The Status of MLM Companies in India

[Shubhi Goyal is a 4th Year Student at NALSAR University of Law, Hyderabad]

Multi-level Marketing Companies (“MLM Companies”) sell their products and services directly to consumers, instead of following the traditional distribution channel of Manufacturer – Distributor – Wholesaler – Retailer – Consumer. They rely for their business on a non-salaried workforce, which sells products to consumers through relationship referrals and marketing by way of word of mouth. The compensation for such sales is paid out of two streams, viz., the commissions from the sales effected by the independent salesperson directly to her own retail customers, and the sales made by the salesforce below the salesperson who had recruited those other participants into the MLM Company. This creates a downline of distributors and a pyramidal hierarchy of compensation.

These companies are highly controversial for their similarity to and use by the organizers of pyramid schemes, which focus almost exclusively on the recruitment of new members, rather than the creation of any product or service of value

Until recently, these schemes did not operate under a legislation nor did they have a proper regulatory framework. They were thus regulated under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (the “Act”) In September 2016, however, the Department of Consumer Affairs announced the Direct Selling Guidelines, 2016 (the “Guidelines”) with a view to regulating the direct selling industry.

The purpose of this post is to explore the legal landscape in relation to these Companies, both before and after the Guidelines were issued in 2016, with regard being had to the Andhra Pradesh High Court judgment in Amway India Enterprises v. Union of India[1] for the former.

The Amway Judgment

Amway Corporation of USA obtained permission from the Government of India to set up a wholly-owned subsidiary in India, to establish and develop  direct selling business in respect of products sourced from local independent manufacturers. The company relied on a system of enrolling members on the payment of a small fees of around Rs. 4000 to 5000, with the opportunity to earn huge sums of money on the enrolment of new members and subsequent sales by them. It was alleged by the petitioner that such a scheme attracted the definition of a ‘Money Circulation Scheme’, which was banned under section 3 of the Act. Amway, however, argued that none of the ingredients of section 2(c) of the Act were attracted in the present case, since there was neither quick nor easy money involved in the scheme, nor was the money received by the sponsor member or promoter dependant on any event or contingency, relative to the enrolment of new members in the scheme. Furthermore, the scheme did not provide for the payment of money upon the mere enrolment of new members.

The Court did not agree with the contention of Amway and held that the money that the sponsor member at the top got was dependent upon the members that were enrolled by her, or upon the members enrolled by the members enrolled by her, which was a mere contingency. The Court also observed that setting out a minimum level of products that the members had to sell to qualify for obtaining a commission, and by offering attractive commission on the business carried out by the downline members, there was sufficient inducement caused for the members to maintain their sales above a minimum level, and also to chase new members to make quick/ easy money.

Amway India filed a Special Leave Petition in the Supreme Court of India; the Supreme Court however refused to disturb the decision of the Andhra Pradesh High Court.

This was followed by a barrage of other MLM Companies being classified as ‘money circulation schemes’ and ‘pyramid schemes’ under the neither, thereby making these schemes illegal in effect.

Guidelines on Direct Selling, 2016

The Guidelines made it clear that the direct selling model would not be considered as a pyramid scheme if it consisted of members enrolling other members in order to receive some benefit, either directly or indirectly, where the benefit was the result of sales of goods or services for such subscribers.

These Guidelines prescribe certain requirements for companies looking to engage in direct selling. To distinguish them from pyramid schemes, these companies need to be registered and can no longer give any incentive for the enrolment of new members, with such remuneration being tied strictly to the sales of goods and services. Certain responsibilities have also been added to such companies as regards their members, from whom they can no longer charge any enrolment, subscription or any other fee. They cannot force these members to buy more products or services from them, than they can be reasonably be expected to consume or sell. They are required to enter into contracts with such members specifying the buy-back, repurchase policy, cooling-off period and warranty and refund policy in compliance with section 10 of the Indian Contract Act, 1872. The members must be provided with identity cards, and must be kept updated about the sales, purchases, details of earnings, commissions, bonus and other relevant information. They need to hold mandatory orientation sessions for prospective members, with fair and accurate information on all aspects of the direct selling operation, including remuneration opportunities, their rights and obligations, etc.

Furthermore, such companies are required to maintain proper records of their business dealings, with details of their goods, services, terms of contract, price, income plan, details of the members, including enrolment, termination, and active status and earning. They are also required to keep records of the members’ verified proof of address, proof of identity and the PAN details. A proper grievance redressal system for the minimisation of consumer dissatisfaction has also been made mandatory for every direct selling company.

These Guidelines were employed by the Karnataka High Court in the recent case of Naresh Balasubramaniam v State of Karnataka,[2] where it held that the activities of the MLM Companies, QNet and Vihan, did not fall under the category of ‘money circulation schemes’ as defined under section 2(c) of the Act or the definition of ‘prize chits’ as provided in section 2(e) thereof.

Conclusion

The Direct Selling Guidelines, 2016 are a welcome change, in so far as they distinguish the MLM Schemes, or Direct Selling Schemes from the Money Circulation Schemes. However, till the Act is amended, or a new legislation dealing exclusively with the issue of direct selling is brought in, many MLM schemes, which by their very nature would offer incentives contingent on the enrolment of new members, and therefore offer quick and easy money, would continue to be governed by the Act and be illegal as a result.

– Shubhi Goyal

[1] 2007 (4) ALT 808.

[2] 2017 (3) AKR 825.

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