Laws & Legal Compliances for Direct Selling Businesses in India: Lawyers Advice for Direct Selling Companies in India | Direct Selling Business Lawyer in India | Direct Selling Business Lawyer in Delhi NCR

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Direct Selling is a business model wherein the direct selling companies sell their products directly to the consumers. The usual manufacturing and distribution line of goods or services which include various intermediaries can be avoided or sidestepped as the goods or services can be delivered directly to the consumer without the goods going into the possession of retail stores.

According to the Direct Selling Guidelines, 2016 (hereinafter called “Guidelines”), a direct selling entity is one which sells, markets or distributes goods or services through a direct seller. There exists a network of direct sellers at different levels of distribution or marketing that the direct selling business undertakes. This also includes multi-level marketing method of distribution.

The Guidelines on Direct Selling in India lays down the following laws, wherein direct selling falls under the purview of:

1. Indian Contract Act, 1872:
   Every Direct Selling entity must enter into a 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 Act. The contract between the Direct Selling entity and the Direct Seller before enrolment must be in accordance with Section 10 the Contract Act, which lays down conditions where an agreement amounts to a valid contract.
2. Consumer Protection Act, 1986:
   According to the Consumer Protection Act, 1986 a “Consumer” is one “who buys any goods for a consideration which has been paid or promised or partly paid and partly promised.” Both the Direct Selling entity and the Direct Seller shall be guided by the provisions under the Act.
3. 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.”

Legal Compliances for every Direct Selling Businesses & Entities in order to conduct their business are:
a) The entity shall be the owner, holder, licensee of a trademark, service mark or any other identification mark which identifies the entity with the goods to be sold or supplied or services to be rendered.
b) The entity shall issue proper identity documents to its Direct Sellers.
c) Proper records must be maintained by the entity, either manual or electronic of the business dealings of the Direct Sellers.
d) The entity shall maintain the Register of Direct Sellers wherein relevant details of Direct Sellers shall be updated and maintained.
e) Proof of address, proof of identity, PAN and other details of the Direct Sellers must be included.
f) The entity shall maintain proper and updated website with all the relevant information prescribed.
g) It shall monitor the value of the purchases of all its Direct Sellers on a monthly basis and once the purchase value crosses the GST threshold, it must intimate the Direct seller to pay the GST.
h) The entity shall not use misleading, deceptive or unfair recruiting practice, in their interaction with prospective or existing direct sellers.
i) It shall not make any factual representation to a prospective direct seller that cannot be verified or make any promise that cannot be fulfilled.
j) The Direct Selling entity shall not use fraud, coercion, harassment, or unconscionable or unlawful means in promoting its Direct Selling practices.

Direct Selling entities and Direct Sellers in India have various obligations they need to comply with before commencing their business. Often these compliances are not abided by which leads to several disputes.
The following are some cases which deal with Direct Selling and Money circulation scheme in India:
In State of West Bengal & Ors v. Swapan Kumar Guha & Ors, [1982 SCR (3) 121], the Hon’ble Supreme Court analysed Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act 1978 interpreted that any activity that makes quick or easy money would not fall within the said section and the making of such quick or easy money must depend upon any event or contingency applicable to the enrolment of members into the scheme.

In another case Kuriachan Chacko & Ors v. State of Kerala, [(2008) 8 SCC 708], a partnership firm was engaged in sale of lotteries and magazines after advance collection of money. They floated a scheme wherein one person (unit holder) has to pay Rs. 625 and purchase one unit of lotteries from the promoters. The promoters will then use Rs. 350 for purchasing 35 lottery tickets each of Rs. 10 for the unit holder. The unit holder will then be returned the amount double of his investment, that is Rs. 1250. The Supreme Court in this case held that both the essentials of Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act 1978 are present. “The Scheme provides for making of quick or easy money, and it is dependent upon an event or contingency relative or applicable to the enrolment of members into the Scheme.”

Therefore, it can be observed that making of quick or easy money by direct selling entities does not always attract the provisions of Section 2(c) and if proper compliance with the laws are not observed then such entities can violate the concerned laws.
Authored By: Adv. Anant Sharma & Sameera Singal