Owing to a paucity of redressal mechanisms, consumers have been subjected to exploitation of countless kinds. The Consumer Protection Act (1986) (hereinafter, the ‘Act’) acknowledged and remedied the challenges that consumers encountered, and it functioned as a formidable barricade against consumer exploitation. The Act defended a consumer's rights against unfair commercial tactics used by producers and distributors, and it aided in educating consumers about one ‘s duties and privileges as consumers, as well as how to pursue justice in the instance of exploitation. In that vein, the Act created a comprehensive mechanism for consumers, duly supported by robust legislation.
The jurisprudence on consumer disputes has evolved and expanded over time. Starting with the inclusion of medical services under the Act[1] and progressing to precise standards to facilitate the regulatory oversight of the E-commerce segment and the impending digital era, it's indeed reasonable to admit that the Act enables a constructive stance in attempting to secure consumer rights and has made great strides in the way it can be employed for the benefit of the public.
Consumer Protection (Direct Selling) Rules (2021) (hereinafter, the 'Rules'), which took effect on December 28, 2021, is yet another leap in the right path. The rules endeavours to effectively tackle the concerns pertaining to direct selling and to establish a legal weight that acknowledges such complications and provides adequate remedies for the same.
Direct selling, commonly known as person-to-person retail, is a diplomatic strategy in which individuals are involved in the sale of products to target consumers directly. Direct selling allows distributors to bypass middlemen in the supply chain and market directly to customers. Generally, products are sold digitally or in a regular store in typical retail settings, while direct selling relies significantly on salespeople directly approaching customers in informal backdrops. According to World Federation of Direct Selling Association (WFDSA) data, the retail size of the Indian direct selling sector was assessed at $3 billion (22,500 crores) in 2020, with yearly growth of more than 20 percent, making fastest growing marketplace worldwide. According to the report, the industry employs over 7 million active direct sellers.
The report goes on to suggest that more than half of this is comprised of women.
Although the concept of direct selling appears to be legitimate and ethical, the challenge lies in contemplating multi-level marketing (hereinafter, 'MLM'). When a direct sales organisation encourages existing distributors to recruit new distributors who are paid a portion of their sales, this is referred to as MLM. Recruiting new members is frequently prioritised over selling actual things. This is due to the fact that a portion of each level's income is distributed as commission to the higher level, resulting in a concentration of wealth. Although some MLMs do focus on product sales, many are infamous for putting pressure on distributors to actively acquire new members. This is referred to as a pyramid scheme. As a result, the trustworthiness and authenticity of firms that employ MLM are disputed. Product quality is overlooked in such organisations because recruiting becomes the major object.
Furthermore, the people who are exploited and enticed into this appealing choice are primarily from the economically poorer parts of society. However, they do not improve their financial state sufficiently and end up losing money.
This necessitated the urgency to address such problems. In 2016, the Central Government of India reviewed Direct Selling for the very first time and developed the Direct Selling Guidelines. These guidelines, however, were merely advisory in essence and was devoid of statutory force. Furthermore, these guidelines were generalized, and the Central Government delegated to the different State Governments the responsibility of tailoring them to their specific localized requirements. This left a crack in ensuring uniformity. The new set of rules (2021) seeks to address all the problems above mentioned. Direct selling businesses are obligated to abide by the Rule's provisions within 90 days from its notification date.
Direct Selling is defined under the Consumer Protection Act (2019) as “marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location”. The Rules do not define ‘direct selling’ and leaves the interpretation to the existing Act.
These rules shall apply to:
1. All goods and services bought and sold through direct selling.
2. All direct selling models and direct selling companies in India that supply goods and services to consumers.
3. Unfair trade practises of any kind, across all direct selling formats.
4. To direct selling organisations that are not based in India yet provide goods or services to Indian consumers.
The Rules also provide a lucid definition of the specific act it intends to restrict. The rules define a direct selling entity as a “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” and goes on to define a Pyramid Scheme as “a multilayered 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”
In that vein, the Rules aims to provide a robust structure to the following concerns:
1. Regulation
The rules mandate the incorporation of all Direct selling entities under the Companies Act of 2013/ Partnership Act (1932)/ Limited Liability Partnership Act (2008). Furthermore, a threshold of one physical location in India as its registered office, is a requisite and inescapable. They are required to secure all necessary registrations, including PANs and other tax identification numbers. Additionally, after complying with the said regulatory rules, direct sellers and direct selling organizations must attest a self-declaration stating that they have duly followed the Rules and are not participating in any pyramid or money-laundering scheme. In addition to the said Rules the organizations are required to strictly abide by regulations mandated under Legal Metrology (Packaged Commodities) Act of 2009.
State governments are also required by the rules to establish a framework to supervise or regulate the operational activities of direct sellers and direct selling organizations placing them under scrutiny.
All these measures help keep the reins on direct selling organizations as taut as possible.
2. Authenticity
The firms are legally obligated to equip written contracts with their sales people and use company-issued identity cards to verify their identities and physical addresses. The direct seller must have a prior written contract with the direct selling business before selling or offering to sell any of such company's goods or services. Additionally, a direct salesperson should not visit a consumer's home without an identity card and a previous appointment authorization
Furthermore, direct selling organizations are legally mandated not to insist or persuade customers to buy an item based on the claim that they may decrease or recoup the price by recommending potential customers to direct sellers for similar transactions.
3. Grievance redressal
All direct selling entities are required to make provisions for a grievance redressal officer and a thorough redressal procedure in place for customers to raise concerns. The grievance redressal representative should acknowledge receipt of any consumer complaint within 48 working hours of receipt of such complaint and is required to rectify the issue within a 1-month time frame. If there is a delay of more than a month, the reasons for the delay and the measures to redress his/her concern must be duly communicated to the consumer in paper. Furthermore, direct selling organizations must select a nodal person who will be responsible for ensuring compliance with the Act and the guidelines.
4. Information to the consumers
The organizations are necessitated to employ a website and provide the requisite information on the website, exhibiting more accessibility and transparency to consumers. Information about the website should be clearly illustrated on the product information sheet or booklet. It is irremissible that a sales person provides any piece of information that has not been approved by the entity. On the consumer's request, the seller is mandated to divulge the identify of the direct selling entity, the address, the type of the products or services marketed.
The seller ought to guarantee that the genuine item conveyed to the purchaser coordinates with the portrayal of the item given and find suitable ways to guarantee the protection of all sensitive personal information provided by the consumer in accordance with the existing legislation at the time.
The seller should present an offer to the consumer which comprises precise and comprehensive information, a demonstration of products and services, pricing, credit terms, payment terms, return, exchange, refund and policy, guarantee conditions, and after-sales assistance.
5. Uniformity
Following the first guidelines outlined in 2016, different states such as Tamil Nadu and Maharashtra developed their own legislation. Any variations in the application of a provision to the very same subject in different states might upset the balance. The revised Rules will now result in a consistent implementation of the law across the country, conforming with the legislative design. Also, by placing direct selling firms and direct sellers under the ambit of the Consumer Protection Act (2019), the Rules provide access to the consumers to effectively address their concerns at consumer protection forums.
The object of the rules is to explicitly include multilevel marketing operations in the direct selling sector, which remained largely unregulated. It is undeniable that the regulations provide a holistic method to manage the complications posed by direct selling. The guidelines are chiefly concerned with educating customers and assuring the validity of sellers on the one hand and establishing a suitable grievance system on the other. The guidelines further stipulate those penalties will be imposed as per the Consumer Protection Act (2019). The rule appears to bring about the much-required transparency while emphasising the elimination of consumer misinformation. All of this sounds golden in theory, but how successfully will it be executed?
[1] Indian Medical Association vs V.P. Shantha & Ors, 1996 AIR 550.
This article is written by Vikram Krishnan of Tamil Nadu National Law University.