 (c) of the Rules defines "direct seller" as a person authorized by a direct selling entity through a legally enforceable written contract to undertake direct selling business on a principal-to-principal basis.
V. Prohibition of Pyramid Schemes / Money Circulation Schemes
The Direct Selling Rules prohibit DSEs and direct sellers from promoting pyramid schemes and enrolling any person in such arrangement or participating in any money circulation schemes under the garb of direct selling business12.
VI. Application of e-commerce rules:
The direct sellers, as well as the DSEs using e-commerce platforms, are required to comply with the requirements of the Consumer Protection (e-Commerce) Rules, 202013.
The new rules impose strict obligations on the DSEs and the direct sellers and appear to be onerous. In our view, however, the Rules are a positive step towards making the Indian market more consumer-friendly by protecting the interests of consumers and by curbing unfair trade practices. The Direct Selling Rules ensures smooth governance of the direct selling industry. The mandatory prohibition on pyramid schemes and money circulation schemes also acts as a check on unethical participants entering this business. Hopefully, the obligations to be undertaken by the DSEs and the direct sellers and the prohibitions under the Rules will streamline the D2C segment.
2. Rule 2 of the Rules.
3. Rule 3(i) of the Rules defines "Pyramid Scheme" as a multi layer 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 or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and enrolled subscribers a lower position, resulting in multi-layered network of subscribers with successive enrolments.
4. Rule 4 of the Rules.
5. Rule 5 of the Rules.
6. Rule 5(3) of the Rules.
7. Rule 5(4) of the Rules.
8. Rule 5(5) of the Rules.
9. Rule 5(6) (7) of the Rules.
10. Rule 5(15) of the Rules.
11. Rule 6 of the Rules.
12. Rule 10 of the Rules.
13. Rule 9 of the Rules.
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