Review of Regulatory Framework for Direct...

Review of Regulatory Framework for Direct Selling in India

Nirupama SoundararajanArindam GoswamiRamneet Goswami

Pahle India Foundation (PIF) is an FCRA certified,

not for profit policy think tank, established in

June 2013 as a Section 8 company. PIF’s motto

is “Facilitating Policy Change.” The motto guides

all our activities. At PIF, we undertake research

and disseminate its findings to contribute to the

necessary paradigm shift in development thinking

and practices in India. PIF is committed to en-

riching the public discourse and also to influence

policy formulation that will help India successfully

complete its triple transition in economic, political

and social fields.

Our aim is to emerge as a credible, trustworthy

and neutral bridge between economic agents like

firms, farmers and professionals on the one hand

and policy makers on the other and to contrib-

ute to bringing the three principle stakeholders

viz Government, industry and academia on the

same page and pulling in the same direction - a

key condition for ensuring India’s success in

global markets. PIF currently has an analytically

strong team of dedicated researchers who are self

motivated. PIF’s highly qualified team specialis-

es in analysing India’s political economy and its

engagement across verticals that are relatively

underworked areas that will permit PIF to create

a niche for itself in the research and think tank

space in the country.

Review of Regulatory Framework

for Direct Selling in India

December 2018

Authors:Nirupama Soundararajan

Arindam GoswamiRamneet Goswami

For further information about this report, please contact:

Nirupama SoundararajanSenior Fellow & Head of [email protected]

Arindam Goswami [email protected]

www.pahleindia.orgfacebook.com/pahleIndia

@pahleindia

+91 11 41551498, 26519889

www.pahleindia.org │ 5

Globally, retail is generally considered as one sector. Regulations for retail are indifferent to source of capital and to the format of sale. In India it is quiet another story. Every format of retail is regulated by a different set of laws. Multi-brand foreign retail stores

are different from multi-brand domestic stores, and both are different from single brand stores. E-commerce is a new format that has its own set of regulations, and between all these formats, there are the age old forms of retail, such as, catalogue sales, phone sales, and direct selling, that are less known, less recognised, and almost always misunderstood.

Direct selling, or multi-level marketing, as it is more commonly known, is not new to India. Over four decades, the sector has been growing steadily amongst a constantly changing retail landscape in India. The direct selling sector boasts of providing direct and indirect employment to over 5 million people. It is a labour intensive sector and it is also one that encourages entrepreneurship. Yet, of all formats of retail, direct selling has always been subject to more stringent norms of regulation. In no other sector has mis-selling or bad handling of consumer complaints ever escalated to the extent of imprisonment of their top management for fraud. The use of the infamous the Prize Chits and Money Circulation Schemes (Banning) Act, commonly referred to as PCMCS Act, has been rampant and very often inappropriate as recent court rulings have pointed out. This is what intrigued the authors of the report.

There have been many reports around the socio economic contributions of the direct selling sector. However, we identified a gap in the existing literature around the regulatory framework of direct selling and the clear disadvantage at which it stands when compared to other formats of retail or similar formats of sale. This report bridges this gap.

This report is the result of an extensive primary survey of direct selling companies and many detailed face to face structured interviews along with an extensive analysis and study of cases registered again the direct selling sector. The study hoped to address two null hypotheses. First, routine complaints escalate to the extent of involving law enforcement due to poor grievance redressal systems at the company level. Second, lack of knowledge on the regulatory framework for direct selling on the part of local law enforcement agencies leads to escalation. At the end of our analysis, we accept both hypotheses.

We make recommendations for both industry and policymakers. Three recommendations stand out. First, the direct selling sector requires legitimacy. Second, as a means to providing this legitimacy, a separate legislation to regulate the business is necessary and also in line with international experience. Third, the sector must bring about standardisation of practices across the sector and ensure better corporate governance.

We hope you find this report informative and interesting. As always we will be delighted to have your inputs and feedback.

Ram Gopal Agarwala

Foreword


6 │www.pahleindia.org

AcknowledgementThis report is the result of extensive field work and numerous interviews. Without the help of many organisations and people, this report would not have been possible.

The authors would like to thank Subrata Bandyopadhyay, Anjani Kumar Jha, and their team at BRIEF for implementing the primary surveys and in collating the results.

The authors would like to thank Indian Direct Selling Association (IDSA), Federation of Indian Direct Selling Industries (FIDSI) and EBS India Inc. for meeting with us and sharing insight about the industry. The author would also like to thank the various industry experts, interviewees and survey participants for meeting with us and sharing their experiences with direct sellers and direct selling companies.

Last but not least, we would like to thank Tara Nair for proof reading the report, Anil Kumar for helping us in formatting the report, and Naveen Jaiswal and his team at Genesis Printers for designing, layout, and printing the final report.

EXECUTIVE SUMMARY .............................................................................................................. 14

Chapter 1: Indian Direct Selling Sector ..................................................................................... 18

1.1 Introduction 18

1.2 Benefits of Direct Selling 20

1.3 The Retail Sector in India 21

Chapter 2: Global Direct Selling Industry ................................................................................. 23

2.1 Direct Selling World Over 23

2.2 Global Regulatory Regime for Direct Selling 25

2.2.1 USA 25

2.2.2 Malaysia 26

2.2.3 Singapore 26

2.2.4 Vietnam 27

2.2.5 China 27

2.3 India’s Best Fit 29

Chapter 3: Regulatory Framework of Direct Selling Industry in India ...................................... 30

3.1 Chronology of Events 30

3.2 Model Guidelines on Direct Selling Issued by Department of Consumer Affairs 34

3.3 A Legal Perspective on Direct Selling 37

3.3.1 Grievance Redressal in Direct Selling 38

3.3.2. How it all started: Amway India Enterprise vs. Union of India (UoI) 38

3.3.3 The Curious Case of Naresh Balasubramaniam 39

Chapter 4: Survey Results - Business Practices ......................................................................... 41

4.1 The Hypotheses 41

4.2 Basic Business Models 41

4.3 Relationship with Direct Sellers 43

4.4 Contracts with Direct Sellers 43

4.5 Purchase of Inventory by Agents 45

Contents




4.6 Policies Maintained by Direct Selling Companies 46

4.7 Disclosures 46

Chapter 5: Survey Results – Complaint Handling ..................................................................... 51

5.1 Agents and Consumers 51

5.2 Nature of Complaints 52

5.3 Registering Complaints 53

5.4 Handling Complaints 54

5.5 Complaint Escalation 54

Chapter 6: Survey Results – Regulatory Regime ...................................................................... 56

6.1 Ease of Doing Business 56

6.2 Regulatory Regime 57

6.2.1 Current Regime 57

6.2.2 Direct Selling Guidelines 59

6.2.3 The Immediate Future 60

6.3 The Way Forward 62

Chapter 7: Recommendations .................................................................................................. 65

Bibliography ............................................................................................................................. 68

Appendices ............................................................................................................................... 69

Appendix 1 69

Appendix 2 71

Appendix 3 73

Contents


Figure 2.1: Market Size Trends in the Global Direct Selling Industry 23

Figure 4.1: Category of the Direct Selling Products (N-60) (Multiple Response) 42

Figure 4.2: Can Consumers Directly Buy From the Company? (N-60) 42

Figure 4.3: Compensation Plan Structure (N-60) 42

Figure 4.4: KYC Requirement of Direct Sellers (N-60) 43

Figure 4.5: Direct Selling Companies Having Contract with Direct Sellers (N-60) 43

Figure 4.6 Turnover Wise Key Details Maintained in an Agreement 44

Figure 4.7: Issuance of ID Card or Any Other Verification Document to Direct Sellers by the

Direct Selling Company (N-60) 44

Figure 4.8: Turnover Wise Inventory That Direct Sellers can Purchase (Min-Max) 45

Figure 4.9: Responses by Direct Selling Companies on What Happens to Unsold Inventory (N-60) 45

Figure 4.10: Policies Maintained by Direct Sellers (N-60) 46

Figure 4.11: Turnover Wise Policies Maintained for Mis-Selling by Direct Selling Companies (N-60) 47

Figure 4.12: Turnover Wise Policies Maintained for Grievance Redressal by Direct Selling Companies (N-60) 47

Figure 4.13: Issuance of Identity Card or Other Verification Documents to Direct Sellers (N-60) 48

Figure 4.14: Mode of Payment For Direct Sellers (N-60) (Multiple Response) 49

Figure 4.15: Companies Having Websites (N-60) 49

Figure 4.16: Information Available on Website (N-58) (Multiple Response) 50

Figure 4.17: Classification of Information Provided to Consumers on Purchase of Products and

Services From a Direct Selling Company (N-60) 50

Figure 5.1: Year Wise Employee Details Maintained by Direct Selling Companies (Average) 51

Figure 5.2: Type of Complaints Received From Consumers by Direct Selling Companies (N-60)

(Multiple Response) 53

Figure 5.3: Complaints Registered in a Week (N-60) 53

Figure 5.4: Channels to Register Complaints (N-44) (Multiple Response) 54

Figure 5.5: Turnover Wise Days Required to Resolve Grievances (N-60) 55

Figure 5.6: Mechanism Adopted For Grievances Redressal After Stipulated Time (N-44) 55

Figure 6.1: Do You Need to Follow Different Regulations in Different States? (N-60) 56

List of Figures



Table 1.1: Share of Different Segments in India and in Select Countries in 2017 19

Table 1.2: Rank of Top Ten Countries in Terms of Direct Sellers in 2017 21

Table 2.1: Comparison of Top Ten Largest Direct Selling Countries and India in 2008 and 2017 24

Table 5.1: Consumer to Direct Seller Ratio 52

Table 6.1: Rating of Guideline on the scale of 1 to 5. (1 Being Lowest) (N-57) 60

Table 6.2: Understanding Among Ministries/people About Your Business

(1 Being Lowest & 5 Being Highest) (N-60) 63

Table A3.1: Difference Between Direct Selling Business and Pyramid/Ponzi Schemes 74

Figure 6.2: States That are Difficult to Undertake Business (N-60) 56

Figure 6.3: Why This Sector Needs to be Regulated? (N-60) 57

Figure 6.4: Who Regulates Direct Selling Companies? (N-60) 58

Figure 6.5: Which Ministry Regulates You? (N-60) 58

Figure 6.6: Which Act Regulates You? (N-60) 59

Figure 6.7: Awareness on Guidelines Issued by Department of Consumer Affairs (N-60) 60

Figure 6.8: Are Present Guidelines Sufficient to Regulate the Direct Selling Sector? (N-57) 61

Figure 6.9: Awareness of Consumer Protection Bill (N-60) 61

Figure 6.10: Impact of Consumer Protection Bill on Consumers (N-56) 62

Figure 6.11: Is There Any Self Regulating Mechanism For Your Sector? (N-60) 64

Figure 6.12: Who Should Regulate This Sector? (N-60) 64

List of Figures

List of Tables


AMFI Association of Mutual Funds

CBI Central Bureau of Investigation

CEIB Central Economic Intelligence Bureau

CID Criminal Investigation Department

CIS Collective Investment Schemes

DEA Department of Economic Affairs

DFS Department of Financial Services

DIPP Department of Industrial Policy and Promotion

DIT Department of Information Technology

DLA Department of Legal Affairs

DoCA Department of Consumer Affairs

DoR Department of Revenue

DS Direct Selling

DS & APS Act Direct Sales and Anti-Pyramid Scheme Act, 1993 (Malaysia)

EU European Union

FAQ Frequently Asked Questions

FIU Financial Intelligence Unit

FMCG Fast Moving Consumer Goods

GDP Gross Domestic Product

GI General Insurance

GoI Government of India

GST Goods and Services Tax

HC High Court

List of Abbreviations



HL-IMG High Level Inter-Ministerial Group

IBA Indian Banks’ Association

ID Identity Document

IDSA Indian Direct Selling Association

IICA Indian Institute of Corporate Affairs

IMC Inter-Ministerial Committee

IMG Inter-Ministerial Group

INR Indian Rupee

IPC Indian Penal Code

KPDNHEP Kementerian Perdagangan Dalam Negeri dan Hal Ehwal Pengguna

(Ministry of Domestic Trade and Consumer Affairs, Malaysia)

KYC Know Your Customer

LI Life Insurance

LIC Life Insurance Corporation (of India)

MCA Ministry of Corporate Affairs

MLM Multi-Level Marketing

MoC Ministry of Commerce

MoF Ministry of Finance

MOFCOM Ministry of Commerce, People’s Republic of China

MTI Ministry of Trade and Industry, Singapore

PCMCS Prize Chits and Money Circulation Schemes

RBI Reserve Bank of India

SC Supreme Court (of India)



SCC Supreme Court Cases

SEBI Securities and Exchange Board of India

SRO Self-Regulatory Organisations

TAT turn-around-time

UK United Kingdom

UoI Union of India

UP Uttar Pradesh

US / USA United States of America

VND Vietnamese Dong

WFDSA World Federation of Direct Selling Association



Direct selling, commonly known as multi-level marketing (MLM) or network marketing, is a method of selling or marketing goods and services directly

to the consumers at their home or workplace. Direct selling depends on the explanation and demonstration given by an independent sales representative (also known as direct selling agents or direct sellers) to the consumer. The industry is labour intensive and generates employment opportunities for skilled and unskilled labour. Direct selling is not a new concept in India.

Direct selling offers manifold benefits. The most pertinent of this is employment. The direct selling business model is a self-perpetuating employment generating sector. The model of network marketing encourages the on boarding of new entrepreneurs. There are around 5 million people directly employed by the sector, of which 4 million are only direct selling agents. The percentage of direct sellers in India to the global total is about 4.37 per cent. The potential for growth in India is immense.

Direct selling can also fulfil another important purpose in India. A World Bank report highlights the serious problem of more women exiting from the workforce in India. In India, direct sellers are predominantly women, almost 60 per cent. If through direct selling, the percentage of direct

sellers to the total population can be increased systematically from its current 0.4 per cent to even 1 per cent, it will mean the addition of another 6 million direct sellers, which means the addition of at least 3.5 million prospective women employees. This sector alone can help in not only creating employment, but also in addressing the gender disparity in the Indian labour force.

The purpose of this study is to examine the regulatory arbitrage that exists between the direct selling sector and other formats of retail. The need for such a study arises because of the spate of cases that have been registered against many direct selling companies and their senior management. This is unique to direct selling. Through this study, we examine the context and cause for these escalations, the regulatory framework that governs these escalations, the cases that have been filed, and judgements that have been delivered.

A primary survey of sixty direct selling companies was undertaken to test two hypotheses. First, routine complaints escalate to the extent of involving law enforcement due to poor grievance redressal systems at the company level. Second, lack of knowledge on the regulatory framework for direct selling on the part of local law enforcement agencies leads to escalation. The survey

Executive Summary


attempted to look at existing grievance redressal mechanisms, sales procedures, disclosures made by the direct selling company, information shared by direct sellers at the time of sale, and information about the company that is available for consumers to view.

Some of our key findings are as follows.

• India has a fragmented approach to retail. One is unsure if direct selling is even classified as retail.

• India has much to learn from Malaysia for direct selling.

• Under the direction of the central government, the Department of Financial Services (DFS), Ministry of Finance formed an Inter-Ministerial Group (IMG) intended to issue guidelines to clarify how to distinguish between genuine direct selling companies and money circulation schemes. It did little to contain the menace of illegal pyramid schemes although legitimate companies did suffer.

• The Department of Consumer Affairs (DoCA) formed another Inter-Ministerial Committee (IMC) that suggested that the Prize Chits and Money Circulation Schemes (Banning) Act of 1978 (PCMCS Act) needed to be amended to bring direct selling under its ambit. It further concluded that the recommendations be submitted to DFS as it is the concerned department.

• Acting on the IMC’s recommendation, a High Level Inter-Ministerial Group (HL-IMG) was formed in May 2013 under the Chairmanship of Secretary, DFS. The recommendation of the HL-IMG suggested the creation of a new law to regulate and monitor direct selling companies.

• The Department of Consumer Affairs issued a set of model guidelines on direct selling in September 2016.

• It has been observed that legal cases registered against legitimate companies have mostly been for cheating. On most occasions, what had been registered as a case of cheating turned out to be a case of unaddressed, unresolved, and/or escalated customer grievance.

• In a majority of such instances, a legal proceeding could have been averted and the matter could have been resolved internally provided the organisation had put in place a proper customer grievance redressal mechanism.

• In the last few years, the use of PCMCS Act against direct selling companies has been rampant. Courts have noted that matters essentially of a civil nature should not be given the cloak of criminal offences and criminal proceedings should not be used as short cut for other remedies available in law.

• Of a sample of 60, 77 per cent of companies are required to follow different regulations in different states.

• Mis-selling often occurs due to poor information transmission. For improving transmission, both training and literature is important. That 8 per cent of the sample do not undertake training nor provide literature to suitably equip their direct sellers is surprising.

• Survey results indicate that only 72 per cent maintain a policy for mis-selling. The presence of a policy institutionalises practices. Absence of one can perpetuate the problem.



• Larger companies are more compliant with institutionalising process through a grievance redressal policy and mis-selling policy. Only around 60 per cent of the smaller companies have such policies in place.

• 10 per cent stated that they do not issue any sort of identity cards to their agents. 23 per cent of direct selling companies pay their direct sellers through cash.

• Less than 75 per cent display details of their management on their website. Ten per cent of the companies do not display the price of the product on their website and just about 50 per cent offer any details on product quality certification. Disclosures around the latter two are important for consumers to make informed choices.

• Twenty seven per cent of the companies leave it to the discretion of the direct sellers to tell their consumer how to register a complaint; 18 per cent do not necessarily tell their consumers how to return a product or how to obtain a replacement for a faulty product.

• Most of the complaints are on operational issues. The most common is that products were not delivered on time (65 per cent). Complaints against their direct sellers or other staff are at 27 per cent and 15 per cent. This, to some extent, validates our initial hypothesis that escalations are mostly on account of poor grievance redressal rather than any fraud perpetrated.

• Consumers have several ways of registering their complaints – email, website, phone, mobile apps to name a few. While a toll free number seems the most popular, there is no one way of registering complaints that is

followed by all in the industry. No response registered a 100 per cent positive response.

• Another problem is that the usual turnaround time stated for complaint resolution is high at 30 days, even if it can and is handled in a shorter period of time. That some companies take as many as 45 days to resolve complaints means redressal systems, even if present, are inefficient.

• Respondents to the survey were unanimously of the opinion that the sector should be regulated. Respondents believed that a regulated sector would protect consumers against fly by night operators, mitigate regulatory arbitrage between states, and build more confidence in direct selling.

• Respondents believed that law enforcement agencies and the judiciary had the least understanding of the direct selling business.

• Only 57 per cent of the respondents believed that the direct selling sector has a self-regulating mechanism. The industry, however, is of the opinion that it requires a regulator, and between the centre, state, and a separate regulator, the preference is for either the centre or a separate regulator.

Our recommendations are:

It is time for India to consider creating a new category called “Retail” under the Concurrent List as part of Schedule 7.

The government should draft a national retail policy. Until then, it will be prudent to set up a national policy for direct selling.

All direct selling companies should register themselves with a single authority.


A proactive approach by industry participants and associations will eventually lead to the creation of an SRO for direct selling.

The direct selling sector requires legitimacy.

Direct selling requires a separate legislation. Furthermore, the PCMCS Act must be amended to clearly define the nature of cases that can be filed under its ambit. These cannot include regular customer grievances.

Direct selling companies should consider setting up a common database of direct sellers to track any fraud or transgression that occurs.

Direct selling companies must look to learn from other retail businesses and particularly from the mutual fund and insurance businesses on how to manage customer complaints seamlessly.

The direct selling sector must work together in studying best practices of the sector and setting appropriate standards. A good place to begin will be to rationalise the nomenclature of business terms.



1.1 IntroductionDirect selling, commonly known as multi-level marketing (MLM) or network marketing, is a method of selling or marketing goods and services directly to the consumers at their home or workplace. Direct selling is a channel of sales that involves direct interaction with a customer away from fixed brick and mortar stores. Direct selling typically includes door-to-door solicitations, appointments, referrals, and product parties, as well as catalogues and online marketing to disseminate information. It is a dynamic and rapidly expanding channel of distribution of market products and services. Direct selling depends on the explanation and demonstration given by an independent sales representative (also known as direct selling agents or direct sellers) to the consumer. In addition, direct selling offers customers the opportunity to see, test, and judge a product at their leisure, in the comfort of their own homes and among friends.

Direct selling has become an extremely popular marketing model across the globe because of its ability to maintain a personal connection with consumers and to promote entrepreneurial initiatives. Direct selling is an entrepreneurial venture that is open to people from all backgrounds regardless of their experience level

or education. In addition, direct selling provides tremendous flexibility in terms of work hours. This industry provides an opportunity to those who find it difficult to manage full time jobs while managing a household. The industry is labour intensive and generates employment opportunities for skilled and unskilled labour.

Direct selling is not a new concept in India. The modern direct selling industry in India came into existence in the early 1980s and started growing in the early 1990s, soon after the country opened up to the global market. The industry started developing after liberalisation with many global players entering the Indian market. Amway, Avon and Oriflame were among the first few major global direct selling companies to enter India in the post-liberalisation period followed by many global direct selling companies such as Herbalife, Forever Living, 4Life Trading, Mary Kay, Tianjin Tianshi, K-Link, QNet and DXN International. Among Indian companies, Modicare was the first company to adopt this channel of distribution and sales.

Direct selling began in South India. Therefore, initially, the southern region held maximum market share in the direct selling sector with Bengaluru, Chennai and Hyderabad leading the way. However, the Annual Survey Report 2016-17

Indian Direct Selling Sector1


published by the Indian Direct Selling Association (IDSA)1 suggests that this trend has changed with Maharashtra taking the lead with 12.89 per cent of total sales through direct selling in India. The report further suggests that at present, North India accounts for around 26.3 per cent of total sales through direct selling followed by West India, which accounts for 24.63 per cent of total sales. South India follows very closely in the third position accounting for 23.6 per cent of total sales while East India accounts for a total sales of 18.80 per cent. The north-eastern region is currently the smallest market for direct selling, contributing only 6.72 per cent. It, however, does remain an area of focus for many in the industry.

While a wide range of products are sold through the direct selling route, specialised products requiring one-to-one interaction with and demonstration to customers such as health and wellness products, cosmetics, and personal care products dominate the direct selling market. Recent trends show that the increasing focus on healthy lifestyles among consumers has also increased the demand for health products. As a result, health and wellness is the largest direct selling segment accounting for a share of 53 per cent of total sales in 2017. Cosmetics and personal care are not far behind and captured 32 per cent share in the market in 2017 (Table 1.1). Industry growth is expected to be driven by an ever expanding market space and a strong, growing consumer base.

Table 1.1: Share of Different Segments in India and in Select Countries in 2017

Segment India South Africa Russia Brazil UK US

Clothing & Accessories 1.0 11.0 9.0 3.0 16.0 8.0

Cosmetic & Personal Care 30.0 41.0 48.0 83.0 28.0 17.0

Home Care 4.0 1.0 10.0 5.0 1.0 2.0

Household goods/home durables 9.0 18.0 4.0 0.0 3.0 14.0

Wellness 53.0 19.0 28.0 7.0 43.0 34.0

Books, toys, stationery, etc. 0.0 0.0 0.0 0.0 8.0 3.0

Foodstuffs & beverages 2.0 0.0 0.0 0.0 0.0 1.0

Home improvement 0.0 0.0 0.0 0.0 0.0 0.0

Utilities 0.0 0.0 0.0 0.0 1.0 8.0

Financial services 0.0 10.0 0.0 0.0 0.0 11.0

Other products & services 1.0 0.0 1.0 2.0 0.2 3.0

Total products & services 100.0 100.0 100.0 100.0 100.0 100.0

Source: Global Sales by Product Category – 2017, published on June 18, 2018 by WFDSA

_______________________________________________________

1 Direct Selling in India: Annual Survey Report 2016-17, published by Indian Direct Selling Association (IDSA)



1.2 Benefits of Direct SellingDirect selling offers manifold benefits. The most pertinent of this is employment. We know that India needs to create 8-10 million new jobs every year. The focus of the incumbent government has been to create not just jobs but also a class of job creators. Direct selling does just that. The direct selling business model is a self-perpetuat-ing employment generating sector. The model of network marketing encourages the on boarding of new entrepreneurs. Figures suggest that there are around 5 million people directly employed by the sector, of which 4 million are only direct selling agents (Table 1.2). The percentage of direct sellers in India to the global total is about 4.37 per cent. The comparable figures for the United States of America (USA), Indonesia, Thailand, Korea, and Malaysia are 15.93 per cent, 14.24 per cent, 9.71 per cent and 7.16 per cent respectively. The potential for growth is immense for two reasons. First, this is one of the few occupations that can provide a healthy source of income even if un-dertaken as a part time activity. Second, it is also one of the few professions that relies exclusively on one’s skills in terms of selling and only a basic level of education.

Direct selling can also fulfil another important purpose in India. A recent World Bank report has suggested that India will have to create 8.1 million jobs annually in order to sustain the current employment rates2. Despite the healthy growth rate in gross domestic product (GDP), and a fair share of jobs that are being created, the report highlights the serious problem of more women

exiting from the workforce in India. Many studies since then have attributed this to cultural norms that certainly require change. The lack of women centric work policies has pushed women out of the workforce. Compared to global peers, India performs quite poorly in terms of female labour force participation, a drop from a somewhat healthy 35 per cent in 1990 to a mere 24 per cent in 20163. China stands at 64 per cent in comparison, USA at 56 per cent and the European Union (EU) at 51 per cent.

For India, creating employment is important, but India must also focus on improving the female labour force participation. While cultural prejudices need to change, they are unlikely to change overnight. Very few industries and sectors are able to offer women a flexible work environment. Direct selling on the other hand epitomises this. In India, direct sellers are predominantly women, almost 60 per cent. If through direct selling, the percentage of direct sellers to the total population can be increased systematically from its current 0.4 per cent to even 1 per cent, it will mean the addition of another 6 million direct sellers, which means the addition of at least 3.5 million prospective women employees. This sector alone can help in not only creating employment, but also in addressing the gender disparity in the Indian labour force.

Besides providing direct employment, the sector also has the potential to generate significant indirect employment through its value chain. Most direct selling companies rely on third party vendors, mostly small and medium enterprises to produce and package their products.

_______________________________________________________

2 https://www.worldbank.org/en/news/press-release/2018/04/15/south-asia-focus-growth-lead-jobless-growth-create-more-jobs3 Ministry of Labour and Employment, Government of India & World Bank


_______________________________________________________

4 https://www.ibef.org/industry/indian-retail-industry-analysis-presentation(last accessed on August 16, 2018)

Table 1.2: Rank of Top Ten Countries in Terms of Direct Sellers in 2017

Rank Country No of Direct Sellers Percentage Share to Global Total of Direct Sellers

1 USA 18600000 15.93

2 Indonesia 16622000 14.24

3 Thailand 11336181 9.71

4 Korea 8360644 7.16

5 China 5350000 4.58

6 India 5102231 4.37

7 Russia 5078835 4.35

8 Philippines 5049630 4.32

9 Malaysia 4250000 3.64

10 Chile 4088414 3.50

Global 116737059 100

Source: Global Direct Selling – 2017 Retail Sales published on 18th June 2018 by WFDSA

Consumers benefit from direct selling because of the convenience and services it provides, including personal demonstration, explanation of product features, and flexible buying hours. It also provides a more personalised shopping experience.

1.3 The Retail Sector in IndiaRetail is one of the largest sectors in India. It accounts for around 10 per cent of India’s GDP and 8 per cent of total employment. In 2017, the market size was valued at USD 680 billion; this is expected to reach at USD 1.1 trillion by 20204. Retail sales of USD 1 trillion in 2017 made India the leading country followed by China in the AT Kearney’s Global Retail Development Index 2017. Despite this stellar performance, one cannot but

wonder if these figures would have been several times higher if India had a unified retail policy.

One could say that India does not have a retail policy, which is a half-truth. In reality, India has many retail policies. The single biggest impediment to the growth of retail in India has been a fractured and painfully arbitrary approach that policymakers have had towards retail. As in any other country, India has several formats of retail that include big and small stores, organised and traditional retail stores, single brand retail, multi brand retail, e-commerce, direct selling, tele marketing etc. All formats survive side by side. This is the first big difference between India and other countries. International experience suggests that large organised formats of retail have led to the closure and very often extinction of traditional



retail formats, popularly known as mom and pop stores. In India, the “kirana stores” have used the presence of organised retail to modernise and market themselves better by endearing themselves to customers.

The second difference between India and most other countries lies in the approach to retail. In most countries except India, retail is viewed in a holistic manner. Retail is an interface between the producer and the individual consumer buying for personal consumption. Thus, retail is the last link that connects the individual consumer with the manufacturing and distribution chain. In 2004, The Delhi High Court defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing, which would be classified as wholesale. Yet, in India, the regulatory framework for retail has created multiple definitions for retail based on the sale format and the origin of capital, resulting not only in a confusing regulatory maze but also giving rise to regulatory arbitrage.

Retail must be viewed from the point of view of the consumer, from the lens of providing the consumer a superior retail experience and from the lens of consumer protection. However, this is not how retail is viewed in India. The principles of consumer protection are the same irrespective of origin of capital and business formats. In India however, we have created an un-level playing

field for all retail formats. It may be something as simple as poor access to credit for traditional retailers when compared to the big guns, or in the case of something more extreme, such as extreme forms of penalties in many instances that under usual circumstances of retail be dismissed as ordinary customer complaints. The end result is almost always a muddle of regulations and regulatory arbitrage that eventually defeats the purpose of consumer protection.

The direct selling sector has been at the receiving end of such muddles of regulation. The purpose of this study is to examine the regulatory arbitrage that exists between the direct selling sector and other formats of retail. The need for such a study arises because of the spate of cases that have been registered against many direct selling companies and their senior management. This is unique to direct selling. Retail trade is not regulated per se. At best, they are covered by the laws of the land. However, even small infractions, that have more to do with poor customer service, have often escalated to full-blown legal cases of fraud in the case of direct selling.

Through this study, we examine the context and cause for these escalations, the regulatory framework that governs these escalations, the cases that have been filed, and judgements that have been delivered.


2.1 Direct Selling World OverThe modern direct selling industry is considered to have originated in the USA in the mid to late 1800s with the establishment of a company named Avon in 1886. The global market evolved between the 1920s and 1930s in the USA driven by the need to regulate marketing and distribution costs, and the need for live demonstrations for certain products in the absence of technology. Since the 1970s, the industry saw substantial changes. The industry started with the sale of products like cosmetics and household appliances through the direct selling channel, but after 1970, many direct selling companies diversified

their product portfolios and included new products such as household goods, food and wellness products. Many new marketing techniques and strategies were developed and new distribution and retail channels emerged. Introduction of MLM compensation plans marked a major shift in the direct selling industry. By the mid-1990s, many large direct selling companies had established a strong foothold in their home countries and started looking outwards at emerging markets such as China and India.

The global direct selling industry expanded significantly over time. Figure 2.1 depicts the

Global Direct Selling Industry2

Figure 2.1: Market Size Trends in the Global Direct Selling Industry

Source: Compiled from FICCI-KPMG (2016), ICRIER (2011) and WFDSA (2017).

7

Chapter 2: Global Direct Selling Industry

2.1 Direct Selling World Over

The modern direct selling industry is considered to have originated in the USA in the mid to late 1800s with the establishment of a company named Avon in 1886. The global market evolved between the 1920s and 1930s in the USA driven by the need to regulate marketing and distribution costs, and the need for live demonstrations for certain products in the absence of technology. Since the 1970s, the industry saw substantial changes. The industry started with the sale of products like cosmetics and household appliances through the direct selling channel, but after 1970, many direct selling companies diversified their product portfolios and included new products such as household goods, food and wellness products. Many new marketing techniques and strategies were developed and new distribution and retail channels emerged. Introduction of multi-level marketing (MLM) compensation plans marked a major shift in the direct selling industry. By the mid-1990s, many large direct selling companies had established a strong foothold in their home countries and started looking outwards at emerging markets such as China and India.

The global direct selling industry expanded significantly over time. Figure 2.1 depicts the change in the global market size of the direct selling industry from 1990 to 2016. The figure shows that the global market for direct selling has been increasing (except for the year 2001). In 1990, the market size of the global direct selling industry was valued at USD 45 billion and in 2000, it increased to almost twice as much – USD 83 billion. In 2016, the revenue of the industry reached an all-time high of USD 182.6 billion. Overall, the revenue of the global direct selling industry has grown around four times between 1990 and 2016.

Figure 2.1: Trend of Market Size of Global Direct Selling Industry

Source: Compiled from FICCI-KPMG (2016), ICRIER (2011) and WFDSA (2017).

45 4863 62 68 75 79 80 82 85 83 79 86 89

99 103 109 114 119 121132

158167

156166

179 183

020406080

100120140160180200

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Val

ue in

$Bi

llion

Year



Table 2.1: Comparison of Top Ten Largest Direct Selling Countries and India in 2008 and 2017

Rank2008 2016

CountryValues

(in $ Billion)Per cent Share Country

Values (in $ Billion)

Per cent Share

1 US 29.6 26.0 US 34.90 18.40

2 Japan 22.8 20.0 China 34.29 18.08

3 Brazil 10.1 8.9 Korea 17.15 9.04

4 Germany 8.8 7.7 Germany 16.69 8.80

5 Korea 7.0 6.1 Japan 15.33 8.08

6 Mexico 4.4 3.9 Brazil 11.85 6.25

7 UK 3.6 3.2 Mexico 5.89 3.10

8 Italy 3.7 3.2 Malaysia 4.66 2.46

9 Russia 2.9 2.5 France 4.99 2.63

10 France 2.4 2.1 UK 3.70 1.95

25 India 0.6 0.5 India (22nd) 1.51 0.80

change in the global market size of the direct selling industry from 1990 to 2016. The figure shows that the global market for direct selling has been increasing (except for the year 2001). In 1990, the market size of the global direct selling industry was valued at USD 45 billion and in 2000, it increased to almost twice as much – USD 83 billion. In 2016, the revenue of the industry reached an all-time high of USD 182.6 billion. Overall, the revenue of the global direct selling industry has grown around four times between 1990 and 2016.

Among the regions, Asia-Pacific forms the largest direct selling market. In 20175, the Asia-Pacific region accounted for 45.02 per cent of the global direct selling market. The direct selling industry

in Asia-Pacific region engages more than 65 million people as direct sellers. Japan, China, Korea, Thailand, Indonesia and India are the major markets in the region. The other larger regions are North America (18.93 per cent), followed by South and Central America (14.32 per cent share) and Europe (20.28 per cent). USA and Canada are the largest markets in North America whereas Brazil is the largest market in the South and Central America, followed by Mexico, Colombia and Venezuela. France, Germany, Italy and UK are the largest direct selling markets, in Europe. Middle East and Africa are smaller markets for direct selling, accounting for less than 1 per cent of global direct selling market.

Source: Compiled from ICRIER (2011) and WFDSA (2018)

_______________________________________________________

5 WFDSA, 18th June, 2018, Global Direct Selling – 2017 Retail Sales


2.2 Global Regulatory Regime for Direct SellingGlobally, the direct selling industry is a moderately regulated industry. Many countries have given direct selling ‘industry status.’ In many countries it comes under ‘retail.’

To regulate the direct selling industry, many countries either implemented new laws or made amendments to existing laws. Some countries have enacted specific anti-pyramid laws to deal with frauds and abusive schemes; however, through specific regulations, they allow MLM operations by direct selling companies. On the other hand, some countries primarily focus on consumer protection and strive to identify fraudulent schemes. This section provides a brief overview of direct selling laws and regulations prevalent in select countries such as the USA, Malaysia, Singapore, Vietnam, and China.

2.2.1 USA

The USA is the oldest and the largest market for direct selling. It has a quasi-federal regulatory structure similar to India. In the USA, there is no specific legislation at the federal level to regulate direct selling. However, a majority of the states (such as Georgia, Louisiana, Maryland, Massachusetts, Wyoming and the Commonwealth of Puerto Rico) have legislations and laws to regulate this industry. In most states of the USA, there is a mandatory requirement that the company should appoint an agent who should abide by certain regulations relating to allowable income presentations, payment of compensation to participants and offer to repurchase unsold inventory.

In all states, the promotion or operation of ‘pyramid schemes’ is prohibited through various legislations/statutes. Some of these statutes have been drafted to combat pyramid schemes specifically; others

use lottery laws and other statutes, which do not specifically mention pyramid schemes but which are used to combat these frauds. These statutes can be civil or criminal in nature. Montana has an MLM filing requirement as part of its anti-pyramid statute. Many states have defined ‘multi-level distribution companies’ as

“Companies which market products or services through independent agents or distributors at different levels and in which participants recruit or sponsor others and receive compensation based upon the recruit’s sale of products.”

There are six states –Idaho, Louisiana, Montana, Oklahoma, South Dakota and Texas – that have anti-pyramid statutes. These statutes clearly state

“Pyramid promotional scheme is one that gives consideration for the opportunity to receive compensation which is derived primarily from a person’s introduction of other persons into the plan rather than from the sale of goods or services.”

In the USA, there is no prohibition on the sale of any consumer products by direct sellers. Certain regulated industries (for example, wines and liquors, securities, insurance, etc.) have requirements that apply across the board to all sellers in those industries and the regulations do not discriminate against direct selling distribution methods. Some product lines (for example, dietary supplements, telephone cards, etc.) have to meet certain requirements at the federal and state levels and direct selling companies have to adhere to those requirements too.

To protect consumers, cooling off rules are implemented at the federal level. In 2015, the federal government amended the ‘cooling-off rule’’ or ‘Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations’ of



1972. As per this new rule, the revised definition of ‘‘door-to-door sale’’ distinguishes between sales at a buyer’s residence and those at other locations. The revised definition covers sales made at a buyer’s residence that have a purchase price of USD 25 or more and sales at other locations that have a purchase price of USD 130 or more.

2.2.2 Malaysia

The country has a comprehensive law to regulate the direct selling industry. The Malaysian government enacted the ‘Direct Sales Act, 1993’ on January 22, 1993. In order to incorporate specific provisions on governing sales achieved through electronic medium and regulations on legitimate multilevel marketing, the Government further amended and renamed it as the ‘Direct Sales and Anti-Pyramid Scheme Act, 1993 (DS & APS Act)’ on March 1, 2011.

All door-to door sales and mail order selling (including sales through telecommunication) in Malaysia are subject to the DS & APS Act, 1993, which provides for licensing of persons carrying on direct sales businesses. The Act laid down the conditions under which business may be conducted, defines requirements of direct sales contracts, mentions the conditions under which licences may not be granted or revoked and the punishment for fraud.

The DS & APS Act, 1993, also provides for a cooling-off period of 10 days after the date of entering into a direct sales contract. Besides, the Act stipulates that any person negotiating door-to-door sales will have to produce an identification card and authority card. This protects consumers from fraudulent schemes.

The three types of marketing plans such as door-to-door sales (multilevel marketing plan/single marketing plan), mail order sales and sales through

electronic transactions are covered under the provisions of the DS & APS Act, 1993.

The new chapter – Prohibition of Pyramid Schemes read with Schedule – Features of Pyramid Scheme or Arrangement to the DS & APS Act – has been introduced and specifically lays down features of a non-pyramid scheme or arrangement such as no payment of bonus solely on new recruitments, mandatory written contracts, no entry fee, price of goods to be commensurate with quality of goods offered for sale, buy-back policy, etc.

There is no prohibition on the sales of specific products. However, direct selling companies wanting to introduce new products must seek prior approval from the relevant authority before distributing the products. Additionally, all health products have to be registered with the Drug Control Authority, Ministry of Health, before they can be sold through this mode.

In Malaysia, direct sellers are treated as independent contractors. Direct selling comes under the purview of the Ministry of Domestic Trade and Consumer Affairs, Malaysia (KPDNHEP). Other statues governing the direct selling industry include the Competition Act, 2010, Personal Data Protection Act 2010, Price Control & Anti Profiteering Act, 2011, and Consumer Protection Act, 1999, under KPDNHEP. Other allied laws in relation to health and taxes are also applicable to such companies.

2.2.3 Singapore

Like Malaysia, Singapore also has a comprehensive law to regulate the direct selling industry. The industry is governed by the Multi-level Marketing and Pyramid Selling (Prohibition) Act, 1973 (revised in December 2000) and the Multi-level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order, 2000 (‘Order’).


The Multi-level Marketing and Pyramid Selling (Prohibition) Act, 1973, prohibited all multi-level marketing and pyramid selling schemes. The aim of the Act was to prevent any unsustainable pyramid selling.

In May 2000, the Singapore government passed the Multi-level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order, 2000, in order to lay down an enabling policy for direct sellers and exclude certain schemes and arrangements to be categorised as ‘pyramid schemes.’

The Order, 2000, prescribes that if any scheme or arrangement, or any class of such schemes or arrangements, satisfies some terms and conditions, then it would not be construed as an illegal scheme.

Singapore adopts a balanced approach to consumer protection. Consumer protection is covered under the Consumer Protection (Fair Trading) Act, 2004, which was amended in August 2016 and renamed at the Consumer Protection (Fair Trading) (Amendment) Act, 2016. There are two key amendments in the 2016 Act. These include the establishment of an independent administering agency, Standards, Productivity, and Innovation Board, commonly referred to as SPRING Singapore, under Ministry of Trade and Industry (MTI) with investigation and enforcement powers. SPRING is responsible for gathering evidence to file timely injunction applications and ensure that errant retailers comply with injunction orders issued by courts. The other amendment includes additional power to courts to stop errant retailers from conducting further business.

In Singapore, direct selling comes under the purview of the MTI. MTI regularly reviews the Consumer Protection (Fair Trading) (Amendment) Act, 2016, to ensure that it remains relevant and provides adequate protection for consumers.

2.2.4 Vietnam

Direct selling is a relatively a new business in Vietnam. Direct selling companies are considered to be multi-level marketing companies in Vietnam. The country has a separate regulation to regulate the industry. In August 2005, the Government of Vietnam enacted Decree No. 110/2005/ND-CP (Decree 110) in order to regulate multi-level marketing. To make regulations more stringent with stricter requirements and control applicable to multi-level marketing activities in Vietnam, the Government issued a new Decree No. 42/2014/ND-CP (Decree 42) in July 2014 and replaced the earlier Decree 110. Recently, the Government of Vietnam issued the Decree 40/2018/ND-CP (Decree 40) on March 12, 2018, replacing Decree 42, to further promote the management of multi-marketing business operations.

This new regulation aimed to tighten the legal frameworks for multi-level marketing and ensure that the business remain focussed on the sale of goods to actual customers rather than on multiple layers of recruitment of new participants. The Decree 40 targets pyramid schemes by specifying what a multi-level marketing firm must not do, including forcing new participants to pay a deposit or buy the firm’s goods to participate in the firm’s business (Box 1).

The direct selling industry comes under the purview of the Ministry of Industry and Trade. Decree 40 also laid down the responsibilities of the Ministry of Industry and Trade with respect to multi-level marketing activities in the country. The Ministry of Industry and Trade is responsible for granting business licences for multi-level marketing activities.

2.2.5 China

Direct selling industry was regarded as an illegal activity until the first concrete legislation



Box 1: Key Provisions under the ‘Decree 40’

Registration: Multi-level marketing activities must be registered in accordance with this Decree. A multi-level marketing firm is required to have a minimum registered capital of approximately VND 10 billion (approximately USD 439,000) before it can receive a business license, and make an escrow deposit equivalent to 5 per cent of its charter capital (but not less than VND 10 billion – an increase from the VND 5 billion required under Decree 42) into a bank account. The escrow serves as security for the MLM participants and funds may be used toward payment of unpaid penalties to Vietnamese authorities, and/or compensation for damages should the MLM company breach any of its obligations to the MLM participants.

Revocation of business licences: Licensed multilevel marketing firms that have no operations or have stopped operations for twelve consecutive months will have their business licenses revoked.

Transfer of direct selling participants: Multi-level marketing firms are not allowed to sell or transfer networks of participants who join multi-level marketing activities to other firms (excluding cases of acquisition, consolidation, or merger of corporations) or entice corrupt participants of other multi-level marketing companies to join their networks. The new decree prohibits multi-level marketing firms from providing false or misleading information about the benefits of participating in multi-level marketing, features, and uses of goods, as well as activities of multi-level marketing businesses.

Source: Extracted from Government of Vietnam (2014).

was released by the State Council in 2005. The legislation consisted of two laws, namely the ‘Regulations on Direct Selling Administration (2005)’, and the ‘Regulation on Prohibition of Chuanxiao (2005)’.

The ‘Regulations on Direct Selling Administration (2005)’ was implemented on August 23, 2005 to regulate direct selling, strengthen supervision over direct selling activities, prevent fraud and protect the legitimate rights and interests of consumers and public interest. The regulation defines direct selling companies as, “companies which, upon approval, sell products by way of direct selling.”

In March 2016, the Chinese government revised the Direct Selling Regulation. In the revised regulation, the government cancelled the requirement for at least three years’ experience of direct selling in overseas markets for international companies that hope to enter China in the Free Trade Zones located in Shanghai, Guangdong, Tianjin and Fujian. The Chinese government also made a list of products that are allowed to be sold through direct sales. These products include cosmetics, cleaning products (personal hygiene products and household cleaning supplies), health food products, health care equipment, small kitchen implements, and household electronic appliances. The regulation upholds that goods that are not allowed to sell through direct sales include restricted goods (such as firearms, drugs, etc.), perishable goods, bulk commodities, etc.

Pyramid marketing is considered an illegal activity in China. In order to prohibit pyramid marketing, the Chinese government issued the Regulations on Prohibition of Chuanxiao (Pyramid Marketing Prohibition Regulations) in 2005. The stated aims of the Pyramid Marketing Prohibition Regulations are to ban certain activities that are considered harmful


to society and the business environment. In 2015, the Government implemented the ‘Regulations on the Management of Direct Sales Industry Behaviour’ to clarify the distinction between direct selling and pyramid selling. This regulation placed more pressure on direct selling companies operating, or seeking to operate, within Mainland China. As per this regulation, companies must provide a fixed place of business, a signed distribution contract, company policies allowing for product returns, and training programmes for sales staff. Direct selling companies are prohibited from activities engaging in false product promotion and/or disseminating inconsistent information; organising direct selling training or examination; encouraging or incentivising sales staff to recruit additional sales people; or engaging in any activities that organise or participate in pyramid selling. In addition, direct selling companies must hold comprehensive files about their dealers (with detailed personal information) that should be submitted to the government.

In China, the Ministry of Commerce, People’s Republic of China (MOFCOM), is the authority that issues direct selling permits. The application for the direct selling permit must be submitted to MOFCOM through their provincial level counterpart where the applicant enterprise is registered.

2.3 India’s Best FitIdeally, India must have one regulation to oversee all retail trade. India has a fragmented approach to retail. Ironically, one is unsure if direct selling is even classified as retail. Even though international definitions (Appendix 1) suggest that direct selling is

a format of retail, albeit an unconventional channel, India has never recognised direct selling as a format of retail. This also holds true for e-commerce. It is because policymakers fail to recognise non-traditional formats of retail that piecemeal regulations arise.

India has much to learn from international experience, especially for direct selling, which is an area of retail that lacks understanding. The USA is the largest direct selling economy, and like India, it is a federal economy. The current regulatory framework for direct selling (for any kind of retail in fact) follows a similar structure. Policy formulation happens at the state level. In some sense, this leads to regulatory arbitrage.

An alternative approach is to look at the experiences of Malaysia, who have enacted a separate act. The socio economic fabric of Malaysia is similar to that of India. Direct selling is popular and almost 15 per cent6 of the Malaysian population are direct sellers. If one were to add other direct and indirect employment created through direct selling, it would be safe to assume that at least 15-18 per cent of the Malaysian population draws its employment from direct selling. Further, direct selling constitutes nearly 3 per cent of total retail trade, which means it affects the life of many people. India is no different. Even though in percentage terms, India’s number are lower than Malaysia, in real terms it is quite likely that India’s numbers are much more. It therefore makes sense for India to consider the Malaysian experience. Instead, the regulatory framework for direct selling in India has devolved, rather than evolve, over years.

_______________________________________________________

6 Calculated from figures in Table 1.2 and Malaysia’s population



3.1 Chronology of EventsIn spite of steady growth and contribution to the economy, the direct selling industry is more often than not misunderstood and criticised for “exploiting customer’s naiveté.” In fact, lack of understanding of business operation, particularly among the media and law enforcement agencies, have culminated in the initiation of legal proceedings against many legitimate direct selling companies and their management. Direct selling started growing in India in the mid-nineties and gained momentum by the end of the century. However, the industry soon started gaining notoriety as it did not meet India’s traditional approach to retail. Furthermore, during that period, there was a sudden rise in the number of fly-by-night operators who operated under the guise of direct sellers. These businesses were running Ponzi or pyramid schemes and would entice customers into buying bogus products and push them to create a chain of more buyers, promising them profits from the advancing chain. Most people fell for such profiteering activities as they would promise high profits in a short time with minimum effort. Although law enforcers cracked down on such businesses from time to time, they were unable to contain these businesses. Due to lack of industry regulations and standards, these business entities took advantage

of the loopholes in the direct selling ecosystem and disappeared after running such schemes for a short while.

The misdeeds of these Ponzi schemes came under scanner in the year 2000, but it was too late for the industry to protect its reputation. The age-old proverb of a rotten apple spoiling the whole basket proved to be a reality as majority of consumers painted the entire direct selling industry with the same brush. Moreover, in the absence of an authorised regulatory body or a designated grievance redressal cell, at the central or state level, consumers were forced to register criminal complaints with local law enforcement agencies against these organisations. On most occasions, junior level officers at police stations register such complaints. Most of these officers lacked basic knowledge of the direct selling business and hence, would book these cases under fraud and cheating. A few of these business entities were also booked under the Prize Chits and Money Circulation Schemes (Banning) Act of 1978 (commonly known as PCMCS Act). As per the PCMCS Act, “money circulation scheme means any scheme, by whatever name called, 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,

Regulatory Framework of Direct Selling Industry in India3


whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”

In the wake of consumerism, a number of legitimate direct sellers were embroiled in litigation either because they were considered Ponzi schemes. Media houses were quick to pick up these stories and were reported without much of a background check. The increasing number of such reports forced policymakers to take notice of the direct selling sector for the first time.

A FICCI-PLR Chamber report7 on direct selling suggests that the Reserve Bank of India (RBI) was one of the first regulators to crack a whip on direct selling companies. The RBI pulled up direct selling companies for accepting what these companies called a registration fee or a “starter kit” from its joining members in exchange for sample products, business literature and training material. The RBI stated that such fees, taken from the depositor, was as good as companies collecting deposits from their customers and comes under the ambit of RBI. However, on further probing, the RBI found that the registration fee charged from direct sellers is essentially in exchange for a product or service provided by the direct selling company. This led RBI to clarify that direct selling companies do not fall under the its purview, as offering product and services in lieu of money is not a deposit taking activity. At present, point G.72 in the FAQ section of “All you wanted to know about NBFCs” (last updated on January 10, 2017) on the RBI website8 states that “…Multi-Level Marketing companies, Direct Selling Companies, Online

Selling Companies do not fall under the purview of RBI. Activities of these companies fall under the regulatory/administrative domain of respective state governments…” On the other hand, the Securities and Exchange Board of India (SEBI) refused to regulate direct selling companies as they do not fall under the purview of capital market regulations.

Indecisiveness among financial regulators over the legitimacy of direct selling operations forced the Government of India (GoI) to refer the matter to the Department of Law, Justice and Company Affairs in January 2002. The department, in its formal communication stated:

• If goods and services are sold lawfully, there is no need for a separate legislation as proposed by the direct selling industry

• The functioning of network marketing does not amount to committing any offence under Prize Chits and Money Circulation Schemes (Banning) Act, 1978

• The activities and area to be covered are not defined under Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and therefore, there is not enough material to support the proposal

• There are adequate provisions in the Sale of Goods Act of 1930, Indian Contract Act of 1872, The Consumer Protection Act of 1986 and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

• If direct selling companies do their activities legally, then their activities would not attract the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

_______________________________________________________

7 FICCI-PLR Chambers, 2017, Ease of Doing Business in India: The Way Forward For The Direct Selling Industry8 https://m.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=1167



In short, the Department of Law, Justice and Company Affairs allowed direct selling companies to carry out their operations as per the law of the land. However, this clarification led to the mushrooming of several pyramid schemes, which started operating under the guise of direct selling companies undertaking multi-level marketing. These Ponzi/pyramid schemes played on the human tendency to make a quick buck and would entice customers, particularly from the lower income strata, to invest money in these schemes. Soon, these schemes gained publicity through word of mouth and a general sense of distrust of direct selling arose among the public.

Around 2009-10, on the basis of specific complaints received in the Department of Consumer Affairs (DoCA) under the Union Ministry of Food & Public Distribution, regional directors (RDs) and the Registrar of Companies (RoCs) had been directed to scrutinise the balance sheets and inspect the books of accounts and other records (under Sections 234 and 209A respectively of the Companies Act 1956) of 87 companies, allegedly carrying on activities relating to prize chit fund and money circulation in the garb of multi-level marketing. Further, under the direction of the central government, the Department of Financial Services (DFS), Ministry of Finance formed an Inter-Ministerial Group (IMG) with members from the Central Economic Intelligence Bureau (CEIB), Ministry of Corporate Affairs (MCA), DoCA, RBI, SEBI, and the Financial Intelligence Unit (FIU)9. The IMG intended to do the following:

i. “Draft Model Rules for MLM companies and define the nature of prohibited schemes under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

ii. Issue guidelines to clarify how to distinguish between genuine direct selling companies from disguised money circulation schemes (sic)”

The recommendations of the IMG (under DFS) did little to contain the menace of illegal pyramid schemes although legitimate companies did suffer. Under mounting pressure from consumers, the DoCA formed an Inter-Ministerial Committee (IMC) in 2012 with members from the CEIB, MCA, RBI, SEBI, and FIU. The Committee was headed by Shri Rajiv Agarwal, Secretary, DoCA.10 The Committee was to consider the following points:

a. Need to enact legislation to regulate MLM companies

b. Issuing guidelines for these companies on the lines of the Kerala government’s direct selling guidelines

c. Including the definitions of direct/multilevel marketing and pyramid schemes in the Prize, Chits and Money Circulation (Banning) Act, 1978 through an amendment

d. Organising an awareness campaign under ‘Jago Grahak Jago’ to protect the interest of consumers in respect of such MLM schemes

e. Adopting International best practices to protect consumers

f. Suggesting legal action against companies dealing with such multi-level marketing schemes

g. Identifying the nodal department that would deal with all matters relating to these marketing schemes (sic)”

_______________________________________________________

9 http://pib.nic.in/newsite/PrintRelease.aspx?relid=8684510 http://pib.nic.in/newsite/PrintRelease.aspx?relid=85482


The IMC, under DoCA, suggested that the PCMCS Act needed to be amended to bring direct sell-ing under its ambit. It further concluded that the recommendations be submitted to DFS as it is the concerned department administering the PCMCS Act. Acting on the IMC’s recommendation, a High Level Inter-Ministerial Group (HL-IMG) was formed on May 8, 2013 under the Chairmanship of Secre-tary, DFS. The group consisted of Joint Secretary level officers from the Department of Economic Affairs (DEA), and the Department of Revenue (DoR), both under Ministry of Finance, MCA, and Joint Secretary level officers from the RBI and SEBI. This group was expected to strengthen the existing co-ordination mechanisms for regulation and supervision of MLM companies or direct selling companies, non-banking finance companies (NBFCs) and companies running Collective Invest-ment Schemes (CIS). The Group’s views were made public by the DFS on October 10, 2014, in which it stated that, “…problems faced by Direct Selling companies may not be solved by amending the PCMC Act.” It also states that, “even if exception clause were to be added to the PCMC Act to ex-clude the activities of certain DS companies, such provision is not desirable or acceptable, unless a very strong legal framework of registration, regu-lation and scheme of penalties for violation of the law on direct selling is put in place”

The recommendation of the HL-IMG suggested the creation of a new law to regulate and monitor direct selling companies. Acting on this, the DoCA, along with the MCA, MoF and the Ministry of Commerce (MoC), formed a new inter-ministerial committee (IMC) in November 2014. This IMC was given the following terms of reference:

• To examine the nature and growth of direct selling/MLM companies in the country over last 5 years.

• To examine the factors/features that distinguish-es the above models of business strategy from pyramid, money circulation schemes.

• To examine whether or not standalone legis-lation is now required to regulate the above business models.

• If so, the possible framework for such legisla-tion based on the existing laws and regulations including that in other countries.

• Identification of goods, services and operational issues to be covered under the new legislation.

• The Committee will be free to record evidence of other stakeholders such as industry bodies, consumer groups etc. (sic)”

In April 2015, the duration of the IMC was in-creased by six months and the report was finally submitted in November 2015. The IMC announced that draft guidelines for direct sellers will be issued soon. At the time the IMC was to submit its final re-port, the Indian Institute of Corporate Affairs (IICA), set up under the aegis of Ministry of Corporate Af-fairs (MoCA) released a White Paper on “Regulation of Direct Selling in India.” The White Paper included a draft legislation on “The Regulation of Direct Selling and Pyramid Schemes (Prohibition) Bill” which delineated legitimate direct selling business from a pyramid scheme, role of PCMCS Act in direct selling business and suggested various measures of regulating the direct selling industry.

The IICA Whitepaper was quoted by the Parliamentary Standing Committee of Finance in its 21st Report on “Efficacy of Regulation of Collective Investment Schemes (CIS), Chit Funds, etc.” which recommended that:

“Given that there is considerable ambiguity in identifying Ponzi/pyramid schemes and distinguish-ing them from legitimate Direct Selling businesses,



there is merit in considering the findings of the “Whitepaper on Regulation of Direct Selling in India” by IICA. Most importantly, the exposure draft in the IICA Whitepaper proposes a statutory provision under Section 5 of the draft that defines a Pyramid Scheme. This definition seems to provide, as evidenced from their legal research on Indian and international jurisprudence, an objective ‘smell test’ for law enforcement agencies to apply at the time of investigation. It is hoped that this will lead to more timely detection and efficacious investiga-tions. The Committee would recommend that the Ministry of Finance, Ministry of Corporate Affairs and Ministry of Consumer Affairs consider the IICA Whitepaper and more specifically, the exposure draft and establish a regulatory framework and compulsory registration process for all Direct Selling businesses in order to provide an oversight mecha-nism as to whether they are legitimate direct selling businesses or Ponzi/pyramid schemes.”

3.2 Model Guidelines on Direct Selling Issued by Department of Consumer AffairsThe Department of Consumer Affairs (under the Union Ministry of Consumer Affairs, Food and Public Distribution) vide order F. No. 21/18/2014-IT (Vol-II) issued a set of model guidelines on direct selling on September 9, 2016. These guidelines were outcome of the inter-ministerial committee constituted by the Union Government to look into matters concerning the direct selling sector. The committee included representatives from the Ministry of Finance (MoF), the Department of Industrial Policy and Promotion (DIPP), Department of Legal Affairs (DLA), Department of Information Technology (DIT), and Ministry of Corporate Affairs (MCA), besides representatives from state governments of Delhi, Andhra Pradesh and Kerala. Inputs for the

guidelines were also obtained through discussions with policy makers and industry stakeholders.

The guidelines act as directives for both state governments and union territories to “…set up a mechanism to monitor/supervise the activities of direct sellers and direct selling companies regarding compliance of the guidelines for direct selling.” The guidelines further state that, “…any direct selling entity conducting direct selling activities shall sub-mit an undertaking to the Department of Consumer Affairs within 90 days, stating that it is in compli-ance with these guidelines and shall also provide details of its incorporation.”

The guidelines are divided into nine different parts or clauses, which are further subdivided into smaller points for explanation and better understanding. These are:

• Definitions

• Conditions for setting up of direct selling business

• Conditions for conduct of direct selling business

• Conditions for Direct Selling contract between Direct Seller/Distributor and Direct Selling Entity

• Certain obligations of direct sellers

• Relationship between direct selling entity and direct seller

• Conduct for the protection of Consumer

• Prohibition of pyramid scheme & money circula-tion scheme (and)

• Appointment of monitoring authority (sic)”

The guidelines define terms such as acts, consumer, prospect, direct seller, network of direct selling, direct selling, direct selling entity, goods, saleable, cooling-off period, pyramid scheme, money circu-lation scheme, remuneration system in Clause 1. A few of the important aspects such as the description of direct selling and direct selling entity, cooling-off


period, pyramid schemes and remuneration sys-tem have been explained in detail. In the context of business, the guidelines describe direct selling as ”…marketing, distribution and sale of goods or providing of services as a part of network of Direct Selling other than under a pyramid scheme. Provided that such sale of goods or services occurs otherwise than through a “permanent retail loca-tion” to the consumers, generally in their houses or at their workplace or through explanation and demonstration of such goods and services at a particular place.”

A direct selling entity has been described as “…an entity, not being engaged in a pyramid scheme, which sells or offers to sell goods or services through a direct seller provided that “Direct Sell-ing Entity” does not include any entity or business notified otherwise by the Government for the said purpose from time to time.”

The guidelines clearly explain what can be termed as a pyramid scheme and how it differs from legitimate multi-level marketing (MLM) or direct selling. The guidelines defines a pyramid schemes 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.” The guidelines further clar-ifies the difference between pyramid scheme and a direct selling entity as follows:

“Provided that the above definition of a “Pyramid Scheme” shall not apply to a multi layered network of subscribers to a scheme formed by a Direct Selling Entity, which consists of subscribers enroll-

ing 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 all of the following:

a. It has no provision that a Direct Seller will receive remuneration or incentives for the recruitment/enrolment of new participants.

b. It does not require a participant to purchase goods or services:

i. for an amount that exceeds an amount for which such goods or services can be expected to be sold or resold to consumers;

ii. for a quantity of goods or services that exceeds an amount that can be expected to be consumed by, or sold or resold to consumers;

c. It demonstration equipment and materials or other fees relating to participation(sic);

d. It provides a participant with a written contract describing the “material terms” of participation;

e. It allows or provides for a participant a reasonable cooling off period to participate or cancel participation in the scheme and receive a refund of any consideration given to participate in the operations;

f. It allows or provides for a buy-back or repurchase policy for “currently marketable” goods or services sold to the participant at the request of the participant at reasonable terms;

g. It establishes a grievance redressal mechanism for consumers.

Explanation 1: For the purpose of this proviso the term “material terms” shall means buy-back or repurchase policy, cooling-off period, warranty and refund policy.”



The guidelines also spell out the remuneration sys-tem and its definition in the context of direct selling. This is explained as “… the system followed by the direct selling entity to compensate the direct seller which illustrates the mode of sharing of incentives, profits and commission, including financial and non-financial benefits, paid by the direct selling entity to the direct sellers , on a monthly, periodic or yearly basis or both, as the case may be. This system, for every Direct Selling entity, shall:

a. Have no provision that a direct seller will receive remuneration from the recruitment to participate in such direct selling;

b. Ensure that direct sellers shall receive remuneration derived from the sale of goods and services;

c. Clearly disclose the method of calculation of remuneration.”

The guidelines, in Clause 2, stipulate that any direct selling company must be registered, hold mandatory orientation sessions for new and existing direct sellers, provide remuneration details, ensure payment of dues to direct sellers, stipulate a buy-back timeframe, specify and ensure that direct sellers are aware of the cooling off period provided, specify the eligibility criteria for promoter of direct selling company, and ensure that the company has an office in the states where they operate.

In Clause 3, the guidelines sets out the conditions for conducting direct selling business. The notable points in this clause are owner/holder/licensee of a trademark/service mark/identification mark; issue of proper ID to direct sellers, upkeep of detailed records of direct sellers; maintaining of an updated website of the organisation with all relevant details of its business and products with an additional provision for grievance redressal; providing periodic information of all business related activities as per

the agreement with the direct seller and payment of financial dues; monitoring the purchase value of direct sellers for taxation purpose etc. The clause also consists of a set of what not to do as a direct selling entity while carrying out the business of direct selling.

Clause 4 of the guidelines consists of the condi-tions to enable a direct selling contract between a direct seller and direct selling company. The broad points presented in Clause 4 are the execution of a contract between the direct selling company and the direct seller consistent with Section 10 of Indian Contract Act 1872; written terms and conditions describing the material terms of participation with reference to frontloading, cooling off period, termination of contract and buy back or repurchase policy.

Clause 5 of the guidelines deals with certain obligations of direct sellers, mostly of good business practices to be adopted by a direct seller. Clause 5 suggests that while making a customer call, the direct seller must carry an ID and visit only after prior approval from the customer, let the customer know of the features and provide adequate information on the goods or services being offered, maintain books of information on sale and so on. The clause also consists of a set of what not to do as a direct seller while carrying out the business of direct selling.

Clause 6 of the guidelines establishes the relationship between the direct selling company and direct seller. The gist of this clause is that the onus of the sale of product and services lies with the direct selling company.

Clause 7 of the guidelines sets the ground rules for the protection of consumers. This clause states that direct sellers and direct selling companies will be guided by the provision of the Consumer Protection


Act 1986. The clause states that both direct sellers and direct selling companies need to comply with customer privacy. Direct selling companies need to appoint a grievance redressal Committee and set up a grievance redressal tracking mechanism with a stipulated turn-around-time (TAT), and provide nec-essary information to consumers on the purchase of a product.

Clause 8 of the guidelines prohibit direct sellers and direct selling companies from taking part in any pyramid scheme or in any money circulation scheme under the garb of undertaking direct selling business.

Clause 9 of the guidelines recommends the appoint-ment of a monitoring authority at the state govern-ment level and directs all entities carrying out direct selling business to submit necessary information to the nodal ministry as and when needed.

Last year, Chhattisgarh became the first state to adopt the central guidelines on direct selling to notify state guidelines for direct selling. Soon Sikkim, Andhra Pradesh and Telangana followed suit. Recently, the Government of Maharashtra indicated that it would adopt the direct selling guidelines. An interesting fact is that even though the central guidelines have been loosely based on the Kerala State Multi-Level Marketing (Control and Regulation) Bill, 2013 (‘Draft Kerala MLM Bill, 2013’) and was made public in 2016, Kerala released its own set of guidelines only in June 2018.

The central guidelines came at a time when the direct selling industry was going through a hard time establishing its credentials as a legitimate business operation and distinguishing it from Ponzi and pyramid schemes. The central guidelines recognised the direct selling sector as a separate legitimate business model and spelt out the dos

and don’ts for the industry to follow. Moreover, prior to the central guidelines, there had been numerous cases registered against the direct selling sector and direct selling companies. In fact, on most occasions, the top managements of direct selling companies had been booked under different laws. The central guidelines have provided the state law enforcement agencies a sense of understanding to demarcate legitimate direct selling from Ponzi/pyramid schemes and specifics for which a direct selling company can be held legally responsible. Moreover, the Consumer Protection Amendment Bill 2018 is pending passage. Once cleared, this will replace the Consumer Protection Act of 1986, which has several shortcomings, the chief one being slow disposal of consumer disputes. Not only this, the Bill will probably subsume the central guidelines and draft rules for the companies to follow.

3.3 A Legal Perspective on Direct SellingThe direct selling sector in India has been in the limelight for all the wrong reasons owing to the several lawsuits that have been registered against the sector in the past years. A closer look at these lawsuits reveals that not all these cases are pertinent to direct selling. In fact, detailed investigations reveal that on most occasions, Ponzi schemes operating under the guise of direct selling were responsible for these scams. SpeakAsia, Pearl Agrotech Corporation, Saradha Group and more recently the Social Trade scam in Noida are a few of the many examples of Ponzi scams caught in the net that were operating under the guise of direct selling. Even though none of these were direct selling in essence, they were still publicised as direct selling scams. The reason for this can be attributed to the ignorance and partial knowledge about direct selling among the media and law



enforcement agencies. A common misconception is that direct selling operations are akin to that of chit funds and Nidhi companies. It is to be understood that direct selling, chit funds and Nidhi companies are all perfectly legitimate business models and operate on stipulated guidelines laid down by the government. In fact, all registered businesses under each of the above three business models are regulated by designated government agencies and have to carry on business honestly as per industry norms and best practices. It is a known fact that a majority of the financial frauds that took place in the last few years were randomly attributed to one of these three business models.

3.3.1 Grievance Redressal in Direct Selling

It has been observed that legal cases registered against legitimate companies have mostly been for cheating. On most occasions, what had been registered as a case of cheating turned out to be a case of unaddressed, unresolved, and/or escalated customer grievance. In a majority of such instances, a legal proceeding could have been averted and the matter could have been resolved internally provided the organisation had put in place a proper customer grievance redressal mechanism. The State Consumer Disputes Redressal Commission’s order on E-Biz Com Pvt Ltd vs. Vishwanath Patil on January 17, 2012 (Order Dated 30/04/2009 in Case No. 431/2008 of District Pune), shows that a consumer grievance escalated to a legal proceeding purely because the consumer and the business entity were not able to come to an amicable solution. It is clear from the proceedings of the court that the dispute arose because the consumer had failed to provide his correct address, and could have been resolved without it having to go to court.

Much like any other sector that is driven by sales, this sector too has to deal with its share of mis-

selling. This means there is always the possibility of some direct sellers setting unreasonable expectations. It can also be that information is purposely withheld or wrong information is provided to expand the network. This kind of intentional mis-selling that stems from wanton dishonesty rather than poor communication is not unique to only this sector. Direct selling companies are never aware of such practises until too late. By this time, an aggrieved consumer who has been duped, will look for retribution in the form of a huge compensation pay-out. Furthermore, since unscrupulous direct sellers often escape unnoticed, even legitimate direct selling companies are forced to prove their legitimacy. Aggrieved customers will, mostly out of anger, complain of fraud to law enforcement, who slap even legitimate direct selling companies with a notice under the Prize Chits and Money Circulation Schemes (Banning) Act (PCMCS Act) of 1978, the most common legislation under which direct selling companies are booked.

In the last few years, the use of PCMCS Act against direct selling companies has been rampant. In most instances, PCMCS is used against legitimate direct selling companies to make a case of dispute or consumer grievance stronger. The rampant use of PCMCS against legitimate direct selling companies can be understood from the instances discussed below.

3.3.2. How it all started: Amway India Enterprise vs. Union of India (UoI)

One of the earliest instances of PCMCS being used to target legitimate direct selling companies is the case of Amway India Enterprises vs. Union of India on July 19, 2007, in the Andhra High Court. Amway India Enterprise decided to move the court to issue a writ of mandamus to declare that the provisions of the PCMCS Act have no


application to the “scheme” run by Amway India Enterprise and to restrain the petitioner (the State through CID) from interfering with its business operation. The police had earlier registered a case for offences under Section 385 and Section 480 of the Indian Penal Code (IPC) and Section 4, 5, and 6 of the PCMCS Act on September 24, 2006, alleging that Amway India Enterprises was running a money circulation scheme on a complaint from Mr A. V. S. Satyanarayana. The defence counsel had primarily based his argu-ments on the incentive qualifying structure for direct sellers on enrolment of new participants, additional incentives from new participants’ sales, and aggressive sales techniques.

From a layman’s perspective, none of these practices are alien to businesses that focus on sales. First, any sales driven industry, be it investment banking, insurance, or fast moving consumer goods (FMCG) adopt aggressive sales techniques and incentives on sales. The direct selling sector is no different. Second, like any other sales driven sector, direct selling companies too reward/give bonus to salesmen (direct sellers) for higher sales. The benefit of the bonus is not only restricted to the salesman of an organisation but is also passed on to the higher level of the hierarchy for achieving a larger sales target. In any other sector, the team leader of the sales team is incentivised based on the sales of his/her team. Segregating the direct selling sector from other businesses, purely based on the nature of sales, is unfair. Third, the direct selling sector suffers from high attrition ratio and hence is always on the lookout for fresh talent. The industry is predominantly dependent on its existing employees for talent acquisition. Hence, rewarding an employee for providing reliable and lasting talent is a common process and

can be at best compared to employee referral schemes run by various organisations including multinational companies (MNCs) which incentivise existing employees for referring new talent to the company. This is also a common practice amongst some financial institutions in India. The only difference is that in direct selling, the incentive on sales is combined with that of the employee referral programme, that is, the employee only gets his/her referral fee when the person he/she referred actually starts doing business, which is a system check that the sector has put in place to prevent referrals for the sake of referral reward.

In the case of Amway India Enterprises vs. Union of India (2007), the defence counsel was able to convince the Hon’ble High Court, leading to dismissal of the petition against Amway India Enterprise. However, this case threw up a bigger question of whether policymakers, law enforcement agencies, and the judiciary in our country have a clear understanding of the direct selling business. The understanding of direct selling business among policymakers has visibly increased in the past few years, which is evident from the issuance of the model guidelines on direct selling by the Department of Consumer Affairs in 2016. This in turn brought clarity in the business operations of direct selling and has made decision making for the judiciary more efficient and industry friendly. The case of Naresh Balasubramaniam vs. the State of Karnataka and others (2017) is an example that shows how the outlook of the judiciary has changed over time with regard to direct selling cases.

3.3.3 The Curious Case of Naresh Balasubramaniam

In the case of Naresh Balasubramaniam vs. the State of Karnataka and others (2017), HC 9308 the



Hon’ble High Court observed that, “…direct selling and multilevel marketing are important industry verticals, the Government of India has issued an Advisory to the State Governments and Union Territories, which contain ‘Model Framework for Guidelines on Direct Selling’. The model guidelines clearly indicate that multi-layered network of subscribers to a scheme formed by a direct selling company, which consists of subscribers enrolling one or more further subscribers in order to receive any benefit, directly or indirectly, where the benefit is, as a result of sale of goods or services for such subscribers, is not illegal.” The Hon’ble High Court further observed that, “…perusal of the material and the charge sheet averments prima facie indicate that the activities of QNet and Vihaan, i.e., the multilevel marketing companies, do not constitute offences under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The activities of the company do not fall within the definition of ‘Money Circulation Scheme’ under Section 2(c) of the Act, nor does it fall within the definition of ‘Prize chit’ under Section 2(e) of the

Act. When the activities of these companies do not constitute either Money Circulation Scheme or Prize Chit, the offences under Sections 4 and 5 of the Act, do not even remotely apply to such activities and consequently charging the accused for such offences is unsustainable.”

Following up on this judgement, the Hon’ble HC quoted the observation of Hon’ble Supreme Court (SC) of India in Sagar Suri vs. UP [(2000) 2 SCC 636] and Hiralal Bhagwati vs. CBI [(2003) 5 SCC 257, where the Hon’ble SC states that matters essentially of a civil nature should not be given the cloak of criminal offences and criminal proceedings should not be used as short cut for other remedies available in law. The court has further observed that in such instances, the jurisdiction under Section 482 ought to be exercised to quash such criminal proceedings. The Hon’ble HC further pointed out that the ongoing case is a distinct example where a criminal legislation, which is not even remotely applicable to the circumstances of the case, have been invoked to substantiate the charges.


4.1 The HypothesesThere are many similarities between the insurance sector and direct selling; the most striking is their use of independent agents (direct sellers) to execute their sale. Traditional retail formats cater to an equal, if not much larger number of consumers. E-commerce is a relatively new concept in India demonstrating exponential growth rates. Direct selling, by contrast, is neither a new phenomenon, nor does it command a market share that is comparable to traditional retail formats. Besides, this sector is not the only one against which complaints have been filed nor is it one that has attracted the maximum number of complaints. However, direct selling companies have had far more scuffles with law enforcement than any other sector. In fact, one would be hard pressed to recall any sector in which routine complaints of defective products, delayed refunds, and mis-selling has resulted in the arrest of the top management. These circumstances formed the basis of the two hypotheses. First, routine complaints escalate to the extent of involving law enforcement due to poor grievance redressal systems at the company level. Second, lack of knowledge on the regulatory framework for direct selling on the part of local law enforcement agencies leads to escalation.

A primary survey of sixty direct selling companies was undertaken to test these hypotheses. The survey attempted to look at existing grievance redressal mechanisms, sales procedures, disclosures made by the direct selling company, information shared by direct sellers at the time of sale, and information about the company that is available for consumers to view. Basic information about direct selling companies such as turnover and profits, product offerings, numbers of direct sellers, and consumer reach were also captured.

4.2 Basic Business ModelsThe product offerings of direct selling companies are not very different from other retail formats. There is, however, a definite skew towards healthcare and personal care products (Figure 4.1). While business models that most offline retailers follow are broadly similar, direct selling companies have a slightly more varied array of models. For example, some companies allow their consumers to buy products directly through them, while others use direct sellers/distributors (Figure 4.2). Another major difference is in the type of compensation plan adopted by direct selling companies, a choice between single-level, binary or hybrid model (Figure 4.3). The most common in our survey was the single-level or uni-level.

Survey Results - Business Practices4



Figure 4.1: Category of Direct Selling Products (N-60) (Multiple Response)

Figure 4.2: Can Consumers Directly Buy from the Company? (N-60)

Figure 4.3: Compensation Plan Structure (N-60)

Figure 4.1:

Figure 4.2:

Figure 4.3

3%10%10%12%13%

18%27%28%28%

38%40%

50%53%

73%87%

InsuranceSoftware Design & Development

StationaryUtility Appliances

Tour & TravelsCookware/ Kitchenware

FMCG ProductsAgriculture Care

Fashion and LifestyleHome Care

Food and BeveragesCosmetics and Skincare

Ayurveda, Herbal & MedicinesPersonal Care

Healthcare and Wellness

82%

18%

Yes No

Figure 4.1:

Figure 4.2:

Figure 4.3

3%10%10%12%13%

18%27%28%28%

38%40%

50%53%

73%87%

InsuranceSoftware Design & Development

StationaryUtility Appliances

Tour & TravelsCookware/ Kitchenware

FMCG ProductsAgriculture Care

Fashion and LifestyleHome Care

Food and BeveragesCosmetics and Skincare

Ayurveda, Herbal & MedicinesPersonal Care

Healthcare and Wellness

82%

18%

Yes No

Figure 4.4

Figure 4.5:

63%

18%

12%

7%

Unillevel Binary Hybrid Others (Generation Plan)

95%

5%

Yes No

Generation Multi Level Marketing Plan is considered to be the compensation plan based on purely product selling. It is a motivational product selling MLM plan where every affiliate promotes the downline to the sale of the products and also gets bonuses and incentives on the specific target achievement.


4.3 Relationship with Direct SellersThe terms of employment between direct selling companies and direct sellers has a direct bearing on compliance issues. Even when it comes to something as basic as collecting know your customer (KYC) documents from direct sellers, the survey results indicate that 5 per cent of the sample, in fact, do not conduct any KYC (Figure 4.4). While five per cent may seem like a relatively small number, when put in perspective, it is in fact a serious cause for concern. A 5 per cent industry average exposes a significant number of consumers to potential fraud.

4.4 Contracts with Direct SellersNot just India, but even globally, the business model followed by direct selling companies is to enter into a contractual relationship with their

agents, rather than take them on the payroll. This is how the direct selling model usually works. It can also be a way to ensure that compensation is given where due instead of it being diverted into company overheads. Most direct selling companies have lean management teams. While this is commendable, in India, this is also one of the reasons why direct selling companies are constantly held responsible for compliance lapses, even if it is not really their fault. Lean management teams indicate that direct sellers are on a contractual basis. This would also mean that this restricts liabilities. In other words, the management cannot be held entirely responsible for the infractions caused by contractual employees, much less, be jailed.

In India, the majority of direct selling companies also have contractual agreements with their direct sellers (Figure 4.5). A typical contract contains clauses on refund, cooling off period, termination,

Figure 4.4: KYC Requirement of Direct Sellers (N-60)

Figure 4.5: Direct Selling Companies Having Contract with Direct Sellers (N-60)

Figure 4.4

Figure 4.5:

63%

18%

12%

7%

Unillevel Binary Hybrid Others (Generation Plan)

95%

5%

Yes No

Fig 4.6

Fig 4.7

93%

7%

Yes No

80% 100% 100% 100% 100% 100% 100% 100% 100%

80%100% 100% 100% 100% 86% 88% 100% 100%

80%81% 80% 83% 100%

86% 88%100% 100%

80%

88% 100% 100% 100%100% 88%

75% 100%80%

88% 100% 100% 100%100% 100% 75%

100%

B e l o w 5 0 L a k h s

5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

Cooling off period to receive refund Termination of contractFull refund/buy back policy Cooling off period to cancel participationMaterial terms of participation



and material terms of participation (Figure 4.6). In order to help them sell the products, a little over 90 per cent of the sampled direct selling companies provide their agents promotional material, training and discounts (Figure 4.7). Mis-selling (not fraud) often occurs due to

poor information transmission. For improving transmission, both training and literature is important. That 8 per cent of the sample neither undertake training nor provide literature to suitably equip their direct sellers is surprising.

Figure 4.7: Issuance of ID Card or Any Other Verification Document to Direct Sellers by the Direct Selling Company (N-60)

Fig 4.8

Figure 4.9

90%

10%

Yes No

1250

940 3000

4625

1000

1200

2333 4666

500

2500

0

2501

4

2250

0

1700

0

1568

4 2616

6

8100

0

4000

0

9000

0

Below 50Lakhs

50 Lakhs to1 Crore

1 to 10Crores

10 to 25Crores

25 to 50Crores

50 to 100Crores

100 to 500Crores

500 to 1000Crores

Above 1000Crores

Min (Rs.) Max (Rs.)

Figure 4.6 Turnover Wise Key Details Maintained in an Agreement

Fig 4.6

Fig 4.7

93%

7%

Yes No

80% 100% 100% 100% 100% 100% 100% 100% 100%

80%100% 100% 100% 100% 86% 88% 100% 100%

80%81% 80% 83% 100%

86% 88%100% 100%

80%

88% 100% 100% 100%100% 88%

75% 100%80%

88% 100% 100% 100%100% 100% 75%

100%


5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

Cooling off period to receive refund Termination of contractFull refund/buy back policy Cooling off period to cancel participationMaterial terms of participation


4.5 Purchase of Inventory by AgentsOne of the biggest differences between Ponzi schemes and legitimate businesses is the forcing or front loading of inventory by the company. Ponzi schemes often force their agents to buy in-ventory, with little or no recourse to refund, that is not commensurate with the agent’s market access. Indian direct selling companies fare well on this

count of protecting the interests of their direct sellers. The average minimum purchase value of the sample is approximately INR 2,000 and the maximum that direct sellers can pick up during a single purchase is INR 38,000 (Figure 4.8). Unsold inventory, depending on the nature of the inven-tory, is either bought back by the company with a 30 day policy in some cases, or at the time of termination of contracts (Figure 4.9). Direct selling companies have come up with various ways to

Figure 4.8: Turnover Wise Inventory That Direct Sellers can Purchase (Min-Max)

Figure 4.9: Responses by Direct Selling Companies on What Happens to Unsold Inventory (N-60)

Fig 4.8

Figure 4.9

90%

10%

Yes No

1250

940 3000

4625

1000

1200

2333 4666

500

2500

0

2501

4

2250

0

1700

0

1568

4 2616

6

8100

0

4000

0

9000

0Below 50

Lakhs50 Lakhs to

1 Crore1 to 10Crores

10 to 25Crores

25 to 50Crores

50 to 100Crores

100 to 500Crores

500 to 1000Crores

Above 1000Crores

Min (Rs.) Max (Rs.)

Fig 4.10

Fig 4.11

17%15% 15% 15% 15%

13%

10%

W e g i v e v o u c h e r t o D S A s a n d

c o n s u m e r s , v o u c h e r h a s i t s v a l i d i t y

A t t h e t i m e o f t e r m i n a t i o n ,

D S A ' s c a n r e t u r n u n s o l d p r o d u c t s b a c k

t o c o m p a n y

6 m o n t h s b e f o r e t h e

e x p i r y d i s t r i b u t o r s r e t u r n t h e i r

p r o d u c t

N o r e t u r n f o r u n s o l d

i n v e n t o r y ( i t s a s s u m e d s o l d )

R e t u r n e d a t t e r m i n a t i o n o f

c o n t r a c t

B u y b a c k P o l i c y

R e t u r n p o l i c y w i t h i n 3 0

d a y s

88%

48%

78% 80%

40%

87%

72%

78% 82%

67%

Serv ice Mis - se l l ing Gr ieva nce Redressa l

Product Return Pol icy

Compensa t ion Pol icy

End-Consumer Direct Selling Agents



Figure 4.10: Policies Maintained by Direct Sellers (N-60)

Fig 4.10

Fig 4.11

17%15% 15% 15% 15%

13%

10%

W e g i v e v o u c h e r t o D S A s a n d

c o n s u m e r s , v o u c h e r h a s i t s v a l i d i t y

A t t h e t i m e o f t e r m i n a t i o n ,

D S A ' s c a n r e t u r n u n s o l d p r o d u c t s b a c k

t o c o m p a n y

6 m o n t h s b e f o r e t h e

e x p i r y d i s t r i b u t o r s r e t u r n t h e i r

p r o d u c t

N o r e t u r n f o r u n s o l d

i n v e n t o r y ( i t s a s s u m e d s o l d )

R e t u r n e d a t t e r m i n a t i o n o f

c o n t r a c t

B u y b a c k P o l i c y

R e t u r n p o l i c y w i t h i n 3 0

d a y s

88%

48%

78% 80%

40%

87%

72%

78% 82%

67%

Serv ice Mis - se l l ing Gr ieva nce Redressa l

Product Return Pol icy

Compensa t ion Pol icy

End-Consumer Direct Selling Agents

ensure that direct sellers feel no pressure to either purchase large amounts of inventory or to assume the financial responsibility of unsold inventory.

4.6 Policies Maintained by Direct Selling CompaniesEthical business practices would mandate direct selling companies to maintain policies pertaining to service, mis-selling, and complaints to name a few. However, survey results indicate that only 72 per cent maintain a policy for mis-selling (Figure 4.10). The presence of a policy institutionalises practices. Absence of one can perpetuate the problem.

A close examination of the issue suggests that larger companies are more compliant with

institutionalising processes through a grievance redressal policy and mis-selling policy (Figure 4.11 and Figure 4.12). Only around 60 per cent of the smaller companies have such policies in place.

4.7 DisclosuresDisclosures are an important part of operating a transparent business. For formats of retail such as e-commerce and direct selling, where the consumer has limited interaction with any kind of office or store of the company, appropriate disclosures help instil a sense of confidence and comfort for the consumer.

There are two worrying statistics that emerge from the survey. First, of the sample, 10 per cent state that they do not issue any sort of identity cards


Figure 4.11: Turnover Wise Policies Maintained for Mis-Selling by Direct Selling Companies (N-60)

Fig 4.12

Fig 4.13

40%56%

40% 50% 50%29%

50% 50%

100%

60%

69%80%

83% 75%

71%63% 75%

100%


5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

End Consumers DSA's

60% 69%100%

67%88% 86% 88% 75%

100%

100% 75%

100%

33%

88% 86% 75%75%

100%


5 0 L a k h s t o 1 C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

End Consumers DSA'sFigure 4.12: Turnover Wise Policies Maintained for Grievance Redressal by Direct

Selling Companies (N-60)

Fig 4.12

Fig 4.13

40%56%

40% 50% 50%29%

50% 50%

100%

60%

69%80%

83% 75%

71%63% 75%

100%


5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

End Consumers DSA's

60% 69%100%

67%88% 86% 88% 75%

100%

100% 75%

100%

33%

88% 86% 75%75%

100%


5 0 L a k h s t o 1 C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0 C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

End Consumers DSA's



Figure 4.13: Issuance of Identity Card or Other Verification Documents to Direct Sellers (N-60)

Fig 4.14

Fig 4.15

90%

10%

Yes No

63%

27% 25% 23%

13%

5%

N e t B a n k i n g D e b i t / C r e d i t C a r d

C h e q u e / D D C a s h A L L M o b i l e W a l l e t

to their agents (Figure 4.13). Second, despite the government’s continued emphasis of shifting from cash based transaction to digital formats, 23 per cent of direct selling companies pay their direct sellers through cash (Figure 4.14). There is a very strong case of policy intervention here; payments to direct sellers must be through cheques/drafts or digital methods.

Almost all the companies surveyed have a website (Figure 4.15). However, the trouble seems to be in what information these websites contain (Figure 4.16). While all websites contain details on product list, product description, contact information and company details per se, only 90 per cent offer information or mechanism for complaint and grievance redressal. Less than 75 per cent display details of their management. It was surprising to see that 10 per cent of the companies do not display the price of the product

on their website and just about 50 per cent offer any details on product quality certification. Disclosures around the latter two are important for consumers to make informed choices.

While direct selling companies have certain obligations with regard to the disclosures that they should make on their website, they should also ensure this obligation is transmitted to the consumers via their direct sellers. Simply put, companies must train their direct sellers to provide certain kinds of information mandatorily at the time of sale. Twenty seven per cent of the companies leave it to the discretion of the direct sellers to tell their consumer how to register a complaint; 18 per cent do not necessarily tell their consumers how to return a product or how to obtain a replacement for a faulty product (Figure 4.17).


Figure 4.14: Mode of Payment For Direct Sellers (N-60) (Multiple Response)

Fig 4.14

Fig 4.15

90%

10%

Yes No

63%

27% 25% 23%

13%

5%

N e t B a n k i n g D e b i t / C r e d i t C a r d

C h e q u e / D D C a s h A L L M o b i l e W a l l e t

Figure 4.15: Companies Having Websites (N-60)

Fig 5.1

Fig 5.3

97%

3%

Yes No

130692 146525 107674 182973

670574 702365 771954

1947500171 180

182

278

0

50

100

150

200

250

300

0

500000

1000000

1500000

2000000

2500000

2014-15 2015-16 2016-17 3 Years from now

Direct Selling Agents Number of Consumers Permanent Employees



Figure 4.16: Information Available on Website (N-58) (Multiple Response)

Figure 4.17: Classification of Information Provided to Consumers on Purchase of Products and Services From a Direct Selling Company (N-60)

38

Figure 4.15: Companies having Websites (N-60)

Figure 4.16: Information Available on Website (N-58) (Multiple Response)

While direct selling companies have certain obligations with regard to the disclosures that they should make on their website, they should also ensure this obligation is transmitted to the consumers via their direct sellers. Simply put, companies must train their direct sellers to provide certain kinds of information mandatorily at the time of sale. Twenty seven per cent of the companies leave it to the discretion of the direct sellers to tell their consumer how to register a complaint; 18 per cent do not necessarily tell their consumers how to return a product or how to obtain a replacement for a faulty product (Figure 4.17).

97%

3%

Yes No

53%67%

69%72%

74%74%

84%90%

91%95%

100%100%100%100%

Product Quality CertificationBusiness Plan/Marketing Plan

Compensation PlanFAQ’s

Management Team/Information Special Discount and/or Offers

Terms of ContractComplaint Redressal for Direct Sellers

PriceGrievance Redressal for Consumers

Company DetailsContact Information

Product ListProduct Description

39

Figure 4.17: Classification of Information Provided to Consumers on Purchase of Products and Services from a direct selling company (N-60)

98%

97%

95%

95%

93%

90%

88%

88%

83%

82%

82%

77%

75%

73%

58%

2%

3%

5%

5%

7%

10%

12%

12%

17%

18%

18%

23%

25%

27%

42%

Price

Durability of Product

Sales receipt

Product Specification

Shelf-life

Direction of Use

The delivery date of goods or services

Exchange/replacement of goods in…

Warrantee of the goods

The name of the purchaser and seller

Procedures for returning the goods

How to get in touch with the Company

Maintenance

Complaint Procedures

Quality Certification

Mandatory Optional


5.1 Agents and ConsumersWe can posit that agents have greater consumer reach than the companies themselves. A comparable sector has been insurance, which also uses independent agents as an effective means of distribution. The Life Insurance Corporation (LIC), India’s largest life insurance company and a public sector enterprise, uses only independent agents for distributing their insurance products. In India, the growth in agents, consumers, and employees has been healthy at around 30 per cent (Figure 5.1)

An interesting analysis of consumer to direct seller ratio reveals that the industry average for the last three years has been steady at 10, that is, one direct seller for every 10 consumers (or 4 if we remove the single outlier). This is despite the fact that the number of direct sellers and consumers have both been growing. The ratio for different sizes of companies is different (Table 5.1). For example, for companies with a turnover of above INR 1000 crore, the ratio is as high as 150. However, as discussed in the previous chapter, their compliance systems are more robust.

Survey Results – Complaint Handling5

Figure 5.1: Year Wise Employee Details Maintained by Direct Selling Companies (Average)

Fig 5.1

Fig 5.3

97%

3%

Yes No

130692 146525 107674 182973

670574 702365 771954

1947500171 180

182

278

0

50

100

150

200

250

300

0

500000

1000000

1500000

2000000

2500000

2014-15 2015-16 2016-17 3 Years from now

Direct Selling Agents Number of Consumers Permanent Employees



Table 5.1: Consumer to Direct Seller Ratio

TurnoverAgent Consumers Consumer/Agent Ratio

2014-15 2015-16 2016-17 2014-15 2015-16 2016-17 2014-15 2015-16 2016-17

Below 50 Lakh 2217 3641 6653 20800 26100 31600 9 7 5

50 Lakh to 1 Crore 24900 29028 35937 182187 210187 231390 7 7 6

1 to 10 Crore 3960 4440 6000 63400 71600 123400 16 16 21

10 to 25 Crore 47651 73030 100783 351166 161500 235833 7 2 2

25 to 50 Crore 34468 43871 60872 215750 250875 310625 6 6 5

50 to 100 Crore 40100 49971 67000 608571 733142 889285 15 15 13

100 to 500 Crore 260312 398562 476875 873750 1017500 1310000 3 3 3

500 to 1000 Crore 525000 584500 678000 1778000 2105875 2808750 3 4 4

Above 1000 Crore 40000 45000 50000 6000000 8000000 9000000 150 178 180

Total 978608 1232043 1482120 10093624 12576779 14940883 10 10 10

The insurance sector has as many as 28 lakh agents and even while there are cases of mis-selling in the sector, they have very rarely faced the kind of flak that the direct selling sector has. This could be for three reasons – first, the insurance sector per se is a regulated sector. Second, disclosures on the part of insurance sector are better. Details on management, robust complaint handling systems, and greater visibility of the company through advertisements create consumer confidence. In contrast, barring the big few, very few direct selling companies are known of. Hardly any advertise. Knowledge about the company happens through word of mouth. People who are not consumers of the products are not exposed to the positives of the sector, but the negatives are in full glare due to media reports. This is important to bear in mind since it has a direct bearing on the third reason, which is the lack of visibility or rather the selective visibility that

the sector has to grapple with, a perception issue that leads to escalation of issues that would be considered almost routine is any other sector.

5.2 Nature of ComplaintsWe asked direct selling companies on the nature of complaints that are typically registered with them (Figure 5.2). The responses are consistent with any other retail industry. The most common, not surprisingly, is that products were not delivered on time (65 per cent). Complaints against their direct sellers or other staff are at 27 per cent and 15 per cent. However, most of the complaints are on operational issues. This, to some extent, validates our initial hypothesis that escalations are mostly on account of poor grievance redressal rather than any fraud perpetrated.


Figure 5.3: Complaints Registered in a Week (N-60)

Figure 5.2: Type of Complaints Received From Consumers by Direct Selling Companies (N-60) (Multiple Response)

42

Figure 5.2: Type of complaints received from consumers by direct selling companies (N-60) (Multiple Response)

5.3 Registering Complaints Forty eight per cent of those surveyed said that they receive under ten complaints a week. Only 8 per cent stated that they received more than 50 complaints in a week (Figure 5.3). Clearly, the volume of complaints is not the reason for inadequate processes. Figure 5.3: Complaints registered in a week (N-60)

12%

13%

13%

15%

15%

18%

22%

27%

32%

35%

38%

40%

47%

65%

Website, tollfree number not workingToo much promotional calls

Over priceDouble payment

Complaint against other staffsFaulty product

Didn't receive discount/offerComplaint against DSA's

Tampered packagingBroken productsWrong delivery

Refund replacementProduct replacement

Not delivered in time

48%

20%

8%

7%

8%

8%

Less than 10 11 - 20 complaints 21 -30 Complaints

31 -40 Complaints 41 - 50 Complaints Above 50 Complaints

Fig 5.4

48%

20%

8%

7%

8%

8%



91%

73%66%

14% 11% 11%

Tol l f ree l ine

E-ma i l Websi te Wa lk in Post Mobi le App

5.3 Registering ComplaintsForty eight per cent of those surveyed said that they receive under ten complaints a week. Only 8 per cent stated that they received more than 50 complaints in a week (Figure 5.3). Clearly,

the volume of complaints is not the reason for inadequate processes.

Consumers have several ways of registering their complaints – email, website, phone, mobile apps to name a few (Figure 5.4). While a toll free number



Figure 5.4: Channels to Register Complaints (N-44) (Multiple Response)

Fig 5.4

48%

20%

8%

7%

8%

8%



91%

73%66%

14% 11% 11%

Tol l f ree l ine

E-ma i l Websi te Wa lk in Post Mobi le App

seems to be the most popular, it was amazing that there is universally accepted way of registering complaints that is followed by all in the industry. No response registered a 100 per cent positive response. The smaller companies seem to depend on emails for registering complaints rather than any other means, especially walk-ins and phone lines. The larger companies provide all options, except postal services. That the overall percentage of complaints registered through walk-ins is as low as 14 per cent is consistent with the lack of physical offices in different places. Typically, physical offices, even a few, tend to increase consumer confidence, again a learning from the insurance sector.

5.4 Handling ComplaintsOf those surveyed, around 30 per cent do not have any complaint redressal system for the direct sellers. This is important to have since in certain models, the direct sellers are also consumers. Around 8 per

cent admitted to having no grievance committee or cell as mandated by the guidelines issued by the Department of Consumer Affairs. This is the first problem. The second problem is that the usual turnaround time stated for complaint resolution is high at 30 days, even if it can and is handled in a shorter period of time. That some companies take as many as 45 days to resolve complaints means redressal systems, even if present, are inefficient (Figure 5.5).

5.5 Complaint EscalationA process for complaint escalations is often more important than first level of complaint redressal, especially for direct selling companies. While many companies may have complaint redressal mechanism, poor systems at times of escalation can push matters out of control. Of the total number of 44 respondents, only 12 per cent stated that their complaints were dealt with in a proper manner. All


Figure 5.5: Turnover Wise Days Required to Resolve Grievances (N-60)

Figure 5.6: Mechanism Adopted For Grievances Redressal After Stipulated Time (N-44)

Fig 5.6

Fig 6.1

80%100% 100%

67%

100% 100%88%

100% 100%

20%

17%

12%17%


5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0

C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

Less than 30 days 30-45 days Above 45 days

22%

20%

17%

15%

15%

12%

G i v e n t o l e g a l t e a m c o m m i t t e e

T r a c k a n d c l o s e E s c a l a t e t o h i g h e r

a u t h o r i t i e s / u n l e s s i t i s

r e s o l v e d w e d o n ' t c l o s e d t h e

t i c k e t .

S h i f t e d t o l e g a l a d v i s o r y , l a w

d e p a r t m e n t

Z o n e w i s e a d v i s o r y

c o m m i t t e e r e s o l v e t h e i s s u e

P r o m p t a c t i o n a l w a y s t a k e n f o r r e s l o v i n g i s s u e

Fig 5.6

Fig 6.1

80%100% 100%

67%

100% 100%88%

100% 100%

20%

17%

12%17%


5 0 L a k h s t o 1

C r o r e

1 t o 1 0 C r o r e s

1 0 t o 2 5 C r o r e s

2 5 t o 5 0 C r o r e s

5 0 t o 1 0 0 C r o r e s

1 0 0 t o 5 0 0

C r o r e s

5 0 0 t o 1 0 0 0

C r o r e s

A b o v e 1 0 0 0

C r o r e s

Less than 30 days 30-45 days Above 45 days

22%

20%

17%

15%

15%

12%

G i v e n t o l e g a l t e a m c o m m i t t e e

T r a c k a n d c l o s e E s c a l a t e t o h i g h e r

a u t h o r i t i e s / u n l e s s i t i s

r e s o l v e d w e d o n ' t c l o s e d t h e

t i c k e t .

S h i f t e d t o l e g a l a d v i s o r y , l a w

d e p a r t m e n t

Z o n e w i s e a d v i s o r y

c o m m i t t e e r e s o l v e t h e i s s u e

P r o m p t a c t i o n a l w a y s t a k e n f o r r e s l o v i n g i s s u e

other responses indicate a delay over and above the 30-45 days to resolve the complaint initially (Figure 5.6). Since most complaints are operational in nature, such delays in complaint resolution

results in loss of confidence, forcing consumers to take more drastic measures such as going to the local law enforcement authority, or registering a case of fraud.



Figure 6.2: States That are Difficult to Undertake Business (N-60)

Figure 6.1: Do You Need to Follow Different Regulations in Different States?

(N-60)

Fig 6.2

Fig 6.3

77%

23%

Yes No

23%

20%18%

13% 13%

7%5%

Kerala Tamil Nadu North East Telangana Other States JammuKashmir

NoDifficulties

10% 10% 10% 10%

8% 8% 8% 8%

7% 7% 7% 7%

1 2 3 4 5 6 7 8 9 1 0 1 1 1 2

77%

23%

Yes No

6.1 Ease of Doing BusinessRetail is a state subject. Notwithstanding the guidelines issued by the Department of Consumer Affairs, states are free to enforce their own variations of regulations. Survey results revealed that 77 per cent of companies are required to follow different regulations in different states (Figure 6.1). Ironically, it is Kerala and Tamil Nadu, the states where direct selling first began, that are the most difficult states to do business in (Figure 6.2). While the consumers of these states have been the most forward thinking in terms of accepting new forms of retail (be it organised retail or even e-commerce), regulations in these states have been the most stringent, very often stifling growth.

Survey Results – Regulatory Regime6


6.2 Regulatory RegimeDespite being at the receiving end of stringent regulations, respondents to the survey were unanimously of the opinion that the sector should be regulated. Respondents believed that a regulated sector would protect consumers against fly by night operators, mitigate regulatory arbitrage between states, and build more confidence in direct selling per se (Figure 6.3).

6.2.1 Current Regime

Any regulatory regime is characterised by a regulator and a regulation. There have been instances in India where sectors have had a regulator, but no regulation – the micro finance sector is a good example. There have also been instances of several regulators and regulations that do not always work in tandem. Despite these drawbacks, sectors are invariably aware of the

Figure 6.3: Why This Sector Needs to be Regulated? (N-60)

Fig 6.2

Fig 6.3

77%

23%

Yes No

23%

20%18%

13% 13%

7%5%

Kerala Tamil Nadu North East Telangana Other States JammuKashmir

NoDifficulties

10% 10% 10% 10%

8% 8% 8% 8%

7% 7% 7% 7%

1 2 3 4 5 6 7 8 9 1 0 1 1 1 2

1. For motivation within the sector and employment stability

2. For ease of implementation and to wipe out fly by night operators

3. Guidelines need to be changed to an “Act” and to be followed by States

4. To prevent cheating and frauds

5. No Need for more Regulation

6. So that consumer gets good products & services

7. To create a brand value for the industry

8. To control mis-selling

9. Require an authority that can differentiate between Pyramid/Ponzi schemes and direct selling

10. Modification is required in the guidelines

11. To protect Direct Selling Agents

12. To control fraudulent dealings



nature of the regulatory framework under which they fall. This is, however, not the case for direct selling. For instance, when we asked respondents if they were regulated by the centre or by states, 80 per cent responded saying centre, and 2 per cent stated that they did not know (Figure 6.4). When asked which ministry regulates direct selling,

most responded stating that it was the Department of Consumer Affairs. There were also a sizeable number who felt it was the Ministry of Corporate Affairs while some respondents said that they have no parent ministry (Figure 6.5). The confusion is legitimate.

Figure 6.5: Which Ministry Regulates You? (N-60)

Fig 6.4

Fig 6.5

Fig 6.6

78%

20%2%

Central Government

State Government

Don't Know

65%

15%

5%

15%

Ministry of Consumer Affairs Ministry of Commerce

Ministry of Corporate Affairs No Parent Ministry

Fig 6.4

Fig 6.5

Fig 6.6

78%

20%2%

Central Government

State Government

Don't Know

65%

15%

5%

15%

Ministry of Consumer Affairs Ministry of Commerce

Ministry of Corporate Affairs No Parent Ministry

Figure 6.4: Who Regulates Direct Selling Companies? (N-60)


Internal trade, which subsumes all retail trade, falls under the ambit of the Department of Consumer Affairs. This is why the direct selling guidelines were issued by the Department, but they are only guidelines and are not truly enforceable. It is for the state governments to adopt these guidelines into regulations, which makes state governments regulators. However, it has been the PCMCS Act that has been cited (erroneously) in almost all direct selling related cases and this act was initially promulgated under the Ministry of Corporate Affairs. It was subsequently passed on to the Ministry of Finance. The confusion regarding which act governs direct selling is therefore understandable (Figure 6.6). The 5 per cent who have stated that they are regulated by

the Consumer Protection Act are not entirely wrong either. The newly amended Consumer Protection Act has made provisions for creating a regulatory framework for e-commerce and direct selling.

6.2.2 Direct Selling Guidelines

The direct selling guidelines is a first step towards regulating the sector. Although they are not necessarily enforceable, they do provide a certain legitimacy to the business, something that the sector has been battling for, for many years. It is also hoped that these Guidelines will act as guiding principles to direct selling companies. It was therefore surprising that 5 per cent of the respondents did not know about these guidelines (Figure 6.7). Those who were aware, were of

Figure 6.6: Which Act Regulates You? (N-60)

Fig 6.7

Fig 6.9

5% 5%

10%

80%

Direct Selling Guidelines issued by DoCAConsumer Protection Act 1986No Specific RegulatorNot Aware

95%

5%

Yes No



Figure 6.7: Awareness on Guidelines Issued by Department of Consumer Affairs (N-60)

Fig 6.7

Fig 6.9

5% 5%

10%

80%

Direct Selling Guidelines issued by DoCAConsumer Protection Act 1986No Specific RegulatorNot Aware

95%

5%

Yes No

Table 6.1: Rating of Guideline on the Scale of 1 to 5. (1 Being Lowest) (N-57)

Value Average Rating

Effectiveness 3.9

Ease of Implementation 3.7

Ability to wipe out fly by night operators 3.6

the opinion that the guidelines are effective but probably not sufficient to curb fly by night operators (Table 6.1). They were also not sure about the ease of implementing these guidelines. A majority of the respondents also felt that the guidelines alone were not sufficient to regulate the sector (Figure 6.8). Our interviews with many direct selling companies revealed that most are in favour of creating a separate direct selling act to regulate the sector.

6.2.3 The Immediate Future

The recently amended Consumer Protection Act presents a new opportunity for the direct selling sector. Ninety three per cent of the respondents were aware of this Act (Figure 6.9). Policymakers have an opportunity to draft rules under the Consumer Protection Act that could potentially regulate the direct selling sector. This presents a fresh chance to direct selling companies and

policymakers to revisit the existing guidelines and not only resolve many existing operational issues, but also make the rules more binding in order to effectively deal with fly by night operators (Figure 6.10).

The most interesting aspect to consider, if the rules were indeed to be drafted under the Consumer Protection Act, they would be considered as


Figure 6.8: Are Present Guidelines Sufficient to Regulate the Direct Selling Sector? (N-57)

Fig 6.10

Fig 6.11

49%

51%

Yes No

93%

7%

Yes No

Fig 6.10

Fig 6.11

49%

51%

Yes No

93%

7%

Yes No

Figure 6.9: Awareness of Consumer Protection Bill (N-60)



Figure 6.10: Impact of Consumer Protection Bill on Consumers (N-56)

Fig 6.13

Fig 6.14

39%

32%

18%

7% 4%

Consumer Protection Bill 2018 is in favour of consumer Create awareness about direct selling among consumers

Effectiveness Consumers will receive more benefits

Shift of power dynamics towards consumers

57%

43%

Yes No

central government regulations. This means that they would supersede all state regulations. This would mean that certain types of retail trade could effectively move from the jurisdiction of states into that of the centre. Just this one change could resolve many ambiguities in the regulatory framework for direct selling.

6.3 The Way ForwardThe problem lies not only in the lack of a definite regulatory framework, it also lies in the half-baked implementation of piecemeal regulations. This we know that the PCMCS Act can only be cited when businesses are fly by night operators or Ponzi schemes but not against legitimate direct selling companies. The fundamental difference between a Ponzi scheme and legitimate businesses lies in the product sold. Legitimate direct selling companies sell products that have value. Ponzi

schemes on the other hand are merely money circulation schemes; there is never any product that is sold. While policymakers appear to be aware of what differentiates legitimate direct selling companies from Ponzi scheme, this is not true of law enforcement agencies. The incorrect use of the PCMCS Act is in great measure due to insufficient knowledge among law enforcement agencies of the direct selling business. It is because of this that legitimate businesses have cases registered against them under PCMCS Act. This sentiment is also shared by the respondents, who feel that more than the regulators themselves, it is the law enforcements agencies (police and judiciary) who least understand direct selling (Table 6.2). As a first step, law enforcement agencies must be educated about the difference between legitimate business and Ponzi schemes so that they can use the PCMCS Act more effectively.


Table 6.2: Understanding Among Ministries/People About Your Business (1 Being Lowest & 5 Being Highest) (N-60)

Ministry/People Average Rating

Ministry of Consumer Affairs 3.9

Ministry of Corporate Affairs 3.3

General Public 3.3

Ministry of Commerce 3.2

Ministry of Finance 3.0

Police (Junior Level) 2.7

State Governments 2.7

Judiciary 2.6

Police (Senior Level Officer) 2.5

While policymakers need to amend the existing regulatory framework, businesses must also be proactive in developing internal checks and balances. Drawing examples from other sectors, industry associations have played an important role in ensuring that businesses adopt best practices and that basic levels of compliance are maintained.

From a consumer protection point of view, companies in the financial sector are subject to the highest degree of scrutiny and regulation, and rightfully so, since they are custodians of public money. Almost all types of financial institutions have their own associations – Indian Banks’ Association (IBA), Life Insurance (LI) Council, General Insurance (GI) Council, Microfinance Network (M-Fin), and Association of Mutual Funds (AMFI) are excellent examples. All mutual fund companies, all life insurance companies and all non-life insurance companies are part of their respective associations.

Associations of long standing and repute eventually become self-regulatory organisations (SROs). SROs are a common phenomenon across the globe. These organisations are typically industry associations that are accorded the necessary powers to set standards, guidelines, and form and enforce certain kinds of regulations to ensure greater compliance in the sector and for consumer protection. AMFI and M-Fin are examples of SROs. Even if formally not accord-ed SRO status, associations have the flexibility to ensure adherence to compliance measures. When asked if the direct selling sector had a self-regulat-ing mechanism, even if not an organisation, only 57 per cent replied in the affirmative (Figure 6.11). The industry, however, is of the opinion that it requires a regulator, and between the centre, state, and a separate regulator, the preference is for either the centre or a separate regulator (Figure 6.12).



Figure 6.12: Who Should Regulate This Sector? (N-60)

57%

8%

35%

Central Government State Government Separate Regulator

Figure 6.11: Is There Any Self Regulating Mechanism For Your Sector? (N-60)

Fig 6.13

Fig 6.14

39%

32%

18%

7% 4%

Consumer Protection Bill 2018 is in favour of consumer Create awareness about direct selling among consumers

Effectiveness Consumers will receive more benefits

Shift of power dynamics towards consumers

57%

43%

Yes No


Retail is a state subject. It is considered to be part of “Markets and Fairs” in the State List of Schedule 7 of the Indian Constitution. Retail has long ceased to be just “markets and fairs”; it has evolved to include new formats and participants, be it direct selling, e-commerce, or multi-brand retail. Since retail continues to remain a state subject, there are substantial differences in the regulatory framework. An important reason for retail to remain in the state list was that tax rates differed across states. Now that the goods and services tax (GST) has been implemented, it is time for India to consider creating a new category called “Retail” under the Concurrent List as part of Schedule 7.

The incumbent government has proposed a National E-commerce Policy. Ideally, the government should draft a national retail policy, one that encapsulates all formats of retail. This may take some time, but it is important for work to begin. A national retail policy will help in aligning regulations for all aspects of retail. Until then, it will be prudent to set up a national policy for direct selling. Such a policy will remove ambiguities in business practices, remove regulatory arbitrage, and increase compliance.

Recently, the Department of Consumer Affairs had requested all direct selling companies to send in information about themselves in a prescribed format. The aim of this exercise was to collate

information on the sector. However, an additional outcome of this exercise has been the weeding out of fly by night operators to some extent. Even so, there is no definite way of estimating the number of legitimate businesses and fly by night operators in direct selling. The simplest way to solve this problem would be to ensure that all direct selling companies are registered with a single authority. This would mean, those businesses that have not registered will be considered to be illegal. Malaysia follows a similar system. It is also a widely followed system for capital market brokers and advisors.

Every time a sector is too large for a single regulator to manage, they collaborate with SROs to ease the process. Sometimes, it is also prudent to assign certain aspects of standard setting and regulations to SROs since they have a better understanding of their respective sector’s participants, business dealings, and requirements. Bearing this in mind, it is time for direct selling associations to step up their role in ensuring compliance in the sector. A proactive approach by industry participants and associations will eventually lead to the creation of an SRO for direct selling.

The direct selling sector requires legitimacy. The guidelines issued by the Department of Consumer Affairs was the result of an inter-ministerial committee that was set up to examine

Recommendations7



the regulatory framework for direct selling. Even so, all regulators are not aligned in their thinking. For example, a Reserve Bank of India (RBI) circular dated January 1, 2015 (Press Release: 2014-2015/1383), considers multi-level marketing firms and Ponzi schemes the same. In the absence of any other subsequent circular, all regulated entities of RBI have no choice but to view even legitimate multi–level marketing firms as illegal, thereby affecting their access to credit. All regulators and ministries must recognise legal MLM businesses and must desist from treating them on a par with Ponzi schemes.

While registration of direct selling businesses is a first step towards providing MLM businesses legitimacy, the lack of any dedicated legislation to regulate them has resulted in many unnecessary cases (that would tantamount to harassment had it been any other sector) filed under the PCMCS Act. Even though the Department of Financial Services (DFS) had suggested that the Department of Consumer Affairs examine the need for a separate legislation, the Department thought it prudent to issue guidelines instead of a new regulation. While the guidelines are a start, it is doubtful if it can solve the problem of the PCMCS Act being arbitrarily imposed upon direct selling companies. Direct selling requires a separate legislation. Furthermore, the PCMCS Act must be amended to clearly define the nature of cases that can be filed under its ambit. These cannot include regular customer grievances. The lack of any other legislation only encourages law enforcement agencies to register every case against any kind of complaint under the PCMCS Act.

As mentioned before, the business model of direct selling is no different from any other product that has many independent sales representatives – independent mutual fund advisors, life insurance

agents, are similar examples. Mutual fund companies and insurance companies do not accept liabilities when their independent sales agent mis-sell products. This is not to say that these companies do not resolve customer complaints, but it is only natural that despite all training that they can provide, monitoring the sales process of independent sales agents spread across a vast geographical area is an impossible task. The difference between direct selling companies and insurance companies, for example, is that a case of mis-selling in insurance has never escalated to the extent that it has affected the reputation of companies or the imprisonment of their top management. Even during the time when unit linked insurance plans (ULIPs) came under a lot of flak, insurance companies were reprimanded, but no arrests were made. Mis-selling does take place in direct selling too. While it is important for policymakers to create suitable regulations to curb the extent of mis-selling, the industry can also do its bit in addressing the issue. Direct selling companies should consider setting up a common database of direct sellers to track any fraud or transgression that occurs. A database such as this could help direct selling companies screen their direct sellers better. This could reduce instances of fraud and mis-selling and concomitantly reduce cases. Any direct selling industry associations could take the lead in setting up such a database.

Other initiatives that companies could take are to spend more time on training direct sellers to make appropriate disclosures at the time of sale. Even the survey results suggest that lack of proper disclosures have resulted in customer complaints. Every direct selling company must also invest in a robust grievance redressal system. The study of case histories suggests that the origin of many litigation


cases lies in escalated consumer complaints rather than any kind of fraud. Direct selling companies must look to learn from other retail businesses and particularly from the mutual fund and insurance businesses on how to manage customer complaints seamlessly.

It would also help the direct selling sector if they can collectively agree upon certain nomenclatures for different aspects of their business. For example, a direct seller is known by different titles in different

companies, such as, agents, representatives, sellers, to name a few. Similarly, modes of payment are often classified as incentive plans or compensation plans. Different nomenclatures can lead to confusion amongst consumers, law enforcement agencies, and policymakers. The direct selling sector must work together in studying best practices of the sector and setting appropriate standards. A good place to begin will be to rationalise the nomenclature of business terms.



Associated Chambers of Commerce and Industry of India (ASSOCHAM) (2017), ‘Direct Selling - Need for Policy and Regulatory Framework’, November, New Delhi.

Department of Consumer Affairs (2016), ‘Advisory to State Governments/Union Territories: Model Frame-work for Guidelines on Direct Selling, September, Ministry of Consumer Affairs, Food & Public Distri-bution, Govt. of India.

Duffy, D. (2005), ‘Direct Selling as the Next Chan-nel’, Journal of Consumer Marketing, Vol. 22, Nr. 1, pp. 43–45

Government of China (2005), ‘Regulations on Direct Selling Administration’, Order No. 443, State Council of the People’s Republic of China, August 23, available at http://www.asianlii.org/cn/legis/cen/laws/rodsa433/

Government of Malaysia (2011), ‘Direct Sales and Anti-Pyramid Scheme Act, 1993’, Act 500, Laws of Malaysia, December 1, available at http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Act%20500%20%20-%20Direct%20Sales%20and%20Anti-Pyramid%20Scheme%20Act%201993.pdf

Government of Vietnam (2014), ‘Decree on Man-agement of Multi-Level Marketing Activities, Decree No. 42/2014/ND-CP, May14, available at http://www.itpc.gov.vn/investors/how_to_invest/law/Decree_No.42_2014/mldocument_view/?set_lan-guage=en

Gupta, Swaroopa Rani N (2016), ‘Direct Selling and Its Benefits to the Market Place’, International

Research Journal of Science & Engineering, Vol. 4 (2), pp. 57-64.

Mukherjee, A., Goyal, T., Satija, D. & Soundarara-jan, N; Indian Council for Research on International Economic Relations (ICRIER) (2011), ‘Socio-Impact of Direct Selling: Need for Policy Stimulus’, New Delhi.

Indian Institute of Corporate Affairs (IICA) (2015), ‘Regulation of Direct Selling As An Aid to Countering Ponzi/Pyramid Schemes’ A Whitepaper, Gurgaon.

KPMG and FICCI (2014), ‘Direct Selling – A Global Industry Empowering Millions in India.

KPMG and FICCI (2016), ‘Direct 2016: The Contribu-tion of Direct Selling to Building India’.

Kustin, R., Jones, R. (1995), ‘Research Note: A Study of Direct Selling Perceptions in Australia’, Interna-tional Marketing Review, Vol. 12, 6, pp. 60-67.

Peterson, R.A., Wotruba, T. (1996), ‘What is Direct Selling? - Definition, Perspectives, and Research Agenda’, The Journal of Personal Selling & Sales Management, Vol. 16, Nr. 4, pp. 1-16

Sharma, S.P. (2016), ‘Direct Selling Industry Un-leashing Employment Potential’, Employment News, Editorial Volume 30, October.

Xardel, D. (1993), ‘The Direct Selling Revolution’, Blackwell Publishers, New York.

World Federation of Direct Selling Associations (WFDSA) (2017), ‘World Federation Statistical Database (2013-2016)’, June, WFDSA, available at http://wfdsa.org/global-statistics/

Bibliography


Appendix 1What is ‘Direct Selling’? There is no definite definition of direct selling. Different countries, associations and individuals have defined it differently. The various definitions of direct selling are discussed below

Definitions

Every country (including associations) and every individual defines direct selling separately.

According to the global federation of direct selling associations, the World Federation of Direct Selling Associations (WFDSA)

“Direct selling is a retail channel used by top global brands and smaller, entrepreneurial companies to market products and services to consumers. Companies market all types of goods and services, including jewellery, cookware, nutritionals, cosmetics, house wares, energy and insurance, and much more. The direct selling channel differs from broader retail in an important way. It isn’t only about getting great products and services into consumers’ hands. It’s also an avenue where entrepreneurial-minded people can work independently to build a business with low start-up and overhead costs”.

The European Direct Selling Association (Seldia)11 which represents the direct selling industry in the Europe, defines it as follows:

“Direct selling is a method of marketing and retailing goods and services directly to the consumers, in their homes or in any other location away from permanent retail premises. It is usually conducted in a face-to-face manner – either where products are demonstrated to an individual, or to a group or where a catalogue is left with the consumer and where the direct seller call as later to collect orders. Unlike direct marketing or mail order, direct selling is based principally on personal contact with the customer”. (sic )

The Direct Selling Association of Malaysia defines direct selling as follows12:

“The distinguishing characteristic of this method of marketing is that the direct seller or retailer initiates contact with the potential customer instead of waiting for the customer to come to a store or some permanent place of business… The direct seller or direct retailer, therefore, is a person who sells consumer products and renders a service by direct personal contact with the consumer – usually, but not always in the consumer’s home”. In the direct selling distribution system, a distributor performs multiple roles of wholesaler/retailer/promoter etc.

The Direct Selling Association of Australia13 :

“Direct selling is a form of retail in which products and services are marketed directly to consumers. Direct selling generally takes place one to one, in a group setting, party or online. The personal

Appendices

_______________________________________________________

11 http://seldia.eu/index.php?option=com_content&view=article&id=5&Itemid=11312 http://www.dsam.org.my/industry/what-is-direct-selling13 https://directselling.org.au/about-us/whatisdirectselling/



component is what makes our channel unique. It is best known for doorstop, party plan and network marketing or a combination of these methods. Direct selling is about connecting people and building relationships while offering personal attention and quality service. These attributes are seeing direct selling move into more omni-channel forms of retail…”

The Indian Direct Selling Association (IDSA):

“Direct Selling means the marketing of consumer products/services directly to the consumers generally in their homes or the homes of others, at their workplace and other places away from permanent retail locations, usually through explanation or demonstration of the products by a direct seller”.

As per the Model Direct Selling Guidelines (2016) issued by the Department of Consumer Affairs under the Union Ministry of Food, Public Distribution and Consumer Affairs (MoFPD&CA)

“Direct Selling means marketing, distribution and sale of goods or providing of services as a part of network of Direct Selling other than under a pyramid scheme, provided that such sale of goods or services occurs otherwise than through

a “permanent retail location” to the consumers, generally in their houses or at their workplace or through explanation and demonstration of such goods and services at a particular place”

Many academicians and experts have also given different definitions of direct selling. The most popular definition of direct selling is “…face to face selling, in another location than a commercial one…” (Peterson and Wotruba, 1996, p.2). Another approach defines direct selling as the process of “…selling products and services directly to the consumers, at their home place of their friends’ houses, at their workplace or other similar places, except stores, using presentations and demonstrations made by the sellers…” (Xardel, 1993, p. 3). “Direct selling is the process of selling a product or a service, from one person to another, in a location that hasn’t a commercial purpose…” (Duffy, 2005; Kustin and Jones, 1995).

There is a variation in the definition of direct selling adopted by different country associations and individuals. However, there are certain similarities among these definitions. These include (a) non-store retailing format; (b) B2B, B2C, single level or multi-level and (c) face to face explanation and demonstration.


Appendix 2Different Methods of Direct Selling

There are three predominant methods of direct selling. These include (i) person-to-person, (ii) party plan, and (iii) online selling.

Person to Person (P2P)

Person-to-person is the most popular method of direct selling. Around 70 per cent of direct sales around the globe take place through person-to-person contact.

In the ‘person-to-person’ method, a direct seller describes or gives a demonstration of a product to the customer with prior appointment. This can be done by door-to-door selling, telemarketing, catalogue distribution, etc. Initially, a direct seller starts by selling products and services to friends and family and expands his/her network of customers from there.

Party Plan Groups

The party plan is a convenient method. It allows direct sellers or sales representatives to promote their products and services to a group of people rather than to individuals. Under this method, products and services are promoted and offered for sale through social events (KPMG and FICCI, 2014). Sales people approach other people to host events during which the products are demonstrated. In return, the host is given a part of the revenue from the goods sold. The salesperson is paid a commission on the sales or on the sales made by the sales people recruited by him/her.

Online Selling/ e-commerce

Online selling is the new method of direct selling. Most direct sales companies today offer website hosting and support to consultants to allow them

to feature their products and services online. Even with the absence of free hosting from the company, it is very easy to create a website and have it available online at a relatively affordable price. Although this method is more impersonal than face-to-face marketing and selling, it allows both sales representatives and consumers to save time and effort.

Compensation Plans of Direct Selling

A good compensation plan is one of the most important tools for the growth of direct selling companies. Globally, direct selling companies adopt different types of compensation plans to reach end consumers. While some direct sellers may be employees of a direct selling company, most direct sellers are independent business operators or self-employed. In a competitive scenario, successful direct sellers thrive only through hard work. The differences in the compensation and the organisation structure are the basis of such plans. These include the following:

Single-level Marketing (SLM)

In the SLM plan, a direct seller buys products from the parent company and sells them directly to the customers. The parent company rewards the direct sellers in the form of commission or bonus for their personal sales activity. Avon, Tupperware and Pampered Chef are well-known examples of single level marketers.

Home-based business people have been pursuing single level marketing for years. SLM plan is best suited for those whose focus lie on the product and service. In the SLM plan, the salespeople do not build their own organisations via recruiting and training, but rather focus their efforts on selling and achieving compensation based on their own sales.



Multi-level Marketing (MLM)

MLM is also known as network marketing or person-to-person marketing. In an MLM plan, direct sellers recruit, train, and supervise other direct sellers, who become part of the recruiter’s network. In return, the recruiting direct sellers receives compensation on the sales of network members as well as on his or her sales.

The MLM plan allows direct sellers to enrol new distributors and create a down line of direct and indirect distributors/sellers. All direct distributors receive commissions/bonuses on the sales made by them and the sales made by their downline direct sellers. The commissions, drawn at different levels,

usually vary and are based on the front-ending and back-ending of the plan benefits (percentage of commissions at different levels).

Globally, more than 80 per cent of the plans in the industry are multi-level because the structure facilitates rapid growth of networks that lead to a faster growth in sales volumes. A few of the globally recognised direct selling companies that uses multi-level marketing plans are Amway, Herbalife, QNET and Oriflame. These companies have been successful in establishing efficient and fair business models in various countries by tweaking their original business models based on local regulations in these countries.


Appendix 3Ponzi/Pyramid Schemes

In today’s world, practically any scheme of a fraudulent nature is termed a Ponzi scheme, named after Charles Ponzi. Under such a scheme, an organiser solicits investments, often with promises or guarantees of exorbitant returns at little to no risk. Instead of investing the money, the organiser/promoter uses it to pay off earlier investors. A pyramid scheme is a Ponzi scheme that typically starts with one person – the initial recruiter – who is at the apex of the pyramid. This person recruits a second who is required to “invest” a certain amount, which is paid to the initial recruiter. In order to make his or her money back, the new recruit must recruit more people under him or her, each of whom will also have to invest. If the recruit gets 10 more people to invest, he or she will make a profit with just a small investment. Further, the new people become recruiters and each one is in turn required to enlist an additional people. Each of those new recruits is also obligated to pay their investment to the person who recruited him or her. Recruiters get a profit of all of the money received,

minus their initial investment paid to the person who recruited them. The process continues until the base of the pyramid is no longer strong enough to support the upper structure, and there are no more recruits.

The guidelines issued by the Department of Consumer Affairs under the Union Ministry of Consumer Affairs, Food and Public Distribution clearly defines a pyramid scheme as, “A multi layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive benefit, directly or indirectly, as a result of enrolment, action or performance of additional subscribers to the scheme. The subscriber enrolling further subscriber(s) occupy higher position and the enrolled subscriber(s) a lower position; thus, with successive enrolments, they form a multi-layered network of subscribers.”

To escape legal scrutiny, many companies following such schemes force people to maintain a high volume of inventory and do not buy back the unsold inventory; this is termed as ‘front-loading.’ Typically, compensation is paid for recruitment rather than sales in these fraudulent schemes.



Table A3.1: Difference Between Direct Selling Business and Pyramid/Ponzi Schemes

Parameter Direct Selling Pyramid/Ponzi Schemes

Definition Marketing of the product/services to the consumers generally from home through a direct seller

Money is primarily made from recruiting other people to market the programme

Driving objective Sale of products and services to the ultimate consumer

Little or no effort is made to market the product. All the focus is on enrolment on new people and collecting money from them.

Cost of entry No entry fee Charge steep start-up costs for joining, including mandatory training, a starter kit and a non-refundable membership fee

Plan/Schemes Plans are primarily based on the value of sale of products

Plans are primarily based on money paid by new recruits, and not on product sales

Mandatory enrolment

Enrolment of recruits is not compulsory for doing business.

Enrolment of recruits is compulsory for doing business

Underlying product Involves marketing of products under established brand names

Either no products are involved, or else the products are a cover and are not really sold to consumers

Buy-back/guarantee of product(s)

Highly competitive No right to return, buy-back or cooling off scheme required

Exit Sellers can exit at any time by returning the inventory.

No refund or exit policy exists

Returns Depends upon the value of products sold and not the number of people enrolled

Money from new participants is used to pay recruiting commissions to earlier participants

Sales incentives Primarily derived from sale of goods and are paid directly through banking channels

Based on recruiting new people rather than on sales; payments are made usually through members.

Source: Extracted from IICA (2015).

facebook.com/pahleIndia @pahleindia

Tel: +91 11 41551498, 26519889www.pahleindia.org

Report Design: N

aveen Jaiswal, G

enesis Printers

Review of Regulatory Framework for Direct...

Documents

Transcript of Review of Regulatory Framework for Direct...