Consumer Protection (Direct Selling) Rules, 2021 – Tightening the Noose on Pyramid and Money Circulation Schemes – Lexology

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Direct selling entities, multi-level marketing and pyramid schemes have existed for decades across the globe. These entities and direct sellers lure customers into these serpentine schemes by provoking an individual’s desire to become entrepreneurs with minimum investment. In addition, COVID-19 induced lockdown proved to be a fertile ground for a significant increase in the establishment of direct selling/multi-level marketing businesses. While some operated legally, others exploited the grey areas in the regulatory framework or were outright pyramid schemes.
Whilst people were and still are jumping into the direct selling bandwagon, the existing and potential stakeholders must be aware of the caution that the Government has issued[1] and the legal landscape surrounding direct selling/multi-level marketing business. The Consumer Protection (Direct Selling) Rules, 2021 (“DS Rules”), one of the primordial tools to regulate the direct selling industry, is being examined herein.
Brief History of the Regulations on Direct Selling
With the intent to curb the menace of illegal multi-level marketing and pyramid schemes that were masquerading as legitimate businesses, back in 2016, the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, formulated a set of guidelines titled “Direct Selling Guidelines 2016”. These guidelines were formulated as model regulations, issued as an advisory that put the onus the State Government and Union Territories for their effective implementation.
Taking a cue from the Central Government’s advisory, various State Governments enacted their respective direct selling guidelines – The Tamil Nadu Direct Selling Guidelines Order 2018[2], Karnataka Direct Selling Rules, 2019[3], Maharashtra’s Guidelines for regulating the business of ‘Direct Selling’ and Multi-Level Marketing (MLM)[4] enacted in 2019, West Bengal Direct Selling Guidelines, 2018[5]. While some State Governments embraced the central government advisory and implemented guidelines on the lines of the DSG 2016, not all States followed suit, resulting in a lack of uniformity and regulation across the country.
With this brief history, let us understand the recently enacted Consumer Protection (Direct Selling) Rules, 2021 under the Consumer Protection Act, 2019, which is intended to operate as a bulwark against pyramid schemes established in India or offer goods and services to customers in India.
Consumer Protection (Direct Selling) Rules, 2021
1. Overview
The Consumer Protection (Direct Selling) Rules, 2021 came into force on December 28, 2021, to prohibit participation and/or promotion of pyramid schemes and money circulation schemes[6]. While the new DS Rules do not define direct selling as compared to the DS Rules, 2016; the term direct selling entity has been defined as “principal entity which sells or offers to sell goods or services through direct sellers, but does not include an entity which is engaged in a Pyramid Scheme or money circulation scheme[7]. The exclusive definition is made to limit the application of the Act only to pyramid or money circulation schemes.
A pyramid scheme has been defined as “a multi-layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and the enrolled subscribers a lower position, resulting in a multi-layered network of subscribers with successive enrolments[8]. And, money circulation scheme is defined as “means the schemes defined in clause (c) of section 2 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978)[9].
The obligations under the DS Rules can be broadly categorized into:
Before analyzing various obligations under the DS Rules, it is pertinent to note that the DS Rules are applicable to any entity offering goods and services to consumers in India, whether or not such entity is established in India[10] and such an entity is mandated to maintain records such as charter documents, tax registration documents, income tax returns, financials, etc.[11] Further, direct selling entities must comply with the provisions of the DS Rules within ninety (90) days from the date of its publication.[12] It is pertinent to note that, the Consumer protection (e-Commerce) Rules, 2020 apply to both the direct sellers and the direct selling entities[13].
2. Obligations under the DS Rules:
Among other things, every direct selling entity shall[14]:
Among other things, every direct seller shall[15]:
3. Duties
Under Rule 7 of the DS Rules, direct seller and direct selling entity shall:
Any contravention of the DS Rules will attract penalties and the legal procedures enumerated under the Consumer Protection Act, 2019[16]. Further, the DS Rules require the State Governments to set up a mechanism to monitor or supervise the activities of direct sellers and direct selling entities, which fortifies the effective implementation of the DS Rules.
Bringing In Uniformity
The Direct Selling Guidelines 2016 were implemented during the time when FTC (Federal Trade Commission) of USA filed a complaint accusing Herbalife Nutrition Ltd. (a multi-level marketing (MLM) corporation) of deceiving consumers about how much money they could make selling its products, noting that most Herbalife distributors make no money at all[17]. The FTC also announced that Herbalife later agreed to pay $200 million to reimburse consumers who lost money on its nutrition supplements and planned a major restructuring of its sales and distribution practices[18].
The Direct Selling Guidelines 2016 which were issued as an advisory by the Central Government, were not implemented by all States resulting in a lack of uniformity, certainty and effective protection from the perniciously proliferating pyramid and money circulation schemes.
The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent. Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction since consumers can now approach the consumer protection forums for effective redressal of grievances.
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