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Consumer Protection (Direct Selling) Rules, 2021 – Tightening the Noose on Pyramid and Money Circulation Schemes

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[1] 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[2], Karnataka Direct Selling Rules, 2019[3], Maharashtra’s Guidelines for regulating the business of ‘Direct Selling’ and Multi-Level Marketing (MLM)[4] enacted in 2019, West Bengal Direct Selling Guidelines, 2018[5]. 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

 

1. Overview 

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[6]. 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[7]. 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[8]. 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)[9].

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[10] and such an entity is mandated to maintain records such as charter documents, tax registration documents, income tax returns, financials, etc.[11] Further, direct selling entities must comply with the provisions of the DS Rules within ninety (90) days from the date of its publication.[12] It is pertinent to note that, the Consumer protection (e-Commerce) Rules, 2020 apply to both the direct sellers and the direct selling entities[13].


2. Obligations under the DS Rules:

Among other things, every direct selling entity shall[14]:

  • 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[15]:

  • 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.

 

3. Duties

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[16]. 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[17]. 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[18].

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.

References: 

[1] RBI cautions Public against Multi Level Marketing Activities: https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=1514, January 01, 2015.

[2]https://upload.indiacode.nic.in/showfile?actid=AC_TN_85_1061_00003_00003_1553515101944&type=rule&filename=trekking_rules.pdf

[3] https://idsa.co.in/resources/media/guidelines/1609826052_Direct%20Selling%20Notification_0.pdf

[4] https://idsa.co.in/resources/media/guidline/1563874609_Maharashtra%20DS%20Guidelines_0.pdf

[5] https://www.idsa.co.in/resources/media/new/1596788872_West%20Bengal%20Direct%20Selling%20Guidelines%202018_0.pdf

[6] Rule 10 of the Consumer Protection (Direct Selling) Rules, 2021.

[7] Rule 1 (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[8] Rule 1 (i) of the Consumer Protection (Direct Selling) Rules, 2021.

[9] Rule 1 (f) of the Consumer Protection (Direct Selling) Rules, 2021.

[10] Rule 2 (2) of the Consumer Protection (Direct Selling) Rules, 2021.

[11] Rule 4 of the Consumer Protection (Direct Selling) Rules, 2021.

[12] Proviso to Rule 2 (1) (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[13] Rule 9 of the Consumer Protection (Direct Selling) Rules, 2021.

[14] Rule 5 of the Consumer Protection (Direct Selling) Rules, 2021.

[15] Rule 6 of the Consumer Protection (Direct Selling) Rules, 2021.

[16] Rule 13 of the Consumer Protection (Direct Selling) Rules, 2021.

[17] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

[18] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

 

Image Credits:

Photo by Tara Winstead from Pexels 

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.

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From Caveat Emptor to Caveat Venditor: A Paradigm Shift

The erratic development in the Real Estate Sector, both in the literal as well athe legal sense, has been a continuous cause of concern for all stakeholders involved. While developers are reeling under the pressures of declining demandhomebuyers are apprehensive about investing their hard-earned income in a shady deal. The snail speed exhibited in the progression of construction projects, misappropriation of funds by developers and delay in handing over of possession to naïve purchasers have been particularly troubling.  

In such circumstances, the latest judgement by the National Consumer Dispute Redressal Commission (“NCDRC”) comes as a sigh of relief for homebuyers. In Shalabh Nigam v Orris Infrastructure and Three C Shelters Private Limitedithe NCDRC has clarified that homebuyers can avail a full refund from developers with 10% interest if the possession of their flats is delayed beyond one year. It is a huge step towards protecting the interests of vulnerable purchasers who enter into unilateral contracts that gravely limits the scope of restitution. This envisages a much-desired shift in these type of transactions from “Let the buyer beware” to “Let the seller beware”. 

Facts in Brief 

The purchaser of a flat in a luxury society filed a complaint with the NCDRC against the landowner and the developer of the society for refund of the payments made by him with interest or delivery of possession of the flat that had been delayed by over two years. The complainant had made all payments as per the terms of the allotment letter. Later, he learned about a huge sewage drainage canal flowing through the middle of the land where the project was being developed. The canal was placed near his apartment and could not be covered.  Further, the layout of the project had also been changed and the clubhouse, which was meant to be near to the complainant’s apartment was moved to the other side of the sewage canal. Therefore, the complainant had made a request for refund which was refused by the developers without giving any reason. 

Further, as per the apartment buyer agreement, the possession was to be handed over within 36 months with a grace period of six months from the date of allotment which had expired two years before the complaint was filed. Moreover, the Developer had promised that the possession would be handed over and all common amenities of the project along with the facilities would be completed two years in advance. In addition, clause 15(a) of the apartment buyer agreement was in the nature of a penalty attracting the applicability of Section 74 of the India Contract Act. However, despite repeated requests, possession was not granted. After paying more than 90% of the total consideration and not receiving the possession of the property, the complainant stopped making further payments and filed a complaint with NCDRC. 

Observation 

The issue for consideration was whether the developer was only liable to pay compensation for the delay as stipulated in the apartment buyer’s agreement or for the loss suffered on account of the deficiency in rendering services?  

The NCDRC found that the project had been delayed by more than 2 years and as per established law, the complainant had the right to seek a refund in the circumstances when even the internal and external development charges had not been paid to the competent authority by the developers. In addition, the Development Agreement was not as per the provisions of law. Consequently, the commission ordered the developers to: 

  • Complete the construction work and handover possession of the flat by a date prescribed. Failing which, the Complainant shall be at liberty to take refund of the total deposited amount along with interest at 10% p.a., as per the Interest Act, 1978. 
  • Pay 6% interest on the amount deposited prior to the due date of possession. For amount paid after that, the interest shall be payable from the date of completion of one year from the date of deposit till the date of physical possession. 

While the Hon’ble Supreme Court and various consumer courts had in the past held that the end buyers could not be made to wait endlessly to take the ownership of their flats, no clarity on the timeline for refund had been prescribed. Therefore, clearing clouds of uncertainty in this regard is a welcome step in the right direction. This remedy passed by the Hon’ble NCDRC shall be considered in addition to the remedies available under provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA) and it would have been the highest relief granted to the home buyers, if the same were passed before the enactment of RERA.  

 

Image Credits: Photo by Valentin Petkov on Unsplash

The NCDRC has clarified that homebuyers can avail a full refund from developers with 10% interest if the possession of their flats is delayed beyond one year. It is a huge step towards protecting the interests of vulnerable purchasers who enter into unilateral contracts that gravely limits the scope of restitution. This envisages a much-desired shift in these type of transactions from “Let the buyer beware” to “Let the seller beware”. 

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