Direct Selling Guidelines - timely advice by the Centre

A direct selling entity is one that sells its goods and services through individuals, without having a permanent retail location. Such individuals — who are referred as direct sellers — approach consumers at their home or workplace, in order to sell the goods.

Companies such as Eureka Forbes, Amway, Oriflame, Tupperware and Herbalife are examples of direct selling entities operating in India. The annual revenue size of the direct selling industry, in 2014-15, was estimated to be Rs 7,900 crore.

Currently, there are no specific laws, that govern the direct selling entities. However, there are laws governing money circulation schemes. The Prize Chits and Money Circulation Schemes (Banning) Act is a law that prohibits money circulation or pyramid schemes.

Such fraudulent schemes have been very broadly defined to include any scheme for the making of quick or easy money, or where one receives things / money for a promise to pay money upon enrolment of more members. This definition caused a lot of ambiguity as to whether direct selling entities were also prohibited — as most direct sellers did get incentivised for adding more sellers onto the distribution network. Hence, direct selling entities were often confused with money circulation schemes, and vice versa. Such confusion not only obstructed the growth of genuine direct selling entities, but in the bargain also enabled pyramid schemes to flourish under the guise of direct sellers.

A brief jist

To curb this mischief, the Ministry of Consumer Affairs has recently issued model guidelines that could be adopted by the state governments to regulate the direct selling network. These guidelines seek to address various gaps that currently exist in the regulation of such entities. They clearly define and distinguish direct selling networks from money circulation or pyramid schemes which remunerate their members merely on the basis of enrollment without any genuine sale of goods or services. This should come as a big relief to direct selling entities as it removes concerns around the legitimacy of their businesses.

The guidelines seek to impose stringent conditions on the direct selling entities. They are required to be registered in India (the registering entity is not clear yet), have a physical office location, enter into full-fledged contracts with the direct seller individuals and transparently provide prescribed information to the direct sellers regarding their rights, obligations and remuneration.

The above mentioned requirements, will enable direct sellers to make an informed decision when engaging in direct selling activities. The guidelines stipulate that the selling entity will not require the direct sellers to purchase goods or services exceeding an amount that can be reasonably expected to be sold. It also mandates the selling entity to buy back goods on reasonable commercial terms.

The model guidelines specify that all direct sellers should have identification documents and their complete details should be maintained with the selling entity.

Consumer protection

Another important issue addressed by the guidelines relates to consumer protection. If implemented, the direct selling guidelines will make it easier for consumers to approach the consumer courts and obtain relief — as it provides a formal framework on direct sale of goods / services and expressly includes the obligations relating to consumer protection and prevention of unfair trade practices.

The guidelines codify the good practices that need to be adopted by the direct selling entity and the direct sellers. Today, though consumers of a direct selling entity, can approach the consumer courts for relief, it is difficult for them to be successful as it is unclear if direct sellers will fall under the definition of trader or a consumer who buys goods for self-employment.

By making it amply clear that direct sellers and selling entity come within the purview of the Consumer Protection Act, the guidelines seek to expel any doubt on this matter. The direct selling entity is also liable for all complaints arising out of the sale of its products by direct sellers, and they are required to set up a grievance redressal committee to track and address such complaints.

An additional requirement on the direct selling entity is that they should clearly specify to the consumer, the procedure for return of goods and warranty of the goods. The guidelines have expressly stated that it applies to all direct sellers, including those who may sell the goods or services through ecommerce platforms.

It also appears that the guidelines seek to increase tax compliance of the participants in a direct selling network. The selling entity is required to monitor the value of purchases by direct sellers and notify them to pay VAT once they cross the VAT threshold.

Thumbs up

Except for certain superfluous provisions such as ‘the agreements between the players should comply with the Contract Act, 1872’, the model guidelines are fairly well drafted. If implemented by the state governments, it will go a long way in providing a regulatory mechanism for direct selling, preventing fraud and protecting the legitimate rights and interests of the consumers. It will also give a boost to this industry that provides flexible employment opportunities to women. One hopes that the various state governments lose no time in legislating on this matter, and preferably come up with laws that are fairly uniform across states.

(The author is a Partner with Shardul Amarchand Mangaldas. Views expressed are those of the author and do not reflect the position of the firm)