Direct selling entities, multi-level marketing and pyramid schemes have existed for decades across the globe. These entities and direct sellers lure customers into these serpentine schemes by provoking an individual’s desire to become entrepreneurs with minimum investment. In addition, COVID-19 induced lockdown proved to be a fertile ground for a significant increase in the establishment of direct selling/multi-level marketing businesses. While some operated legally, others exploited the grey areas in the regulatory framework or were outright pyramid schemes.
Whilst people were and still are jumping into the direct selling bandwagon, the existing and potential stakeholders must be aware of the caution that the Government has issued and the legal landscape surrounding direct selling/multi-level marketing business. The Consumer Protection (Direct Selling) Rules, 2021 (“DS Rules”), one of the primordial tools to regulate the direct selling industry, is being examined herein.
Brief History of the Regulations on Direct Selling
With the intent to curb the menace of illegal multi-level marketing and pyramid schemes that were masquerading as legitimate businesses, back in 2016, the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, formulated a set of guidelines titled “Direct Selling Guidelines 2016”. These guidelines were formulated as model regulations, issued as an advisory that put the onus the State Government and Union Territories for their effective implementation.
Taking a cue from the Central Government’s advisory, various State Governments enacted their respective direct selling guidelines – The Tamil Nadu Direct Selling Guidelines Order 2018, Karnataka Direct Selling Rules, 2019, Maharashtra’s Guidelines for regulating the business of ‘Direct Selling’ and Multi-Level Marketing (MLM) enacted in 2019, West Bengal Direct Selling Guidelines, 2018. While some State Governments embraced the central government advisory and implemented guidelines on the lines of the DSG 2016, not all States followed suit, resulting in a lack of uniformity and regulation across the country.
With this brief history, let us understand the recently enacted Consumer Protection (Direct Selling) Rules, 2021 under the Consumer Protection Act, 2019, which is intended to operate as a bulwark against pyramid schemes established in India or offer goods and services to customers in India.
Consumer Protection (Direct Selling) Rules, 2021
The Consumer Protection (Direct Selling) Rules, 2021 came into force on December 28, 2021, to prohibit participation and/or promotion of pyramid schemes and money circulation schemes. While the new DS Rules do not define direct selling as compared to the DS Rules, 2016; the term direct selling entity has been defined as “principal entity which sells or offers to sell goods or services through direct sellers, but does not include an entity which is engaged in a Pyramid Scheme or money circulation scheme”. The exclusive definition is made to limit the application of the Act only to pyramid or money circulation schemes.
A pyramid scheme has been defined 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 or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and the enrolled subscribers a lower position, resulting in a multi-layered network of subscribers with successive enrolments”. And, money circulation scheme is defined as “means the schemes defined in clause (c) of section 2 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978)”.
The obligations under the DS Rules can be broadly categorized into:
- obligations of direct selling entities;
- obligations of direct sellers; and
- duties of direct selling entity and direct seller.
Before analyzing various obligations under the DS Rules, it is pertinent to note that the DS Rules are applicable to any entity offering goods and services to consumers in India, whether or not such entity is established in India and such an entity is mandated to maintain records such as charter documents, tax registration documents, income tax returns, financials, etc. Further, direct selling entities must comply with the provisions of the DS Rules within ninety (90) days from the date of its publication. It is pertinent to note that, the Consumer protection (e-Commerce) Rules, 2020 apply to both the direct sellers and the direct selling entities.
2. Obligations under the DS Rules:
Among other things, every direct selling entity shall:
- have a physical office in India.
- Keep their website updated including details of its nodal office, grievance redressal officer and mechanism, management, products information including price and such website shall also explicitly provide name, address, contact details, complaint tracking mechanism, return, refund and warranty, payment-related information.
- obtain all relevant registrations, including PAN and other tax registrations.
- obtain a certificate from a company secretary for all information provided on its website.
- Make just, fair and equitable written contracts with its direct sellers for dealing with the entity’s products and services.
- ensure its direct sellers have verified identities and physical addresses.
- comply with the Legal Metrology (Packaged Commodities) Rules, 2011.
- store personal data within India.
Among other things, every direct seller shall:
- Provide full information about the direct selling entity, nature of goods and services, terms of purchase, return and refund, warranty, etc.
- Provide an order form with various details about the direct seller and the direct selling entity.
- Protect the sensitive personal information provided by consumers.
- Not approach a consumer without his/her identity card and prior approval, provide literature to prospects without approval, make claims inconsistent with claims as authorized by direct selling entity.
Under Rule 7 of the DS Rules, direct seller and direct selling entity shall:
- ensure terms of offer are clear, make true representations, not use unfair or deceptive trade practices, not indulge in fraudulent activities, not portray direct selling as market research.
- not indulge in mis-selling products or services to customers.
- charge any entry or subscription fee.
- ensure orders are delivered within the proposed delivery date at the time of purchase.
- follow provisions of the Legal Metrology Act, 2009 and rules framed thereunder.
- Not induce customers to make purchases based on the representation that they can reduce or recover the price by referring prospective customers to the direct sellers for similar purchases.
Any contravention of the DS Rules will attract penalties and the legal procedures enumerated under the Consumer Protection Act, 2019. Further, the DS Rules require the State Governments to set up a mechanism to monitor or supervise the activities of direct sellers and direct selling entities, which fortifies the effective implementation of the DS Rules.
Bringing In Uniformity
The Direct Selling Guidelines 2016 were implemented during the time when FTC (Federal Trade Commission) of USA filed a complaint accusing Herbalife Nutrition Ltd. (a multi-level marketing (MLM) corporation) of deceiving consumers about how much money they could make selling its products, noting that most Herbalife distributors make no money at all. The FTC also announced that Herbalife later agreed to pay $200 million to reimburse consumers who lost money on its nutrition supplements and planned a major restructuring of its sales and distribution practices.
The Direct Selling Guidelines 2016 which were issued as an advisory by the Central Government, were not implemented by all States resulting in a lack of uniformity, certainty and effective protection from the perniciously proliferating pyramid and money circulation schemes.
The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent. Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction since consumers can now approach the consumer protection forums for effective redressal of grievances.
 RBI cautions Public against Multi Level Marketing Activities: https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=1514, January 01, 2015.
 Rule 10 of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 1 (d) of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 1 (i) of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 1 (f) of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 2 (2) of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 4 of the Consumer Protection (Direct Selling) Rules, 2021.
 Proviso to Rule 2 (1) (d) of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 9 of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 5 of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 6 of the Consumer Protection (Direct Selling) Rules, 2021.
 Rule 13 of the Consumer Protection (Direct Selling) Rules, 2021.
The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent. Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction the consumers can now approach the consumer protection forums for effective redressal of grievances.