The government recently notified the 2021 Consumer Protection (Direct Selling) Rules to regulate the direct selling industry. The rules also aim to clearly prohibit pyramid schemes and monetary circulation and to provide a framework for consumer protection. Here is an explanation.
The Ministry of Consumer Affairs recently notified, on December 28, 2021, the Consumer Protection Rules (Direct Selling) 2021. These rules specify the compliance requirements for direct selling agents.
As defined in the Consumer Protection Act, 2019, direct selling means
“Marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent point of sale. ” Direct selling is one of the approaches to promoting and selling goods and services.
New rules bring regulation to a hitherto largely unregulated market
This segment has largely remained unregulated in India, and the current rules aim to introduce some form of regulation. In the absence of specific regulations relating to direct sales, direct sellers were previously covered by – Prize Tokens and the Circulation of Money (Systems) Prohibition Act, 1978.
However, there have been instances where direct sellers have been improperly booked under this law even though they have complied with all other relevant regulations required to do business in India.
In 2016, the Department of Consumer Affairs issued “Model Direct Selling Guidelines” as advice to state governments and UTs regarding direct selling.
This notice included general guidelines to States, with the respective States being required to propose their own regulations. With the implementation of the Consumer Protection and Direct Selling Rules of 2021, there will be uniform regulation of direct selling across the country.
The rules explicitly prohibit any form of pyramid scheme under the guise of direct selling
The Consumer Protection and Direct Selling Rules, 2021 state that these rules apply to all goods and services bought or sold through direct selling, to all models of direct selling, to all sales entities. direct offering goods and services in India etc. .
Thus, these rules are applicable to all individual sales, multi-level marketing, etc. However, pyramid schemes are strictly prohibited. In its definition of a direct selling entity, the Rules explicitly state that it does not include an entity engaged in a pyramid scheme or a monetary circulation system.
The rules also clearly define a pyramid scheme as a system with a multi-layered network of subscribers involved in signing up more subscribers to receive a benefit, either directly or indirectly.
While making it clear that pyramid schemes do not fall under the legal framework of direct selling, the definition of “direct seller” also excludes a few other entities.
- A retailer has a storefront or location to conduct sales, as defined in the definition “Other than by permanent location. ”
- Employees or agents appointed by organizations for promotional activities. The rules state that a direct seller is “A person authorized by a direct selling entity through a legally enforceable written contract to undertake direct selling activities on a principal-to-principal basis”. Once named, any sale through promotional activity is not considered direct sale.
- Direct selling agents (DSAs) appointed by a financial institution are also excluded.
Direct selling entities to ensure compliance with rules within 90 days
The Consumer Protection and Direct Selling Rules, 2021 establish the compliance framework to be undertaken by all entities that fall under the definition of a Direct Seller.
Here are some of the important rules for direct selling entities:
- Must keep documents such as certificate of incorporation, PAN, TAN, computer declarations, GST registration, FSSAI license in case of food products, etc., among others.
- Entities must have at least one physical location in India and obtain the necessary business registrations in accordance with Indian law.
- Mandatory to store sensitive customer data in Indian and take adequate protection measures.
- Entities are responsible for monitoring direct sellers and handling complaints arising from goods sold by direct sellers.
- Have a grievance adjudication officer.
- Maintain a well-functioning website and provide prescribed information to increase transparency with customers.
- Regulate direct sellers in order to fight against embezzlement adopted by sellers when selling products or services.
All entities that fall under the definition of Direct Seller must ensure compliance with these rules within 90 days.
The new rules also set out the obligations direct sellers must meet:
- Have a prior written contract with the direct selling entity.
- Disclose the identity of the direct selling entity at the time of initiating the sale.
- Provide accurate information on prices, payment terms, refund policy, return policy, etc.
- Provide a purchase order with complete information about the direct seller or direct selling entity.
- Get GST registration, PAN registration, all applicable business licenses, etc.
- Make sure that the delivered product matches the product description.
- Take appropriate measures to ensure the protection of sensitive personal information of the consumer in accordance with the laws.
One of the important aspects of the Rules is that direct selling companies are responsible for grievances arising from the sale of goods or services by their direct sellers.
Direct selling entities and direct sellers using e-commerce platforms for sale must also comply with the Consumer Protection Rules (Direct Selling), 2021.
These rules also require state governments to put in place a mechanism to monitor the activities of direct sellers and direct selling entities.
Recently released direct selling rules have international precedent
While India recently introduced the legal framework for direct selling, many other leading countries have already put laws in place.
The United States Federal Trade Commission (FTC) points out that MLM activities are illegal and violate FTC law. The FTC Act sets out regulations regarding the methods and practices of entities engaged in commerce.
The Multi-Level Marketing and Pyramid Selling (Prohibition) Act explicitly excludes certain schemes and arrangements that are MLM or pyramid schemes. The law aims to protect consumers and promote an enabling environment for legitimate businesses.
The Consumer Protection (Fair Trade) Act 2003 provides the legislative framework for consumers harmed by unfair practices and civil remedies.
The Direct Selling Authority in the UK oversees the various aspects of direct selling, both from the point of view of direct sellers and customers.
Important laws relating to direct selling and the protection of consumer rights in direct selling include: the Consumer Protection Regulations 1987 (Cancellation of Contracts concluded outside of business premises) and its 1988 amendment, and door-to-door sales regulations.
Most of these laws clearly delineate what constitutes direct selling and what MLM or pyramid schemes are that are not part of the legal framework. The customer recourse mechanism is also a key element of the law in place in many of these countries.
According to a fact sheet from the “World Federation of Direct Selling Associations (WFDSA),” direct selling is a $ 179.3 billion industry worldwide and encompasses 125.4 million independent representatives, as of 2020. The United States, China, Germany, South Korea and Japan are the Top 5 markets for direct sales.
The size of the Indian direct sales market is approximately $ 3.2 billion. With a growing number of direct and consumer-based sales platforms, the new government regulations are an important step in ensuring customer safety and establishing a legal framework for better enforcement.
The selected image: Direct Selling Rules