Decriminalising Multi-Level Marketing: The Need For Nuance

A notification by the Department of Financial Services on June 8, inviting comments from stakeholders on the decriminalisation of a number of legislations and provisions, has drawn much interest, especially from the financial and legal sectors. However, much of the attention has been concentrated towards one legislation, which is the Negotiable Instruments Act and the decriminalisation of the offence of cheque bounce. The notification also proposes the decriminalisation of money circulation schemes punishable under Sections 4 and 5 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 which is a significant development for the multi-level marketing industry.

Most people of a certain age know enough to recognise a multi-level marketing pitch at a distance. Perhaps you have that one acquaintance who enthusiastically suggests you read the book ‘Rich Dad Poor Dad’, or know a friend of a friend who persistently invites you to a talk at a nearby hotel or community centre which he promises will open your eyes to the secrets of doing business, or maybe a distant relative who puts in considerable effort to convince you that you can make your money earn more money for you. Going forward from the pitch, there are some people who have made significant sums of money from MLM schemes, a large number who haven’t made much money, many who have lost money and from anecdotal evidence, the vast majority have stayed away.

These pitches can draw you into a direct selling arrangement, an MLM arrangement or they may be a pyramid scheme. The last of these is essentially a fraud that grants membership for payment and promises that you will recover many times the amount you have invested when you recruit similar paying members and those members further recruit more paying members.

All In One Bucket

MLM companies in India have, for some years now, faced the hard end of the law as a result of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The legislation goes by a broad definition of money circulation schemes and defines it as one which accepts money from a joining member and promises to pay the member money if they recruit more members, whether or not the money paid comes from the entrance money of the new members. It is illegal not only to promote or run such a scheme but also to enroll or participate in it as a member. Violation of the provisions of the Act is punishable by imprisonment for up to three years.

After the arrest of the CEO of a prominent MLM company some years ago for offences under the Act, the Indian Direct Selling Association, the industry body representing the interests of such MLM companies, had sought an amendment of the law. They argued that the core of the business is sale of the products. They distinguish themselves from a pyramid scheme on the basis that in the case of an MLM business, the members, at each level, generate income for themselves and those in the levels above them via sale of products and not via the recruitment of new members.

Make A Clearer Separation, Even A New Law

Businesses that make sales to customers outside of a retail environment such as a shop, store, or marketplace describe themselves as direct sellers. Their sale is usually done through person-to-person contacts and it is but natural that they would be on the lookout for more and more distributors or sales agents by whatever name they are called. The very act of recruitment of new members cannot be criminalised, especially in the era of the gig economy.

The purpose of the decriminalisation proposal is to give a boost to business activity in the aftermath of the pandemic-related slowdown.

The Prize Chits and Money Circulation Schemes (Banning) Act was enacted more than 40 years ago. In the intervening decades, India has moved ahead by leaps and bounds in the field of corporate law and securities regulations which have at their disposal far more sophisticated tools and mechanisms to detect and prevent pyramid schemes arguably at a larger level.

The Standing Committee on Finance of the Lok Sabha in its 21st report submitted in September 2015, had recommended two steps with respect to MLM and direct selling companies.

• First, there has to be a mandatory registration process for direct selling facilitated through a central regulatory body.
• Second, the Standing Committee recommended a clear definition of direct selling distinguishing it from pyramid schemes.

Pursuant to this report, the government issued the Direct Selling Guidelines 2016. The definitions in the guidelines are somewhat circular as the direct selling business relies upon such business not being a pyramid scheme and the pyramid scheme relies upon the scheme not being a direct selling business. To some extent, the definitions also come into conflict with the Prize Chits and Money Circulation Schemes (Banning) Act. Where the act prohibits any benefit or payment for the recruitment of new members, the guidelines permit it as long as it comes from the sale of products.

Further, it would exacerbate the trust deficit the public has in this model of business as they would have no way to distinguish between a genuine MLM or direct selling company and a pyramid scheme. Implementation of the recommendations of the Standing Committee, by resolving the conflicts between the guidelines and the Act, perhaps by bringing in new legislation and doing away with the 1978 Act, along with a system of accreditation of such schemes would give the much-needed boost to their business and image while at the same time protecting the interests of the public.

Vikram Hegde is a lawyer practicing in the Supreme Court of India and other courts and tribunals in Delhi.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.