Help in the hour of need: RBI relaxes asset classification norms for MSME accounts

By Abhirup Ghosh(

The Reserve Bank of India (RBI), on 7th February, 2018[1], has come out with a notification to grant relaxation to banks and NBFCs with respect to asset classification in case of MSME accounts. The notification has been released on the pretext that the due to the implementation of Goods and Services Tax, the cashflows of small enterprises have been impacted severely, thereby hampering their ability to honour their financial obligations.

In this write up we have tried to cover the impact of the notification.

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An Insight on Direct Selling Guidelines, 2016 Pyramid Schemes vis-a-vis MLM

By Saloni Mathur (


There has been a shift in the paradigm of the performance of the direct selling agents. The role and responsibilities of the direct selling agents have witnessed a revolution, where they are required to comply with certain codes as prescribed by the government from time to time, and follow certain practises while discharging their responsibilities. The RBI’s master directions[1]on the outsourcing norms have put stringent compliances on the service providers while discharging their functions, and increased responsibility and monitoring on the part of the non-banking financial companies. The question that arises here is whether those non- banking companies complying with the outsourcing guidelines, fall under the ambit of the direct selling guidelines also and if they, then what is the nature of the applicability of these direct selling guidelines on them.

According to a report on the Indian direct selling industry published by FICCI and KPMG, the direct selling market in India has grown at a CAGR of 16 per cent over the past five years to reach INR75 billion today.[2] Due to this unprecedented rise in direct selling industry and the growth of a large distribution base, major scams have been witnessed over the years in reputed companies owing to the nature of marketing methods adopted by them.

The Government of India, Ministry of consumer affairs, food and public distribution, department of consumer affairs, vide its notification number F.No.21/18/2014-IT (vol II) dated 09th September, 2016 modelled certain guidelines on the direct selling regulating the business of direct selling and the multi-level marketing.

This article is an attempt to envisage the rationale behind these guidelines and the applicability of these guidelines on the direct selling agents and the various compliances that are required to be made by the direct selling entities and the direct sellers.[3] Further this article also takes into account the concept of Multi-level marketing and the pyramid schemes with reference to the applicability on the direct selling agents.

Rationale behind the launch of the Scheme

The direct selling industry has brought about with itself a huge reservoir of marketing, selling and distribution base for the goods and services, which has given rise to various fraudulent practises in the marketing and the distribution system. Instances can be drawn from the famous Amway and the Qnet case where entire money in the chain was earned only through the recruitment of new members and adding more participants to the channels of distribution, rather than the actual sale of the goods and services. Though the Amway was convicted of “illegal pyramid scheme” it could finally escape all criticism under the umbrella of the “the Amway safeguard rules”. However, the case has left strong marks of scepticism in the validity of the direct selling business.

The companies which were engaged in multi-level marketing were carrying out various frauds through the recruitment of large number of participants in the system. Thus, a need was felt where a robust system of direct selling guidelines was required to protect the interest of the consumers.

Defining the Pyramid and the MLM schemes

Defining the Pyramid Scheme

“Pyramid Scheme” as defined in the guidelines mean 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, action or performance of additional subscribers to the scheme. The subscribers enrolling further subscriber(s) occupy higher position and the enrolled subscriber(s) lower position, thus, with successive enrolments, they form multi-layered network of subscribers.

The key feature of the pyramid is that as the entrants in the last layer of the pyramid continue to get more and more participants who pay money. By way of this a hierarchy is created and the sponsor who holds the top most position is the recipient of the highest commission. The Amway case is the perfect example of the “illegal Pyramid scheme” where the purpose of the scheme was to make money through recruiting more distributors at various levels.

The pyramid scheme is illegal in India under the Prize chits and Money Circulation Schemes (banning) act, 1978. Hence there is a non-applicability of this scheme.

Following are some of the key constituents of the Pyramid Schemes

High registration fees

The basic quality of a pyramid scheme is that there is a high registration and entry fees upfront that the participants in the scheme have to pay. The entry fee is so high that the participants holding top position get a very high commission fees.

Goods sold at a price higher than the fair value and a higher quantity that is generally sold in the market

The goods and services under the pyramid schemes are not sold at the fair value. Fair value means the price at which the goods and services are generally available in the market. If the goods are sold to the consumers at a price higher than what is a general fair market price, it is a pyramid scheme.  Similarly, if the goods are sold at a quantity higher than what is expected to be consumed by, or sold, resold to consumers, it will constitute to be a pyramid scheme. The price of the goods and services have a higher component of commission cost rather than the actual product price. The price of the product generally has 70% commission cost and remaining 30% cost of the product.

The level of unsold inventory

Under the pyramid schemes the unsold inventories of the participants is not generally brought back by the distributor.

Emphasis on the recruitment of more members

There is a greater emphasis on the recruitment of more members rather than promoting and distributing the product. The purpose here is to fetch higher commissions for the sponsors at the top most level.

No material contract between the direct selling entity and the direct seller

There is no material agreement entered between the direct selling entity and the direct seller on buy back, refund, repurchase policy of the unsold inventory.

No cooling off period

There is no cooling off period given to the direct sellers up to which they can cancel the contract.

Defining the Multi-level Marketing (MLM) scheme

In an MLM structure, multi-level marketing or the network marketing are used to sell the products directly to the consumers in which the salesmen are compensated not only for the work done by them but also for the sales of the people who have joined the company through them.[4]

The main purpose of the MLM scheme is to ensure wide distribution of the products or services and the intent is to sell the product through a network of wide range of distributors. Thus, it is just a marketing strategy unlike a fraudulent pyramid scheme where there are tangible distribution of the goods and services.

Comparing the MLM and the ‘Pyramid’

The big difference between multilevel marketing and a pyramid scheme is in the way the business operates. The entire purpose of a pyramid scheme is to get distributors’ money and then use it to recruit other distributors. The entire purpose of MLM is to move the product and ultimately achieve the sales of the product. The theory behind MLM is that the larger the network of distributors in a chain, the more products the business will be able to sell. Therefore, whether it is a pyramid scheme or an MLM approach depends upon the legality of the schemes and the purpose behind their operation as the Pyramid scheme is illegal.

Defining key concepts under the ‘direct selling guidelines 2016’

‘Direct selling’ has been clearly defined in regulation 6 which means marketing, distribution and the sale of the goods or providing of any services as a part of network of direct selling other than under a pyramid scheme.

Thus, what constitutes to be a direct selling is based on four conditions i.e direct selling has to be marketing, distribution, and selling of the goods and services as a part of network of direct selling. Thus all the four conditions need to be qualified simultaneously for determining direct selling. Thus, a direct selling agent, if restricts its services only to marketing of products and not to selling and distribution would not be required to comply with these guidelines.

Similarly, the network is defined as an arrangement of intersecting horizontal and vertical lines. To be a network it is therefore necessary that there is a hierarchy of a direct selling agents such that there is a superior subordinate relationship at all levels of distribution

The ‘network of direct selling’ means a network of direct sellers at different levels of distribution who may recruit or sponsor further levels of the direct sellers, who they then support. “Network of direct selling” shall mean any system of distribution or marketing adopted by a direct selling entity to undertake direct selling business and shall include the multi-level marketing method of distribution.

This network of direct sellers also includes the multi-level marketing method of distribution.

Thus, network of direct selling shall be hierarchical. Single level of distribution would not constitute any network.

Comparing the network, the Pyramid and the MLM

The network may be at a horizontal level also. For example, if there is one direct selling entity selling goods and services through a single level of the direct sellers, all at the same level shall constitute a network. However, Pyramid necessarily has to be a vertical hierarchy such that there should a superior subordinate relationship. Multi-level marketing shall have to a be a legal marketing strategy and not a fraudulent scheme.

Understanding the applicability of the scheme

The applicability of the above guidelines on the direct and selling agents have to be checked from the following facts:

This scheme is applicable on the following companies.

  1. Companies engaged in marketing as well as selling and distributing the products simultaneously under the network of direct selling.
  2. All the multi-level marketing schemes such that there are different levels of distribution and the participants are at different distribution levels. Here the participants at the same level of distribution shall not be required to comply with the scheme.
  3. Company carrying its operations through a hierarchical multi-level system.
  4. Companies appointing the direct selling agents in such a way, such that they are sponsoring or carrying out recruitment further so that a large network of distribution is created
  5. Companies that have relevant clauses in the outsourcing agreement and which specifically reflect the outsourcing or subcontracting of the service to the third parties.
  6. Companies requiring direct selling agents to pay high membership fees and greater entry costs.

Non-Applicability of the guidelines to Pyramid schemes and companies having only one level of distribution

The guidelines shall not be applicable to the pyramid scheme. This is because these schemes are generally money-making schemes and not any legal marketing strategy. This comes from the fact that pyramid schemes are generally created not to market the products, but to create a distributor base for earning large money through promotion. Thus, the direct selling guidelines take a legal view and apply to only legal MLM schemes and direct selling.

Further the companies having only a horizontal distribution base such that they are not recruiting or sponsoring further levels in the chain shall be kept out of the purview of these guidelines.

Quick compliance checklist for direct selling guidelines 2016

  1. All direct selling companies in India shall submit an undertaking to the department of the consumer affairs within 90 days from 12th September 2016.
  2. Direct seller cannot receive remuneration or incentive for the recruitment/enrolment of the new participants.
  3. Direct sellers can only receive remuneration derived from the sale of goods or services
  4. Direct seller shall carry its identity card and not visit the customers premises without prior intimation/approval.
  5. Direct selling company cannot force its direct sellers to purchase more goods or service than they can expect to consume or sell.
  6. Direct selling company cannot demand any entry fee/registration fee.
  7. Company must provide every participant written contracts describing the material terms (buy back, re-purchase policy, cooling period, warranty and refund policy.
  8. Mandatory orientation session with accurate information for the newly recruited direct selling agents
  9. There shall be prohibition of the pyramid scheme and the money circulation scheme.
  10. There shall be a monitoring authority to deal with the issues related to the direct selling.


There is no scepticism regarding the benefits of the direct selling guidelines on the interest of the consumers in prevention of the frauds against them, however comprehending the applicability of these directions is a hard nut to crack for various entities who are in a dilemma to comply with these guidelines. The guidelines do not specifically state the extent of the applicability; however, they do give certain apparent indications to the entities to whom these guidelines shall be applicable.

Thus, any company desirous of increasing their distribution base for selling wide range of products or services and who intend to do it by creating a hierarchical distribution that requires further outsourcing and recruitment shall be required to comply with the guidelines. Further the outsourcing agreement between the DSA and the service provider shall clearly state the provisions regarding contracting and the sub-contracting, subsequent to which only a network of distributors could be created.





Performance of NBFCs in 2016-17

By Mayank Agarwal (

2016-17 could be summed up as a year of ‘Coming of age’ for Non-Banking Financial Institutions(NBFIs) as they finally fulfilled their potential by displaying a resilient performance against the backdrop of revised regulatory frameworks, widened credit gap due to sluggish performance by banking institutions and providing specialized services to the sector to which they cater. As per the recently released ‘Trend and Progress of Banking in India’ report by RBI,[1] NBFCs have given a stiff competition to established banks in the country, having finally edged ahead in the financial credit race in the country as their portfolio of loans grew at 14.9% during the first half of 2017-18, compared to 6.2% in the case of banks. The share of NBFCs in the total credit granted by NBFCs as well as Banks rose from 9.5% in 2008 to 15.5% as of March 2017, thus showing the increasing popularity of NBFCs as a source of finance. The credit granted by NBFCs as a percentage of GDP rose to 8%, displaying their significance in the country’s financial ecosystem. While the bank credit reached a historical low during 2016-17, NBFCs recorded an increased credit performance during the same year, highlighting the growing popularity in the country.

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By Saloni Mathur (


Mr. Le Kuan Yu, Singapore’s founding father once said, “If you are depriving yourself of the outsourcing business and your competitors do not, you are putting yourself out of the business.” These words reflect upon the importance of outsourcing as a function that has become a necessity for the business organizations in the current scenario, to manage their core as well as ancillary functions through the specialized services of the third parties. This business process re-engineering can reap bundle of benefits to the organizations and its inevitability can be based on the fact that these activities can help organizations to access skilled expertise, reduce overhead, offer flexible staffing, increase efficiency, enhance technological know-how, reduce turnaround time, and eventually generate more profits for the business houses.


According to a report of the Boston consulting group ‘21st annual analysis of the outsourcing industry’, the average number of functions outsourced by the organizations across the world has risen by 225% over the past 5 years and are expected to keep on growing. Outsourcing has been moving from the peripheral activities to the core ones. The recent survey report of the ‘Statistita on Global market size of the Outsourced services from 2000-2016, March 2017’ says that  the use of outsourcing in the Indian financial services sector is projected to increase by 36% in the next 3 years, with a CAGR of 7.6%.[1]

Suffice it to say, that the competition between banks, financial institutions in India have increased significantly in the last decade and the consumers now have even higher expectations than in the past when it comes to customer experience and service for which they are using the services of specialised entities. However, such rampant outsourcing of key functions are coming at the cost of loss of managerial control, threat to security and confidentiality and the quality problems, owing to the fact that these institutions are responsible for the funds of the general public. Therefore, it is the need of the hour to have a robust regulatory mechanism which shall ensure appropriate norms for the outsourcing, in order to safeguard the interest of both the customers and the organization.


The transferring of financial services to the third parties for using their specialised services, which otherwise could be performed by them itself, would amount to outsourcing. However, using the services of the third parties for actions that could not be taken in-house would not be considered as outsourcing. For example, statutory audits of the companies cannot be conducted in house itself, thereby keeping them out of the purview of the concept, outsourcing. Similarly, the payment gateway services and agreements would not constitute to outsourcing because these cannot be taken by the companies itself and require the services of the third parties for a speedy and an efficient process.

Thus, the agreements in the nature of debt recovery and repossession agreements, the agreements with the direct selling agents, the agreements related to cash management with the third party would constitute to outsourcing.

Hence organizations have to clearly demarcate between what is outsourcing and what is not,  thereby applying this code of conduct only to the key areas of outsourcing.


The RBI’s master directions [2]on the outsourcing norms have put stringent compliances on the service providers while discharging their functions, and increased responsibility and monitoring on the part of the non-banking financial companies. The RBI has come up with more tougher norms, where the new directions prohibits the NBFC’s to outsource the core management functions to the third parties including the internal audit, the strategic and compliance functions, and the decision-making functions. However, they can be outsourced within the same group/conglomerate subject to the compliance and instructions in para 6 of the master directions, which states that the NBFC’s shall have a board approved policy and service level arrangements with the group entities prior to entering into such transactions with them.

Further the scope of these directions and new code of conduct applies only to the ‘outsourcing of the financial services’ keeping, general IT related services, and management services like janitorial services, housekeeping, catering of staff out of the purview of this code. Further the code requires NBFC’s strict compliance and monitoring of the activities of the service providers, where the service providers shall not impede or interfere with the RBI during the monitoring of its functions.


The RBI is of the view that over the years, increased outsourcing in the financial sector have posed major risks to the organizations in terms of strategy, reputation, compliance operational, legal, concentration and the country risk. As we could see the rapid outsourcing in different sectors of the services, the underlying principles behind these directions emphasise that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced.



The  board of directors and the senior management shall have to observe the materiality while outsourcing the key functions in terms of the business operations, reputability, profitability and customer service. The materiality would be based and assessed on the following parameters.

Thus, companies board first need to determine the materiality of the activities being outsourced. For example, an agreement with the direct selling agents, direct marketing agents, debt recovery agents, to market the company’s products would be material outsourcing, because here the brand value of or the reputation would be at stake if the service provider fails. Further such kind of outsourcing would be material in nature because of the huge operational costs in direct marketing and high DSA’s pay-outs.


The new directions on outsourcing can be envisaged as careful and robust approach by the RBI in safeguarding the NBFC’S from certain risk exposures with the service providers. Initiatives like a holistic code of conduct for the direct selling agents, the setting up of the internal and the external audit committees to monitor the outsourcing activities, the increased role of RBI to have a close eye on the operations, substantially drafted service agreements that deal with all the risks that could arise and the subsequent clauses to address them,  set up of a grievance redressal mechanism, could pave a way for a better regulatory environment and protection of the interests of the public, the NBFC’S and the service providers.

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Cautious Approach to be taken by NBFCs while outsourcing activities ancillary to financial services

By Mayank Agarwal & Anita Baid, (

The Reserve Bank of India (RBI), on the 9th of November, 2017 released a notification bringing out the Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Non-Banking Financial Companies (NBFCs).[1] (“Directions”) These Directions are a much awaited outcome of the draft guidelines[2] which had been issued long back, in the year 2015. The Directions come in the wake of ever-increasing need to outsource ancillary activities such as applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities in order to provide the customers best possible services associated with the core business of the company. The Directions have been issued to ensure that there exists no possibility of discrepancy or fallibility that could affect the customer as well as the NBFC in an adverse manner.

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Mandatory linking of Aadhaar and PAN under PMLA

By Anita Baid, (

PML Second Amendment Rules

The Ministry of Finance on 1st June, 2017 vide notification No. G.S.R. 538(E) issued the [1]Prevention of Money-Laundering (Maintenance of Records) Second Amendment Rules, 2017 (hereinafter referred to as “Second Amendment Rules”) mandating all account holders of the reporting entities i.e., banks and financial institutions to link Aadhaar number issued by the Unique Identification Authority of India and Permanent Account Number (PAN) or Form No. 60 as defined in Income-tax Rules, 1962. The timelines for the same were as below- Read more

RBI’s P2P Regulations: A step forward or backward?

The Reserve Bank of India issued a Master Directions – Non Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (hereinafter referred to as “Directions”) on 4th October, 2017[1], which is an extensive statement outlining in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending (hereby known as NBFC-P2P) will have to comply with. These Directions shall come in force with immediate effect and shall apply to all NBFC-P2Ps, i.e. with effect from the date of issuance of the Master Directions, mentioned above. Read more