Legality of Multi-Level Marketing (MLM) Companies in India: Lawyers Advice for MLM Companies in India | MLM Lawyer in India | MLM Lawyer in Delhi NCR
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Multi-level Marketing (MLM) is a business model where the sale is carried out between one individual to another. Many businesses like Amway, Oriflame, etc. carry out the same individual networking system. The intermediaries involved in a traditional business model does not exist under Multi-level marketing, as the consumers purchase the goods directly from the distributor or seller. The distributor gets a commission for the sale he carries out. He can also appoint other representative under him to sell the products.
In 2016, the Ministry of Consumer Affairs, Food and Public Distribution Department of Consumer Affairs under the Government of India issued Guidelines on Direct Selling and Multi-Level Marketing (MLM) in order to regulate the businesses and strengthen the regulatory mechanism.
The Guidelines on Multi-level Marketing in India lays down the following laws, wherein direct marketing falls under the purview of:
- Indian Contract Act, 1872:
The entity must enter into a written contract with the Direct Seller, either directly or indirectly and the rights and obligations of the parties must be coextensive to the rights and obligations of parties provided under the said Contract Act. The contract between the Multi Level Marketing (MLM) entity and the Marketer before enrolment must be in accordance with Section 10 the Contract Act, which lays down conditions where an agreement amounts to a valid contract. - The Prize Chits and Money Circulation Schemes (Banning) Act, 1978:
Money circulation scheme shall have the same meaning as defined under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. “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, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”
In the case of Amway India Enterprises v. Union of India, [2007 (4) ALT 808], the issue dealt with was whether Multi-level marketing comes under the ambit of Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The judgment lays down that the scheme provided for quick or easy money to the sellers. Each member paying Rs. 4,400 on his enrollment and his future earnings through either enrolling other members or through marketing constitutes an event or contingency relative to his enrollment.
Thus as far as the member joining the scheme is concerned the ingredients of Section 2(c) of the Act are satisfied that is, (a) making quick or easy money and (b) chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied. The Court further held that the scheme run by the petitioners attracts the definition of Money Circulation Scheme as provided in Section 2(c) of the Act.
In another case, M/S. Apple FMCG Marketing v. Union of India, [W.P.NO.22674 OF 2004], the petitioner prayed that selling of products through the marketing system does not contravene the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and is a valid system. The marketing process was carried out by the distributors of a product and any person interested was given a product at a fixed price. These distributors enrolled more distributors under them. The commission given was only with respect to the sale made by that individual distributor and his team. The Court clarified in this case that, if the chain of customers is created and the chain progresses without any break in the link then the principal distributor shall receive more commission. However, if the chain is broken, then the distributor’s commission is also reduced. The Court therefore concluded that, multi-level marketing does fall within the description of money circulation scheme and is hence prohibited under the Act.
Therefore, it can be concluded that a legislation revolving around the conduct of such businesses is essential, and the Guidelines issued by the Government of India is however a right step towards making such multi-level marketing businesses more efficient in India.
Authored By: Adv. Anant Sharma & Sameera Singal