The government is to soon issue draft norms on multi-level marketing companies, to ensure more accountability.
The guidelines would make it mandatory for the companies to register in India, have minimum paid-up capital and a guarantee scheme to pay back consumers, if the products are not up to the mark. A committee, formed under the Department of Financial Services, was working on the draft and was likely to finalise these by the end of this month, officals said.
The sector says the move is welcome, as it would differentiate genuine players from fly-by-night operators.
“The guidelines will mainly provide a legal and regulatory framework for direct selling companies that are widely spreading their networks across,” an official said.
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For instance, once the norms are in place, all companies in this segment will be required to register themselves with the registrar of companies under the ministry of corporate affairs. This will make them liable under the Companies Act, while enabling the government’s investigative arm, the Serious Fraud Investigation Office (SFIO), to probe fraudulent ones.
Recently, while investigating an alleged multi-level online marketing scam by SpeakAsia, the SFIO was faced with a legal hurdle, as the online company is registered in Singapore and not in India.
According to sources, the proposed guidelines will mainly outline norms for companies in this segment, the required agreement between the direct selling entity and the direct seller, and the penalty for defaulters. And, guard the interests of consumers. “Stringent regulatory norms will deter non-serious and fraudulent players from entering the market,” the official said.
The guidelines would also play a significant role in defining and distinguishing various entities and terms in the segment. For instance, the norms are likely to have separate definitions for a direct selling entity, a pyramid scheme and so on, an official said.
Major entities in the segment such as Amway, Oriflame, Avon and Tupperware have welcomed the move.
“The need of the hour is to have stringent norms, which not only curb the operations of fraudulent schemes but also paves the path for successful operational aspects for the direct selling industry providing self-employment opportunity,” says Chavi Hemanth, secretary-general of the Indian Direct Selling Association (Idsa).
She said the rules should be progressive for the sector’s growth and focus on a clear distinction between direct selling and pyramid selling through fraudulent schemes. And, provide for remuneration based only on the sale of goods and services, and ensure a redressal mechanism.
“While direct selling companies supply products to meet genuine demand and direct sellers are encouraged to hold minimal inventory and replenish as and when the need arises, those involved in fraudulent financial pyramid schemes encourage front-loading,” she said. Idsa has 18 members, including Amway, Oriflame and Tupperware.
This direct selling industry is currently estimated at Rs 5,230 crore, with a potential to grow at 20 per cent annually for the next four years, said Hemanth.
Yoginder Singh, senior vice-president, legal, for Amway, said: “Fly-by-night operators are often clubbed with direct selling companies. It is important to differentiate genuine players. Doing so will also safeguard consumer interests”.
He said the government had started a consultation process with those in the sector on the draft guidelines and it was a very positive move. “We have been pushing for such regulations for a long time,” he said.
Various small-time entities in this segment attempt to woo consumers for quick cash. For some of these, one is primarily required to become a member and bring in more members. Since money circulation programmes are not legitimate in India, some of these companies are also disguised as those selling products.
