Regulation Of Direct Selling In India | Key Provisions Of The Consumer Protection (Direct Selling) Rules, 2021 – Consumer Trading & Unfair Trading – India – Mondaq

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The need to address the concerns of retail consumers in a post-industrial world dominated by multinational giants led various jurisdictions to legislate specifically for consumer welfare and regard the roman law maxim caveat emptor as better suited to parties with similar bargaining power.
India's consumer welfare legislation was largely embodied in the Consumer Protection Act, 1986. Recently, this law was overhauled in order to regulate 21st century retail practices such as direct selling and ecommerce, by the enactment of the Consumer Protection Act, 2019 (the “Act”)1 . The Act defines 'direct selling' as 'marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location'2 and includes any person who 'purchases any goods or avails any services through direct selling' within the definition of a 'consumer'3 . The Act also provides the Central Government with the power to enact rules for prevention of unfair trade practices in the direct selling and e-commerce industry in furtherance of the provisions of the Act4 .
Pursuant to this power, the Ministry of Consumer Affairs, Food and Public Distribution (the “Ministry”), through the Department of Consumer Affairs (the “DCA”), had enacted the Consumer Protection (ECommerce Rules), 2020 (the “E-Commerce Rules”) in July 2020. We have discussed the implications of the E-Commerce Rules in our previous Infolex Alert5 . More recently, after a long wait and much stakeholder discussions, the Consumer Protection (Direct Selling) Rules, 2021 (the “Direct Selling Rules”) have been notified on December 28, 2021. Given the niche and easily misunderstood nature of direct selling, the rules have been promulgated with the aim to increase transparency and consumer access to information, including by the introduction of the enhanced disclosure requirements for the direct selling entities (the “DSEs”).
While the Direct Selling Rules have been recently notified and existing DSEs have a 90 (ninety) day period to ensure compliance, this article sets out the key provisions under the Direct Selling Rules which, in conjunction with the Act, intend to provide regulatory certainty, protect the interests of the consumers more efficiently and regulate DSEs and direct sellers.
The direct selling business model became prominent soon after the era of liberalization commenced in India. Several leading global brands including Amway, Oriflame, Tupperware entered the Indian market during the 1990s. Within India, Eureka Forbes and Modicare were amongst the first few Indian companies to adopt direct selling as a method of marketing and distribution of personal care, home care and other categories of products6 . With the direct selling industry gaining traction in India, issues on account of lack of regulatory framework became of concern, as India saw a rise in the number of pyramid schemes / money circulation schemes being operated in the guise of direct selling business
A money circulation scheme or a pyramid scheme, similar to a direct selling business, involves enrolment of members in a scheme. Though, unlike a direct selling business which involves value addition by the members engaged and provision of incentives only on account of sales made by the members, a money circulation scheme or a pyramid scheme thrives primarily on enrolment of new members and the subscription money or deposit received from these new members to incentivise the older members of the scheme.
With an increase in criminal complaints being filed against direct selling entities for fraud and cheating on account of operating pyramid schemes / money circulation schemes, under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (the “PCMCS Act”), the Indian courts applied PCMCS Act not only on bogus companies operating money circulation schemes under the guise of direct selling, but also on legitimate businesses engaged in the business of direct selling.
For instance, in Amway India Enterprise vs. Union of India,7 the Andhra Pradesh High Court held that the scheme run by Amway (multi-level marketing) falls within the scope of a 'money circulation scheme' under the PCMCS Act. However, pursuant to certain legislative initiatives (as discussed below), a change in the attitude of the judiciary was prominently visible in the case of Naresh Balasubramaniam vs. State of Karnataka,8 where the Karnataka High Court held that direct selling involves a multi-layered network of subscribers and legislations such as the PCMCS Act are not applicable to the activities of such multilevel marketing companies. The High Court also referred to the Guidelines (as defined below) and stated that “model guidelines clearly indicate that multi-layered network of subscribers to a scheme formed by a direct selling company, which consists of subscribers enrolling one or more further subscribers in order to receive any benefit, directly or indirectly, where the benefit is, as a result of sale of goods or services for such subscribers, is not illegal”.
We aim to highlight some key past initiatives (albeit, not concrete) undertaken by the relevant departments for regulating the direct selling sector, below:
1 For an analysis of the key changes brought about by the Act and E-Commerce Rules, please refer to our article Key Facets of the Consumer Protection Act, 2019 and E-Commerce Rules.
2 Consumer Protection Act 2019, s. 2 (13).
3 Consumer Protection Act 2019, s. 2 (7) explanation (b).
4 Consumer Protection Act 2019, s. 94 and s. 101 (2)(zg).
5 Ibid note 1.
6 FICCI, Ease of Business Doing in India- The Way Forward for Direct Selling Industry (2017), please refer to https://ficci.in/spdocument/22924/Report_Ease-of-Doing-Business.pdf.
7 2007 (4) ALT 808.
8 2017 (3) AKR 825.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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