Consumer Protection (Direct Selling) Rules, 2021, A Step Towards Making Direct Selling Companies Accountable – Part I

This is part I of the series of three-part blog posts on the relevance of making the direct selling companies accountable under the Consumer Protection (Direct Selling) Rules 2021 and providing relief to the consumers.

INTRODUCTION

Multi-Level Marketing (MLM) is a form of marketing approach that relies on non-salaried workers to sell products and services through a pyramid scheme[1]. A ‘pyramid scheme’’ in simple terms means an of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, as a result of enrollment of additional subscribers to the scheme. This has been defined in section 3(i) of the Consumer Protection (Direct Selling) Rules, 2021.  The lack of clear rules and regulations for the governance of these schemes was a cause for concern in India. The Central Government in the exercise of the powers conferred by clause (zg) of sub-section (2) of section 101 read with section 94 of the Consumer Protection Act, 2019 has notified the Consumer Protection (Direct Selling) Rules, 2021[2].

According to Rule 2 of the 2021 notification the existing direct selling entities need to comply with these rules within ninety days from the date of publication of these rules in the Official Gazette.

The direct sellers as well as the direct selling entities using e-commerce platforms for sale are instructed to mandatorily comply with the requirements of the Consumer Protection (e-Commerce) Rules, 2020.

APPLICABILITY OF THE 2021 RULES

These rules are applicable to five categories unless it is expressly provided otherwise. The five categories are:

  1. All goods and services bought or sold through direct selling.
  2. All models of direct selling.
  3. All direct selling entities are in the business of offering services and goods to Indian consumers.
  4. All trade practices are unfair in nature in the ordinary course of business in direct selling.
  5. To a direct selling entity that is not established in India, but offers goods or services to consumers in India.

DIRECT SELLING ENTITIES AND DIRECT SELLERS ARE PROHIBITED FROM:

  1. Promoting a Pyramid Scheme[3] or enrolling any person in such scheme or participating in such arrangement in any manner.
  2. Participate in a money circulation scheme under the disguise of ‘Direct Selling’.

ENFORCEMENT AND MANDATORY COMPLIANCE WITH THE 2021 RULES

The 2021 Rules also lay down the process for supervision and monitoring by the Government of the respective state through the process of setting up an effective mechanism to ensure that there is strict compliance with these rules.

THE RULES LAY DOWN CERTAIN OBLIGATIONS UPON DIRECT SELLING ENTITIES REGARDING THEIR MANAGEMENT AND CONDUCT:

The Direct selling entities are mandated to adhere to the following rules regarding their management and conduct to ensure that the unfair trade practices are avoided and the basic requirements are met by these entities:

  1. Incorporation under the Companies Act, 2013 if the Direct Selling Entity is a company or if a partnership firm the entity has to be registered under the Partnership Act, 1932, or if it is a limited liability partnership, be registered under the Limited Liability Partnership Act, 2008;
  2. Have a minimum of one physical location as its registered office within India;
  3. Make self-declaration which would state that the entity engaged in Direct Selling has and strictly complied with the provisions of the 2021 rules and is not involved in a pyramid based commission system scheme or any form of illegal money circulation;
  4. maintain and regularly update their website with the requisite details of that direct selling entity, including the self-declaration in accordance with rule 4 and clause (c), contact information which is current and updated, details of its nodal officer, grievance redressal officer, its management, products, product information, price, and grievance redressal mechanism for consumers;
  5. Own, hold, or be the licensee of a trademark, or any mark such as the identification or service mark which would help determine the entity in the context of the goods and services that are being sold by the direct selling entity. However, it has to be noted that such identification, service, or trademark shall not give commissions, bonuses, or incentives on sale of goods or services of which it is not the owner, holder, or licensee of trademark, service mark, or other identification marks;
  6. Obtain all applicable trade registrations and licenses, including Permanent Account Number and Goods and Services Tax Registration; and get all information provided by it on its website duly certified by a Company Secretary;
  7. Have a prior written contract with its direct sellers in order to authorize them to sell or offer to sell its goods or services, and the terms of such agreement shall be just, fair and equitable;
  8. Ensure that all its direct sellers have verified identities and physical addresses and issue identity cards and documents only to such direct sellers;
  9. Create adequate safeguards to ensure that goods and services offered by its direct sellers conform to applicable laws;
  10. Be liable for the grievances arising out of the sale of goods or services by its direct sellers;
  11. Every direct selling entity is mandated to ensure that their updated website prominently contain the information in accordance with the checklist in the 2021 rules which has been described below:
    1. Registered name of the direct selling entity;
    2. The registered address of the direct selling entity as well as the registered addresses of its branches, if any;
    3. Contact details, including email address, fax, landline, and mobile numbers of its customer care and grievance redressal officers;
    4. A ticket number for each one of the complaints that is lodged b the consumer to ensure that the progress on the complaint can be tracked by the consumer;
    5. Information relating to return, refund, exchange, warranty and guarantee, delivery and shipment, modes of payment, grievance redressal mechanism, and similar information for effective grievance redressal of the consumers;
    6. Information on the different types of payment methods, the nature of security of those different payment methods, the fees or charges that would be charged by the users of those payment methods, the procedure to cancel uniform and systematic payments under those different payment methods, and the name and the contact information of the respective payment service provider;
    7. The total price of the sold goods or service in one single figure in addition to the break up of the entire price to show the compulsory and voluntary additions made chosen by the consumers. This must also include the delivery, handling, postage, courier, conveyance, and tax charges break-up in the final amount.
    8. Provide whole and accurate information prior to the purchase stage to ensure that the consumers make informed purchase decisions.
    9. This information regarding the name of purchaser and seller; the description of goods or services; quantity of goods or services; the estimated delivery date of goods or services; the process of refund; warranty of the goods;) exchange or replacement of goods in case of it being defective and all contractual information required to be disclosed by or under any law for the time being in force. This information is in addition to the mandatory declarations to be provided under the Legal Metrology (Packaged Commodities) Rules, 2011

Furthermore, No direct selling entity shall adopt any unfair trade practice in the course of its business or otherwise and shall abide by the requirements specified in any law for the time being in force.

In addition to the above-mentioned rules, all products of a direct selling entity have to mandatorily comply with the declarations to be made under the Legal Metrology Act, 2009.

Part II of this series will discuss the Grievance Redressal Mechanism under the Consumer Protection (Direct Selling) Rules, 2021 for the consumers.

Author: Shradha Pandey – a student of Tamil Nadu National Law University (Tiruchirapalli, an intern, and Chhavi Pande – Sr Associate Litigation at Khurana & Khurana, Advocates and IP Attorney. In case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com

References:

[1] Corporate Finance Institute. “Multilevel Marketing (MLM), https://corporatefinanceinstitute.com/resources/knowledge/strategy/multilevel-marketing-mlm/

[2] Ministry of Consumer Affairs, Food & Public Distribution; Consumer Protection (Direct Selling) Rules, 2021. Available at: https://consumeraffairs.nic.in/sites/default/files/232214.pdf

[3] Consumer Protection (Direct Selling) Rules, 2021 Rule 3 (i) “Pyramid Scheme” means a multi-layered 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 of subscribers with successive enrolments.

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