Decoding the Direct Selling Rules

Kanakprabha Jethani | Manager and Ridhima Jain | Executive (finserv@vinodkothari.com)

Background

The Ministry of Consumer Affairs on 28th December, 2021 issued Consumer Protection (Direct Selling) Rules, 2021 (‘Rules’)^[1], which provide for several compliance requirements for direct selling agents. With issuance of the said Rules, there have been questions on who will be covered by these Rules.

To give a background, direct selling is used as one of the approaches for promotion and sales of one’s goods and services. This model is used by manufacturers of goods (usually consumer goods, FMCG etc.) or services such as in the insurance sector.  Until recently, this segment remained unregulated, however, the same will now be regulated with the issuance of these Rules. This article intends to give a brief introduction to what these rules are and who will be covered by the same.

Applicability

The applicability clause of the Rules states that these Rules shall apply to all goods and services bought or sold through direct selling, all models of direct selling, all direct selling entities offering goods and services to consumers in India. Such as one to one sales, multi level marketing and so forth. However, Pyramid schemes have been strictly prohibited as we will be evidencing in the forthcoming paragraphs.

In this context, a direct selling entity has been defined as the 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.

Here, the pyramid scheme here refers to 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.

Now, let us break the applicability into questions to understand on whom these Rules shall be applicable.

Will retailers be included?

Direct Selling, as defined in the Consumer Protection Act, 2019 (‘Act’)^[2] means marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location;

From the above, it is clear that direct selling involves marketing, distribution or sale without having a permanent retail location. Hence, if a person/entity is engaged in the aforesaid functions by having a separate location, say a retail shop etc, the same would be outside the ambit of direct selling and would not be covered by the Rules.

Is Promotion a form of Direct Selling?

Promotion of goods or services by visiting customers and providing various promotional offers, deals, etc. These are usually employees or agents appointed by the manufacturer or service providers for the limited purpose of promoting the product or service, for a limited time or purpose.

The Rules define “direct seller” as a person authorized by a direct selling entity through a legally enforceable written contract to undertake direct selling business on principal to principal basis;

This means that for a person to become a direct seller, it is essential that the business should be on a principal to principal business, meaning thereby that any activity undertaken by a person as an agent of the principal entity would not make him a direct seller.

Hence, such promotional activities do not constitute direct selling.

Are DSAs appointed by financial institutions direct sellers?

The Direct Selling Agents (DSAs) appointed by financial institutions act in the capacity of an agent of the institution.

What constitutes an agency may be derived from the Indian Contract Act, 1872. The principal test to determine the presence of an agency is, whether the person is acting on behalf of the principal entity and represents as such in front of third parties and whether the principal entity is responsible for the acts of the agent.

Usually, DSAs represent themselves as an agent of the financial institution or acting on behalf of such institution. Further RBI guidelines require such agents to specifically disclose the names of the lenders on whose behalf they are interacting with customers^[3].

Hence, it may be concluded from the above that such DSAs shall not be covered by the said Rules.

Compliances for those covered by the Rules

The Rules prescribes the following with regard to the compliance to be undertaken by the entities:

• The entities are required to mandatorily maintain documents, as listed in the Rules. The documents range from the entity’s constitutional documents to its financials and the licences and intellectual rights held by it.
• The entities are required to have at least one physical location in India and are also required to obtain necessary trade registrations as mandated by Indian law. Further, it is mandatory to store the customer’s sensitive data in India and make adequate safeguards thereof.
• Such entities shall be responsible for ongoing monitoring of the direct sellers and the grievances arising out of the goods sold by the direct sellers.
• The entities are required to have a grievance redressal officer. Timelines have also been stipulated regarding acknowledgment and disposal of the complaints so received.
• The entities are now required to maintain a well-functioning website, and maintain the prescribed information on the said website, signifying enhanced transparency to the customers.
• The Rules also seek to regulate the direct sellers. The stipulations mainly are concentrated to curb the malpractices adopted by the sellers while selling the products or services.
• Further, the direct sellers are also required to obtain trade licences as are mandatorily stipulated.

Conclusion

From several questions raised above, one may infer that the said rules are not applicable to retail outlets, employees or agents appointed by the manufacturer or service providers. The intent of the Rules is to specifically cover direct selling models or the so-called multi level marketing schemes only.

^[1] https://egazette.nic.in/WriteReadData/2021/232214.pdf

^[2] https://egazette.nic.in/WriteReadData/2019/210422.pdf

^[3] https://m.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11920

Our other material on the topic:

A comparison between MLM and Pyramid schemes : https://vinodkothari.com/2018/01/an-insight-on-direct-selling-guidelines-2016-pyramid-schemes-vis-a-vis-mlm/