Is Multi-level Marketing Legal in India? Here’s all you Need to Know
July 11, 2023 हिंदी में पढ़ेंTable of Contents
What is Multilevel Marketing?
Multilevel marketing has been a popular business form for decades in India. Tupperware, Amway, Oriflame et cetera are some examples of MLM or multilevel marketing. Search companies provide an easy way of income for a number of persons over different economic strata. Companies like Amway are a household name, especially for housewives, etc.
Multilevel marketing is also known as MLM. It is a pyramid selling scheme, network marketing, or referral marketing. Multilevel marketing is a market strategy for selling goods and services, where the employees or the workers act both as sales persons as well as buyers. The revenue of a multilevel marketing company is derived or generated from this non-salaried workforce.
MLM is a promotional business strategy where the salesperson of a particular company sells a particular product/good or service for this MLM business and recruits new sales persons under them in order to branch out the sales of that particular MLM business's products or services. As stated earlier multilevel marketing follows a hierarchical structure whether the objective of the individual on a higher level is not only to sell the good or service but, to expand this hierarchy by recruiting and in a way placing more individuals under him/her.
Thus, MLM creates a chain of selling. With more people being recruited, a new branch or branch in the pyramid is created. This is why it is also called network or matrix marketing.
A majority of people in India are unaware of whether MLM is legal or not since MLM frauds are common.
The multilevel marketing business in India hit the business industry in the year 1995 with the global MLM company Oriflame. There are several such MLM companies that have seen a spurt in growth in the country.
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The legality of Multilevel Marketing or MLM in India
Multilevel marketing is actually a legal form of business in India. However several illegal and fraudulent MLM companies also operate in the country and run pyramid schemes in order to lure more people to buy faulty products and even scam these people for their money. A legal MLM company is one that functions and operates under legal procedures, thereby, following rules and regulations laid down by the government of the country.
However, the regulatory framework for the MLM industry is weak and thus, it is full of fraudulent practices/schemes that offer quick money but to no avail.
Features of a legal multilevel marketing company are given below:
1. A legal MLM company Will offer a fixed time to its members to achieve financial benefits.
2. High-quality/Legit products are offered by legal MLM companies to their customers, and, these products are backed by certificates of quality.
3. A legal MLM company will offer a fixed amount of incentive or commission to the members basing it upon the performance and sales.
4. A well-defined plan to sell the product or service will be shared with the members of a legal multilevel marketing company by it.
Consult: Top Corporate Lawyers in India
Initially, MLM companies and businesses were treated under the Prize Chits and Money Circulation Schemes Banning Act 1978. However, due to the rising number of multilevel marketing frauds in India on 12 September 2016, the government introduced certain guidelines for MLM/direct selling. The following provisions are included in these guidelines.
1. An Undertaking shall be submitted by each direct selling company to the Department of Consumer Affairs.
2. A multilevel marketing company cannot force the consumer to buy the goods or services more in number than what they can afford to sell or consume.
3. The participation of any individual is required to be free in a strict manner. The company shall not ask for any participation fee including fees for entry, registration, et cetera.
4. A written agreement must be provided and signed by every participant in the business would state the terms of participation in accordance with the Indian Contract Act 1872.
5. The company is required to lay down a cancellation and refund policy regarding the membership.
6. A purchase and buyback policy must be established by a company.
7. A physical office for the company's operation must be present in India.
8. The MLM company shall provide full information regarding the direct selling operations and policies to its direct sellers.
9. The MLM company is required to disclose in a clear and unambiguous manner, the methods of calculating the fees/remunerations/salaries.
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Difference between Legal and Illegal MLM
Several multilevel marketing schemes are launched each day. Although some MLM businesses or Legal with honest intentions and honest businessmen, some are intentionally defrauding and conning gullible people and robbing them of their money. Although it is not easy to identify a genuine MLM business from a fake one, however, there are certain ways through which individuals can understand if a direct marketing business is hinting toward being illegal in nature.
Some features which may differentiate Legal from illegal MLM businesses are explained below:
1. Illegal MLM schemes generally promise an extremely high rate of return, though, in reality, there are no underlying goods or services which would actually bear such value. Whereas a legal and genuine multilevel marketing company is built through the actual sale of products and not over fake promises.
2. In an illegal MLM business scheme, the commission is paid to an agent to merely rope in other investors or agents. Whereas, in a legal scheme, distributors will be paid commissions on the actual and real sale of products and goods by the roped-in agents.
3. In illegal multilevel marketing schemes, there is usually an unreasonably high rate of return for which no reasonable explanation exists. Whereas, a legal MLM scheme involves giving compensation to its agents and distributors based on a reasonable basis.
4. The main aim of an illegal marketing scheme is to make quick and easy money, without giving any valuable product or service, whereas, a legal MLM scheme would not follow this.
Consult: Top Corporate Lawyers in India
Illegal practices of MLM or Multilevel Marketing in India
There are several schemes of Multilevel Marketing in India which is considered illegal. Some of these have been explained below:
1. Ponzi Schemes:
A Ponzi Scheme is a kind of MLM fraud promising a hurry to return to its investors. It is essentially a fraudulent investment scheme. Old investors are paid returns by the cash inflow acquired from the new investors. This scheme thus relies on a constant flow of new investments by new investors and breaks or falls apart when this flow of investments from investors stops.
It is important to understand the difference between a legal MLM scheme under a fraudulent Ponzi scheme. In a Ponzi scheme, a single person controls the funds and the money is transferred from one person to another without making any actual or real investments. The person carrying out the Ponzi scheme tries to gain the confidence of investors and once investors start investing the money and are confident in the Ponzi scheme, such person committing the fraud disappears with all the investments. However, in a pyramid scheme, the person who starts this game will recruit investors and it will be the job of those investors to recruit further investors.
2. Pyramid Schemes:
In India, a pyramid scheme is described as one where the owner or organizer builds a pyramid-like structure, starting with one person who represents the top of the pyramid. Another person is recruited who works under the owner. This other person is required to invest a particular amount of money which is paid to the initial recruiter. Now, to make returns on the invested amount, the new members have to recruit further new members who will now invest fixed amounts of money thereby forming a chain of pyramids. A statement cautioning investors against such pyramid scheme frauds that promise high returns and run on big member subscription fees was released by the reserve bank of India recently. It was stated by the RBI that payment structure schemes or chain marketing promise easy or quick money when enrolling members. The RBI advised that individuals should not be tempted by promises of such high returns as offered by MLM companies that run network marketing, pyramid structure schemes, or chain marketing in the country.
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3. Money Circulation:
Prize Chits and Money Circulation Schemes (Banning) Act 1978 defines a money circulation scheme as “any scheme that assures quick and easy earning money through money chain or if someone demands money from another in order to invest it into a money circulation scheme means any scheme for making quick or easy money or for receiving any money or valuable thing as consideration for the promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions”. Money chain businesses or money circulation schemes or illegal in India.
4. Chit Funds:
Chit funds act defines a chit fund as “a transaction whether called chit, chit fund, chitty, Kuri or by any other name or under which a person enters into an agreement with the specified number of persons that every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period. Each such subscriber in chit fund shall, in his return, as determined by lot or by auction or by tender or in such manner as may be specified in the city agreement, be entitled to the prize amount.”
A group of people contributes a certain fixed amount of money into a pool after which any member is allowed to draw a lump sum amount through ways such as a lucky draw or maybe an auction. Any member may also be allowed to draw money from the chit fund based upon his or her needs.
Consult: Top Corporate Lawyers in India
What to do in case of Fraud by an MLM Company in India?
If you are being lured into a direct selling business or a pyramid scheme by your friends or family, it is important to ask yourself the following questions as part of your personal due diligence:
1. Whether the company is selling a physical product or service that is legitimate.
2. Whether the company has a bank account in a nationalized bank in India.
3. Whether the company pays taxes to the government of India.
4. Whether or not there is a refund policy regarding a product or service and if so whether it is being communicated at the time of purchase.
5. Whether the company has a local office or not.
6. Whether the product is reasonably priced or not.
7. Whether the product works in proper condition as claimed by the salesman or the person luring you.
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If the above questions satisfy you regarding the product/service, the company et cetera, then you can go ahead. However, if you have doubts regarding the answers to the above questions, then, one needs to be careful while delving into such practice/buying such goods or services.
However, a lot of multilevel companies have been found to be illegal after many people became victims of MLM fraud and scams but these companies. If you have also fallen victim to such MLM fraud in India, you must approach a lawyer and take help. Given below are a few steps that you must take in order to seek justice:
1. First of all, you must send a legal notice drafted by a lawyer. This legal notice must be sent to this MLM company and must include the facts which prove how you have been wronged and it must also consist of the compensation/recovery amount that you demand from the said company.
2. If you have been defrauded, you can also file an FIR against the fraud multilevel marketing company and initiate a criminal case against them. A criminal lawyer will guide you in this process.
3. A complaint can also be filed with the registrar of companies if the company is working illegally and violating company laws of the country.
Consult: Top Corporate Lawyers in India
How can a Lawyer Help you?
In a situation where you are scammed or defrauded by a multilevel marketing company that is illegal, it is the best practice to consult a good criminal lawyer or a corporate lawyer . A criminal lawyer will help you understand what approach you should take, he/she will guide you in the right direction and will initiate the correct steps on your behalf. A lawyer can help prepare a case against an MLM company and will help in drafting, appearing on your behalf, presenting evidence in court et cetera. Thus, it is imperative to hire a good lawyer in order to get justice when you have been wronged.
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