In May this year, three senior executives of Amway, the American multinational direct selling company which sells a variety of personal care products, were arrested in Kerala. The executives, including its India CEO, were taken into custody following complaints from distributors that Amway had not given them the incentives promised even after they stumped up money for its products. The officials were later released on conditional bail.
The incident has given a fresh impetus to the demand for a specific law dedicated to regulating direct selling (DS) in India. At present direct selling — where products are marketed directly to consumers, doing away with the whole intermediary structure of wholesalers and retailers — comes under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, or the PCMCS Act. Stakeholders in the field are also calling for an amendment of this law as it has no clear definition of direct selling.
In fact, a long-standing demand of the Indian DS community is that the PCMCS Act should be amended because the “vagueness” of some provisions apparently leads to legitimate companies getting lumped with Ponzi schemes. As far back as in 2002, it was noted in Parliament, “The main contention... was that members of Direct Selling Association are being targeted owing to the vagueness of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, in distinguishing between Prize Chit Funds and genuine agencies involved in direct marketing.”
According to the PHD Chamber of Commerce and Industry (PHDCCI), the north India-based business lobby group which has a research-based policy advocacy role, almost all Indian states regulate DS under the 1978 act. At the state level, the sale of goods by direct selling companies are regulated under the Indian Contracts Act, Sale of Goods Act and Consumer Protection Act. However, Kerala and Rajasthan formulated DS-specific guidelines in November 2011 and October 2012, respectively.
The Forum for Direct Selling Companies and Consumers of India (FDCI) says many genuine DS companies in India face harassment, thanks mainly to the PCMCS Act. “There is even a pattern in harassment by enforcement authorities — a general consumer complaint (which all companies contend with on a daily basis) is turned into a criminal case by the police and FIRs filed under Section 420 of the Indian Penal Code and the PCMCS Act,” says P.A. Joseph, general secretary, FDCI and national secretary for the Indian National Trade Union Congress (INTUC). DS companies such as K-LINK, DSN, SamiDirect, HerbaLife and QNET have apparently been unfairly targeted using the act.
Lawyers say the PCMCS Act was enacted long before the DS industry started operating in India in 1995. Its main purpose was to control chits and other benefit or savings schemes. “The latter were deemed prejudicial to the public interest and also affected the efficacy of fiscal and monetary policies,” says Niloy Pyne, senior partner, Lakshmikumaran & Sridharan Attorneys, a corporate law firm. “Thus prize chits or money circulation schemes were banned under Section 3 of the PCMCS Act.” Violation of the provisions attracts imprisonment for up to three years or a fine up to Rs 5,000 or both.
Pyne says that the act has no statutory definition of either DS or Ponzi schemes, and this is confusing.
The industry feels that in addition to PCMCS amendments, a central law is the need of the hour to define the guidelines and regulatory framework and addressing in detail more specific issues such as the compensation plan, fair pricing, consumer rights and code of ethical marketing. Senior Amway officials point out that apart from the US and the UK, several Asian countries such as Thailand, Malaysia and Singapore have specific laws on DS.
William S. Pinckney, managing director and chief executive officer, Amway India, says, “India does not have specific guidelines for direct selling companies. Various authorities try to put the segment under various laws and these are not really applicable. In the absence of a clear definition of direct selling, regulators can’t tell the difference. The solution is to create a new law defining direct selling, registering direct sellers and establishing the principle that distinguishes direct sellers from pyramid schemes. In fact, direct selling should be taken out of the ambit of the Prize Chits and Money Circulation Schemes (Banning) Act.”
The industry says there are compelling economic reasons to bring in effective legislation for DS in India. A recent PHD Chamber report says the industry segment posted impressive growth in recent years. For example, its revenue went up from Rs 5,229 crore in 2010-11 to Rs 6,385 crore in 2011-12.
Experts too underscore the benefits of the DS industry. In a report on DS prepared for Indicus Analytics, a premier economics research firm in India, economist Bibek Debroy notes, “DS through multi-level marketing is a form of disintermediation and has the obvious advantage of reduction in transaction costs and bridging the gap between consumer prices and manufacturer prices.”
He says, moreover, “The benefits are further enhanced when we consider the impact as an additional source of employment, often to untrained and otherwise unemployable persons and also often to women.”
Stressing that Indian policymakers need to better comprehend the nuances of the DS and MLM industry, the report calls for clear definitions of direct selling, including MLM and pyramid or Ponzi schemes.
Experts say clear guidelines are also needed to check fly-by-night operators in the DS segment. Take the multi-crore Speak Asia scam that broke in 2011. The Singapore-based online company had several lakhs of Indian investors who were allegedly asked to pay Rs 11,000 annually and were assured that they would get Rs 52,000 a year in exchange for conducting online surveys for the website. Needless to say, they never got the promised returns.
According to the FDCI, currently there is no single Indian ministry that regulates DS in India. P.A. Joseph says that an inter-ministerial group, led by Pankaj Agrawala, secretary, ministry of consumer affairs (MoCA), and comprising representatives from the finance and the corporate affairs ministries, is busy formulating some kind of a regulatory framework.
According to sources, the MoCA has said in a recent meeting that a final recommendation is still awaited, after receiving inputs from industry. In all probability, the focus will remain on the PCMCS Act amendments, being currently dealt with by the department of financial services under the Indian finance ministry.
From all accounts the DS industry is desperate for a new law or at least amendments to the existing PCMCS Act. However, with the Lok Sabha polls looming next year, it is unlikely that the government will take any concrete step in this regard right now.
Hence it may be a while before the direct selling industry in India can begin to check the boxes on its wishlist.