Legality of Multi-Level Marketing (MLM) & Direct Selling Business in India: Lawyers Advice
With the growth of information technology, businesses also tend to follow the same trend up or down the business cycle. With more and more businesses moving online one area that has seen an exponential growth is Direct Selling. Direct Selling simply means selling of goods directly to the end consumers without the need of any intermediary or middleman. As per the reports of FICCI and KPMG in 2015, INR 75 Billion Market in India was of Direct Selling.
There are two ways of Direct Selling:
- Single Level Marketing (SLM): In single level marketing direct sales are made in person to person or door to door.
- Multi-Level Marketing (MLM): In Multi-Level Marketing sales are made through a distributor network.
This articles enumerates in detail the list of legal challenges faced by the Multi-Level Marketing (MLM) Companies, the legal compliances which is/are to be followed by the Multi-Level Marketing (MLM) Companies and carries the legal advice for the Multi-Level Marketing (MLM) Companies respectively.
Legal Concept of Multi-Level Marketing (MLM)
It is one type of marketing method used by pyramid–structured organizations to sell their services as well as products. In MLM workers are buyers as well as salespersons. Other names of MLM are network marketing, pyramid selling scheme, referral marketing. Major MLM companies in India are MaryKary, Forever Living, Avon, Amway etc. and all these companies occupied Indian market and even gave employment opportunities to unemployed, housewives or retired people.
Difference between Direct Selling and Multi-Level Marketing (MLM)
Multi-Level Marketing is one type of Direct Selling. In Direct Selling the sales are made directly to the customers. Intermediaries are removed from the supply chain of distribution. Direct Selling is a broader concept than Multi-Level Marketing. In Direct Selling only sellers earn profit by selling the product but in MLM Sellers can recruit more people to sell the product.
Multi-Level Marketing (MLM) & the E-Commerce Business
With the growth of E-commerce sector, many businesses can sell their products online. If someone wants to grow his or her business then he can choose any of the strategy E-commerce or Multi Level Marketing. Or combo of both the strategies can be joined as E-commerce Multi-Level Marketing. When the MLM business wants to sell his products online medium, it will become MLM E-commerce Business. For this MLM software can be made.
Is Multi-Level Marketing (MLM) legal in India
One question that generally arises when someone wants to start MLM Business is whether this business is legal or not? In India MLM is considered to be legal except for a few businesses which trap the customers who invest in in such schemes. The Indian Government has mentioned a few types of MLM which are considered illegal in India to safeguard the interest of the consumers. The illegal MLM strategies are mentioned in Direct Selling Guidelines 2016 and Prize Chits and Money Circulation Schemes (Banning) Act 1978.Thus, the notion that the Multi-Level Marketing (MLM) business is illegal in India is completely false and wrong.
Multi-Level Marketing (MLM) Schemes which are considered illegal in India are:
Chit Fund is also known by the name of Kuri, Chitty etc. Chit Fund is a kind of lottery system in which every subscriber deposits a certain amount of money in installments for a period of time and any subscriber can take that lump sum money whenever he or she needs the money. The Saradha Group chit fund scam is one of the major scam of chit fund. In this scam an company was incorporated under the name of Sarada Devi in the year 2006. This company used to attract the investors in West Bengal and avoid Securities Exchange Board of India. In the year 2013 this company went into the losses around 300 crores. The chairman of the group was arrested and investigation are still going on.
This scheme is one kind of fraud investment scheme in which MLM promises higher rate of return to the investors. In this scheme single person controls the activities related to fund such as transferring of the funds.
Money Circulation Scheme
Schemes that assure fast earnings. Sometimes people are asked to invest money in this scheme for making fast money which is illegal in India
In this type of scheme, the employer builds a structure of pyramid and that person represents the tip of pyramid. One person can recruit another to work under him.
Reserve Bank of India said that Pyramid Scheme is fraud and illegal in India.
Example – Amway Scam, Mr. William S Pinckney, Chief Executive Officer of Amway Company, India was arrested as he was involved in Pyramid Scheme. In this scam the prices of the products was high than the maximum retail price and false promises were done to the distributors for fast money in case they sell the product at higher rate. And customers were not purchasing the product at high price and distributors went into loss.
How to verify that the Multi-Level Marketing (MLM) business is legal or legit
Though MLM is legal in India but there are some fake multi-level marketing in India. So following are differences between Legal and Illegal MLM
- If someone promises higher rate of return then it is Illegal where as Legal Multi Level Marketing involves actual sales of the products.
- In illegal MLM scheme , commission is paid to the agents. But in case of Legal MLM commission is paid to the distributors.
- In Illegal MLM there is no reason for higher rate of return but in Legal MLM for giving commission there is reason for it.
Legal Remedy available to a victim of Multi-Level Marketing (MLM) fraud
In such case the victim person can prepare a notice with the help of Lawyer and send it to the company. The person can also file a complain to the Registrar of companies. FIR can also be filed against the company and criminal case can be done against the company. There are many Multi-Level Marketing (MLM) Companies who have committed cheating and fraud with their customers, however, the victim has numerous options to report such illegal and unlawful acts.
Benefits of a Multi-Level Marketing (MLM) business
The main reason why people are engaged in the business is flexibility in the work. People have the opportunity to work from any place. As per the research of Direct Selling Association, 90 percent direct sellers work less than 30 hours per week and 50 percent direct sellers work less than 10 hours in a week. MLM business can be started without making much investment. An MLM business does not require long term commitment.
Criticism of Multi-Level Marketing (MLM)
In older times MLM used schemes like Ponzi scheme, Pyramid Scheme, Chit Funds which are illegal as per Direct Selling Guidelines. There are certain illegal schemes in MLM which promises faster return of investment or promises of making huge money without working much and created a negative impact on society.
Laws applicable upon the Multi-Level Marketing (MLM) businesses in India
Companies Act of 2013
Income Tax Act of 1961
Consumer Protection Act of 1986
Information technology Act of 2000
Legal Metrology Act of 2009
Future of Direct Selling Business in India
As per the report of KPMG, Direct Selling Business gave employment to 5.8 million people and the said number can reach 18 million by 2025. Currently 3.4 million women are Direct sellers which can reach to 10.6 million by the year 2025.
How can you start a legal Multi-Level Marketing (MLM) business in India
The vary first steps while starting MLM Business is selection of product and the target audience. After that comes the marketing strategy for the business. Once we are done with marketing we have to search the investors who can invest in the business. after this is done then comes development of the network through which the business can grow. After all this steps are done then register your business with the purpose and product of the business. There are various MLM plan such as Matrix Plan, Generation Plan, Stair Step Plan, Unit Level Plan Forced Matrix Plan etc.
How can you legally start a Direct Selling Business in India
In case of Foreign Company
These companies are allowed to do Direct Selling in case they have
● Branch Office in India – branch office have to represent the company. They need to do research work about the activity of the company. They are also responsible for export and import activities. Branch office is prohibited from doing any manufacturing activity. they have to submit certificate to RBI annually
● Project Office in India – Such companies are allowed to open an Project Office if they have specific project but they are not allowed to carry activities which is beyond the Specific Project.
● Their Representative Office in India – such offices are governed by Foreign Exchange Management Act and Reserve Bank of India. The expensed incurred in such offices are to be remitted by Foreign Exchange in Head Office only. Such offices are prohibited from charging any commission from the customers for liaison services. Annual activities have to be filed to Reserve Bank of India which is authorized by Charted Accountant.
In case of an Indian Company-
International company can start an Indian company as per the rules of Companies Act of India. And to register as Indian Company, an application has to be filed to the Registrar of Companies. Joint venture can also be started with existing Indian Company.
Pre-Conditions for a legal Direct Selling Business
- The business should have GST number
- The firm should have Tax, TDS License as per the rules of Income Tax Act
- The firm should have bank account in nationalized bank
- In the Memorandum of Association the nature of business must be stated
- The company must display names and identification number of its Direct Sellers
- The company should have consumer grievance portal on its official website
Legal Compliances of Multi-Level Marketing (MLM) Companies under the Legal Metrology Act of 2009
Certain declarations have to be made on the product which is being sold by MLM. The declarations which are important to be given on prepackaged goods is given in chapter II of Legal Metrology Act. The declarations are as follows-
- There must be name and address of manufacturer on the packaging
- There must be name of country of origin on the packaging of product
- Details like net quantity, standard weight, manufacturing date etc must be printed on packaging of product.
Legal Compliances of Multi-Level Marketing (MLM) Companies under the Income Tax Act of 1961
The MLM Company have to comply with the rules of Income Tax Act of 1961 and should be registered under the Income Tax Act of 1961. It must have GST Number, PAN Number, TDS and other license as prescribed in the law of its principle place of business. The MLM Company has to file Income Tax Return as per prescribed format and procedure in the Act. In case of failure in filing return MLM have to pay interest and penalty. It has to file GST return also in the prescribed form in Goods and Services Tax Act and has to furnish all the relevant information with the returns.
Legal Compliances of Multi-Level Marketing (MLM) Companies under the Companies Act, 2013
There are certain provisions for MLM under Companies Act,2013 such as the company has to be registered. The details of the company have to be filed in the prescribed form as per the said act. There are many other provisions and MLM have to comply with all the provisions of the Act.
Legal Compliances of Multi-Level Marketing (MLM) Companies under the Consumer Protection Act of 1986
MLM companies must have an official website and a portal for consumer grievances’. The complaints of consumer registered on the portal must be solved within 7 days from registration of the complaint.
Biggest Legal challenge faced by Entrepreneurs who want to start MLM Business.
There are several laws applicable on MLM such as Income Tax Act, Legal Metrology Act, Companies Act, Consumer Protection Act etc. With the passage of time and requirements many changes are made in law and entrepreneurs are generally unaware about the laws which are applicable on MLM which is a big problem for the entrepreneurs to start MLM Business.
Guidelines of Central Government for the Multi-Level Marketing (MLM) Businesses in India
Central Government can ask states to make separate act for regulating MLM companies in the country. Central law has been made to control such companies. Inter–Ministerial committee was set up for framing laws, regulations and rules for MLM business in India. In the report of the committee, it was mentioned that State police and State Government have powers to take action against MLM companies under Prize Chit and Money Circulation Schemes (Banning) Act 1978. The committee also mentioned that the sale of goods by MLM companies can be governed under the Sale of Goods Act, Consumer Protection Act and the Indian Contract Act which will binds such companies during the delivery of products to safeguard the interests of the customers.
- Inter-Ministerial committee was set up to look into matters relating to MLM or Direct Selling. This committee will be consisted of members representative of Ministry of Finance, Department of Information Technology and Ministry of Corporate Affairs.
- Guidelines on MLM have been formulated with the consultation of Inter-Ministerial committee and stakeholders. State Government have to take necessary steps for the implementation of the guidelines issued for MLM. States have to supervise the activities of direct sellers or MLM.
- Any Direct Selling company conducting the business of MLM or Direct Selling have to submit undertaking within 90 days to the Department of Consumer Affairs mentioning that they had followed the guidelines issued and the details of incorporation of the business must be provided with it.
Guidelines Issued by the Ministry of Corporate Affairs for the Multi-Level Marketing (MLM) Businesses in India
Clause 1 of the guidelines deals with the definitions
Clause 2 Conditions for incorporation of Direct Selling Business
● It must be a registered legal company under the laws of India
● It should provide complete and accurate information regarding the business including the new recruitments which are done.
● It should clear all the dues
● It should provide complete and fair information of direct sellers who are already engaged in the business with their remuneration policy.
● It should give full information about the refund policy and also provide guarantee for buy back to direct sellers on commercial agreement terms.
● Notification must be given to direct sellers regarding to cooling off period for return of any goods.
● Key Managerial person or promoter of MLM should not be convicted of any offence related to criminal turpitude or criminal offence with imprisonment of last five years by any court of jurisdiction.
● MLM must have an office with an identified jurisdiction of its working in the state.
Clause 3 Conditions for doing Direct Selling Business
● There must be an identification mark which helps in identification of the company including the goods which are to be sold or supplied. The company should issue proper documentation to its Direct Sellers
● There must be maintenance of proper records with the complete details of contract agreement, price, direct seller details, income plan.
● The company also needs to maintain updated website with the details of contact. In the website there must be portal for registering consumer complaints.
● Direct Selling Business should not misrepresent the sales. It should not use unfair trade practices.
Clause 4 Conditions of Contract
● There must a contract between between the Direct Selling Entity and Direct Sellers regarding the terms of employment. The agreement must be according to Section 10 of the Indian Contract Act,1878. Rights and obligations governing the parties must be included in the agreement.
● The agreement must be in writing.
Clause 5 Obligations of Direct Sellers
● Direct Sellers can’t visit customers place without appointment and they should have their identity when visiting customer’s place.
● Information regarding name, address, identity card contact number, details of direct selling must be provided.
Clause 6 Relationship between Direct Seller and Direct Selling Business
● The relationship between Direct Seller and Direct Selling Business must be as per the contract agreement in which rights and obligations are provided for conducting the activities of business.
● The Business will be liable for problems arising out of the sale of the goods.
● The business will be responsible for monitoring the practices done by the Direct Sellers.
Clause 7 Practices for Protection of Customers
● Both Direct Sellers and Direct Selling Business must follow the provisions given in Consumer Protection Act and Legal Metrology Act.
● All the complaints received through any medium must have Complaint Number
● Consumer Redressal Committee must be constituted
Clause 8 Prohibition of Money Circulation Schemes and Pyramid Scheme
● Businesses are prohibited for promoting Pyramid Scheme
● Business or persons are not allowed to deal in Money Circulation Schemes
Clause 9 Duties regarding registration
● There entity should have its registered office in India
● It should have local office address
● It should submit balance sheet of last three years to its prescribed authority.
● The minimum age of Direct Sellers must be 18 years old. And he should be an Indian citizen.
● The entity should work according to provisions mentioned in Indian Contract Act.
Clause 10 formalities required to start Direct Selling Business.
The Direct Selling Business must have GST number, PAN number, CIN number, Certificate of Incorporation issued by the Registrar of Companies.
Clause 11 – Appointment of Monitoring Authority
There must be an agreement between direct seller and direct business enterprise for appointment. The applicant must be fit as per Indian Contract Act. Every direct seller must be allocated with Unique Identification Number.
Clause 12 – Maintaining of records.
As per this clause every direct seller has to maintain its accounts properly as per Income Tax Act. And the accounts of business must be kept for three years.
Clause 13 – in this clause powers related to entry, search, seizure etc are provided
Clause 14 – Guidelines regarding Appeal is given in this clause.
Guidelines Issued by the Reserve Bank of India for the Multi-Level Marketing (MLM) Businesses in India
Reserve Bank of India stated that accepting any money under Pyramid Scheme, Chit Funds, Ponzi scheme is cognizable offence as per Money Circulation Act. Reserve Bank of India said that one should not be convinced by the false promises regarding higher investment returns.
Guidelines Issued by the Ministry of Consumer Affairs for the Multi-Level Marketing (MLM) Businesses in India
Any person engaged in the business of direct selling have to submit undertaking to the Department of Consumer Affairs mentioning its Compliances with the guidelines and information of its incorporation. Further, the State Governments are required to make policies for protecting the interest of the consumers. They also need to supervise the activities done by Direct Selling Business or Direct Sellers.
Legal Compliances to start Multi-Level Marketing (MLM) Businesses in India
Following are the legal guidelines for starting MLM Business in India
● The company have to register itself under Companies Act ,2013
● It should acquire license as per law to start the business.
● PAN, CIN Registration number, TIN number, bank account labour license should obtain to do Direct Selling Business in India.
● Company’s structure and status should be mentioned in MOA or in Partnership Deed.
● Company must comply with the laws of Income Tax, Service Tax, Food Safety and Standards Act of India.
● The minimum paid up capital of the company should be of RS 500000
● The company should have official website with portal of consumer grievances mechanism
● Rate of incentives and profits to be distributed must be written in the agreement.
● Time limit of the payment must be mentioned.
● Independent department must be there to solve the issues of consumers within 7 days from the complaint received.
● Office documents such as MOA, GST Return, Sales Tax etc. must be maintained in a file.
Important Cases on Multi-Level Marketing (MLM) business in India
Amazon Seller Services Pvt. Ltd. vs. Amway India Enterprises Pvt. Ltd. & Ors. FAO(OS) 133 of 2019
In the year 2018 Amway came to know that its products are sold on e- commerce platform such as Amazon and others. The products of Amway were only allowed to be sold by the direct sellers because of the rules of Amway Company. Amway has not permitted e- commerce platforms to sell its products as mentioned in clause 7(6) of Direct Selling Guidelines, 2016 while the e-commerce platforms said that they are not bound by the Direct Selling Guidelines, 2016 and they are also exempted from liability of section 79 of Information Technology Act, 2000 as they are middlemen.
Important issues which were raised:
● Are Direct Selling Guidelines applicable on E-Commerce Platforms, if so, then to what extent?
● Does the sale of product of Direct Selling Enterprises on E-Commerce platforms breach the trademark policies?
● Is section 79 of Information Technology Act and Intermediary Guidelines, 2011 are applicable on E-Commerce?
The Court held that the guidelines cannot be enforced by Court because of statutory nature of the guidelines and as per section 7(6) Direct Selling Guidelines are not violating any laws. The Court further held that there is no need to take written permission from Direct Selling Enterprises for selling the product of such entities by E-commerce platforms and as per the section 79 of Information Technology ACT, intermediaries not chargeable and they are also not responsible for breach of contract.
Amway India Enterprises vs. Union of India Case No. 20471 of 2006
In this case the Hon’ble Supreme Court observed that there was a scheme which provides faster return of money to the distributor and distributor gets reward of the money and such activity comes under Money Circulation Scheme which is illegal as per the guidelines issued in Direct Selling Guidelines 2016. The judgement of the Hon’ble Supreme Court was based on Guidelines issued by Ministry of Corporate Affairs for Direct Selling Enterprises.
Kuriachan Chacko vs. State of Kerala Case No. 17283 of 2016
A Partnership Firm named as M/S Ernakulam was engaged in the business of lottery. The firm introduced a scheme named as LIS Deepasthambham Scheme. In this scheme one has to pay RS 625 in order to purchase single unit of the lottery from the firm and the firm used Rs 350 to purchase 35 lottery tickets from Kerala Government and the person who invested in such scheme will get the double amount of the invested amount. The Hon’ble Supreme Court observed that the scheme provides for faster return of the investment. And this comes under cheating and multi-level marketing which is illegal. The Court further held that it is punishable act under section 420 read with section 34 of Indian Penal Code (IPC) of 1860.
State of Bengal vs. Swapan Kr. Guha, Sanchita Investments
In this case a partnership firm was registered with a share capital of INR 7000/- and the firm was engaged in the business of Investment and Finance. FIR was filed on the firm with the allegations that the firm reduced interest rate to 36 percent for 47 percent and the firm was also engaged in money circulation scheme. The Hon’ble Supreme Court held that activity involving fast money return will not come under section 2(c) of the Act and stated that the allegations made in FIR is not correct.
In order to conclude it can easily be said that the Multi-Level Marketing (MLM) or Online Direct Selling business is legal and/or legit in India. The best legal advice for an Entrepreneur who has a Multi-Level Marketing (MLM) or Online Direct Selling business or is planning to incorporate a Multi-Level Marketing (MLM) or Online Direct Selling business in India is to follow the legal compliances (as mentioned hereinabove) in their entirety.
Authored By: Adv. Anant Sharma & Daminee Jain