MLM In India – A Confusing Legal Situation

India MLM


According to the Indian E-Magazine Business Standard the Indian Government struggle with MLM:

As scams related to fraudulent direct selling, multi-level marketing (MLM) and illegal money circulation schemes hit the nation, the government seems to be in a bind on what exactly defines an illegal activity from a genuine business model in this sphere.

Though the issue of lack of regulatory clarity to differentiate genuine direct selling and MLM companies from fraudulent pyramids and ponzi schemes has been hanging fire since early 2000, it is in the last couple of years that the matter has taken the centre stage following a series of scams.

However, till date, despite three inter-ministerial groups (IMGs) working in tandem – the latest being the one constituted after the Saradha scam– there is still no clarity over difference between direct selling, MLM and money circulation schemes and what kind of activities attract the provisions of the Prize, Chit and Money Circulation Schemes (Banning) Act (PCMCSA), 1978 and what does not.

Three different departments of the government–consumer affairs, corporate affairs and financial services– are working at various levels to clear the air over this critical sector, but none has yet managed to lay down clear guidelines, even as India was ranked 11th among the countries having top direct selling businesses in 2009-10.

In 2012, the department of consumer affairs formed the first IMG to suggest ways to resolve the vexed issue of segregating genuine direct selling activities from illegal money circulation models, said officials in the know. The consumer affairs department was prompted to do so as protecting the right of consumers and controlling internal trade fell within its ambit.

However, the department of financial services (DFS), which was part of the committee, opined that since PCMCSA fell within its domain, it only should be given the task of framing rules or amending the Act. The corporate affairs ministry, too, stepped in as checking ponzi schemes was its responsibility. It was also entrusted to check corporate frauds and hence had a role in determining the fate of India's direct selling industry.

DFS, in the meantime, took upon itself the role of framing new rules under the PCMCSA. It constituted another IMG to do this job. In October 2012, DFS came out with a draft model rules and circulated it to all the states.

Officials said states had to be involved in framing rules or amendments to PCMCS Act as it was implemented by the states despite being a central Act.

The draft rules framed by DFS failed to address the real issue and made all sort of direct selling activities illegal, which included pyramid marketing schemes and also genuine MLM firms.

As the genuine direct selling industry grew restive, DFS assured that it would instead amend the PCMCSA, so that the impact was uniform across the country and states did not have to alter the rules.

The corporate affairs ministry, headed by Sachin Pilot, meanwhile, urged the department of consumer affairs to frame guidelines for genuine direct selling and MLM companies as internal trade falls within the ambit of consumer affairs, said officials.

The second IMG formed by DFS subsequently finished its work after it framed the draft model rules and decided to amend the Act. However, the tenure of the first IMG under consumer affairs was extended till April 2013 from August 2012, after the corporate affairs department urged consumer affairs to have a look at the existing rules.

DFS, which was part of this original committee, contended it was in the process of amending the Act and therefore, there was no need to look into it again.

The third and the latest IMG was formed after the Saradha scam on investment schemes, which was thoeretically different from direct selling, MLM or money circulation schemes. Even then, the group was mandated to review the PSMCSA as well. The problem as to what is legal MLM or illegal MLM- the reason why most direct sellers are under threat – remains as it is even as the government keeps on grappling with the definitions of MLMs, money circulation and other schemes.

Rules governing direct selling in some countries

United State
Has one of the oldest and largest quasi-federal regulatory structures. State-specific laws regulate direct selling, not central law

United Kingdom
No specific law, but multi-level marketing covered under the Fair Trading Act – 1973. A rule called the Trading Schemes (Exclusion) Regulations 1997 was introduced

European Union
Directive like the Commercial Agents (Council Directive) Regulation 1993 apply to direct selling. Companies have to regularly report to the Income Tax Authorities with list of sellers whose earnings have exceeded certain levels

One of the few with a comprehensive law called the Direct Selling Act – 1993. Pyramid schemes are banned. All door-to-door sales come under this. It also provides for licensing.

Direct selling is governed by the Multi-level Marketing (MLM) & Pyramid Selling (Prohibition) Act 1993 and MLM & Pyramid Selling (Exclusion, Schemes & Arrangement) order, 2000. The order passed later excludes some MLMs, which have met some conditions.

Source: Business Standard

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