Model Guidelines on Direct Selling, 2016

The Department of Consumer Affairs has released ‘Direct Selling Guidelines 2016’ framework for state governments to regulate the business of direct selling and multilevel marketing in order to protect the consumers from Ponzi schemes. The framework has defined the legitimate direct selling schemes and has differentiated it from pyramid and money circulation schemes to aid investigating agencies in identifying fraudulent practices and players. The guidelines have been issued to the states and union territories for implementation purposes. They can make some modifications as per their localized requirements. However, the guidelines are optional and would not be mandatory for the states to adopt them. The entities that would be governed by these guidelines include Tupperware, Amway, Oriflame etc.

Background

The process for framing of the guidelines started way back in 2013 after the arrest of the then Amway India’s Chairman William S Pinckney and two other company directors over allegations of fraud under the Prize Chits and Money Circulation Schemes (Banning) Act. After holding several rounds of discussions with the concerned stakeholders, the Department of Consumer Affairs came up with these guidelines which have also made a clear distinction between genuine direct selling companies and the fraudulent Ponzi schemes.

Key features of the Model Guidelines

Definition of direct selling

The guidelines have defined ‘Direct Selling’ as marketing, distribution, and sale of goods or provision of services as part of a network. Such a sale has to happen on places other than a permanent retail location such as consumers’ workplace or residence.

Prohibition of certain schemes

The guidelines have prohibited pyramid and money circulation schemes. A pyramid scheme is one in which the existing members get benefits from the enrolment of additional members. A money circulation scheme is one in which quick money can be made by enrolling new members into a scheme through entrance fees or periodical subscriptions.

Conditions for setting up of direct selling business

• Following are some of the guidelines that have to be met within 90 days in order to establish a direct selling business:
  • Entity should be a legal entity under the laws of India.
  • Giving accurate information to direct sellers about the remuneration, rights and obligations.
  • Presence of an office in the relevant state to enable access to information.
  • Post-sale grievance redressal.
  • The key management should not have been convicted of a criminal offence with imprisonment in the last 5 years.

Consumer protection

Following are some of the steps the direct sellers have to take for the protection of consumer rights:

• Constituting a grievance redressal committee to address the grievances of the consumers.
• Providing consumers with information like purchaser, seller, warranty etc.

Other provisions

• The central and state governments are required to set up monitoring authority for dealing with issues related to direct selling.
• A direct selling entity should refrain asking direct sellers to provide entry fees and other benefits in order to participate in direct selling operations.
• The direct selling entities are required to enter into agreement with the direct sellers to offer full refund or buyback guarantee for the goods and services sold to them.

Significance

• It will prevent fraud and protect the rights of consumers. Till now, the fraudsters have been taking advantage of the absence of proper policy or guidelines. The guidelines also provide for the establishment of a grievance redressal committee to protect the rights of the consumers.
• The guidelines would help to bring clarity in regulations as this industry has the potential of reaching Rs 64,500 crore by 2025.
• It is expected to spur the growth of direct selling in India and drive entrepreneurship.
• It will also help in identifying and protecting ethical direct selling companies. It also prohibits direct selling entities from using misleading and unfair recruitment practices.

Way forward

The guidelines are considered to be a milestone and a progressive move on the part of the government towards a consumer driven regulatory era. The government should take a step forward and should provide statutory recognition to these guidelines. If possible they can also be made as a part of the Consumer Protection Act itself. Secondly, if these guidelines are adopted by all the states and UTs then it would help to unleash a conducive ecosystem for direct selling industry in India.