Is Multi-Level Marketing (MLM) Legal in India?

MLM refers to multi-level marketing. It is also known as pyramid selling scheme, network marketing, and referral marketing. According to 2015. As per the FICCI report compiled by KPMG in 2015 direct selling is an INR 75 Billion Market in India. Direct selling is a legitimate business with significant tax revenue and self-employment opportunities across the country. 

Multi-Level Marketing is a marketing strategy used mostly by pyramid-structured companies for selling products and services, where workers act as both salespeople and buyers and the revenue of an MLM company is then derived from this non-salaried workforce. 

This is done so that MLM companies in India or in the world maintain a steady number of sales, while the burden of having to sell & distribute the product/services is not put on the workforce alone.

The multi-level marketing or MLM business plan really hit the Indian business industry in 1995 with global MLM company Oriflame being the flagbearer of network marketing in India. Soon Tupperware's multi-level marketing was launched and the Indian market was flooded with MLM business opportunities. 

According to DSN, the fastest growing MLM company in India is Amway. And seeing the spurring growth of so many multi-level marketing companies, let’s understand MLM in-depth to know the legality of multi-level marketing in India. 

What is Multi-level Marketing (MLM) in India?

Multi-level marketing in India is a broad terminology given to marketing which takes place through a distributor network such as a pyramid scheme or a direct selling scheme in India. 

It is employed by companies employing direct sales strategies under direct selling guidelines 2016 to encourage their existing distributors to recruit new distributors by giving the existing distributors a commission on the sales of the new distributors. Some of the famous network marketing companies such as Tupperware use a network marketing strategy.

MLM company in India as per DSN report includes:

The scheme of earning commission-based remuneration and perks depending upon the performance of the network marketer was seen as a cost-effective method of earning from home and has provided for opportunities under the MLM business in India. This business works on the direct selling model where the buyer directly purchases a product from the company, instead of involving a middleman. 

However, thanks to the weak regulatory framework in India, the MLM industry is full of fraudulent practices, schemes offering quick bucks that bring negativity to the entire sector. If you are being lured by one of your friends or family members into a direct selling business or a pyramid scheme, ask yourself the following questions as part of your personal due diligence. 

1. Is the company selling a legitimate physical product or service?

2. Does the company have a bank account in a nationalized bank?

3. Does the company pay taxes? 

4. Is there a refund policy, if yes is that being communicated during the purchase?

5. Does the company have a local office?

6. Is the company listed as a legitimate business with the government?

7. Is the product priced reasonably?

What is the legality of MLM in India?

Network marketing is legal in India. So are multi-level marketing schemes, except for certain businesses that are categorized as illegal multi-level marketing, as they are done to trap innocent consumers who invest in MLM schemes, and there is no actual trade in goods and services directly by the investors or the promoters. Rather, there is just a promise that returns will be gained by the investor. However, such promises never materialize and render huge losses to investors. 

Due to this, the government of India has identified a few types of network marketing fraud strategies as illegal in India in order to protect consumers. These network marketing schemes are not legal in India under the Direct Selling Guidelines 2016 and Prize Chits & Money Circulation Schemes (Banning) Act 1978 (pdf). 

Following schemes of MLM India are considered illegal:

Pyramid Schemes

A pyramid scheme in Indian law is described as the scheme where the organizer builds a structure of a pyramid which starts with one person, who represents the tip of the pyramid 

• A person recruits another person who works under him/her. And this person is required to invest a certain amount which is paid to the initial recruiter 
• In order to make returns on his/her investment, the new member has to recruit more investors who invest a fixed sum of money, thereby forming a chain of pyramids
• Recently, the Reserve Bank of India (RBI) released a statement cautioning investors against pyramid scheme fraud, that promises high returns and runs on hefty member subscription fees 
• The RBI stated that MLM, chain marketing or pyramid structure schemes, promise easy or quick money upon enrolment of members. The RBI advised that the public should not be tempted by promises of high returns offered by multi-level marketing companies, that run network marketing, chain marketing or pyramid structure schemes in India.

Money Circulation Schemes 

A money circulation scheme has been defined under Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

• It states, “As any scheme which 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 a 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 Circulation Schemes or money chain business are not legal in India

Ponzi Schemes

A Ponzi Scheme is a fraudulent investment scheme and is a kind of MLM fraud which promises a high rate of return to its investors 

The returns are paid to the old investors by employing the cash inflow of the new investors. Thus, the scheme relies on a constant flow of new investments and falls apart when the flow of investors stops

• It is essential to understand the difference between a Ponzi scheme and any other type of multi-level marketing scheme such as a pyramid structure 
• In a Ponzi scheme, there is a single person who controls the funds and only transfers the money from one person to another, without making any real investments of the money
• Once the investor gains confidence and other investors start investing money, the person committing the fraud disappears with all the investments
• On the other hand, a pyramid scheme is structured in such a manner that the person who starts the scheme will recruit a few investors and it will be the task of those investors to recruit further investors

Chit Funds

A chit fund has been defined under the Chit Funds Act, 1982(1) as “a transaction whether called chit, chit fund, chitty, Kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period.

• Each such subscriber in chit fund shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”
• The way it works is that a group of people contribute a fixed sum of money into a pool 
• After this, any member can draw a lump sum through ways such as a lucky draw or an auction (eg: If there is a group of 10 people and the contribution paid by each person is Rs. 1000 a month, then the pool is Rs. 10,000.)
• Any member-based on his needs can draw money from the chit fund.

What is the difference between Legal and Illegal MLM in India?

A new multi-level marketing scheme is launched every other day! 

While some MLM is legal, having actually honest businessmen; some are involved in MLM frauds having conmen, who lure a gullible audience to rob their money. 

It might get difficult to identify a genuine or fake multi-level marketing in India. But there are some ways to know the difference between network marketing that is legal and illegal in India, such as:

• The general features of MLM scheme which is not legal in India are that there is a promise of a very high rate of return, but in most cases there is no underlying goods or services which bears any value

• On the other hand, a legal multi-level marketing company in India like Tupperware is built through the actual sale of products

• In illegal network marketing schemes, commissions are paid to agents for merely roping in other agents or investors. Whereas, in a legal scheme, distributors are paid a commission on actual product sales of the agents who they have roped in.

• There is usually an unreasonably high rate of return, for which there is no scientific explanation in illegal MLM schemes. On the other hand, a scheme in MLM  is, when there is a scientific basis established for giving compensation to its agents and distributors

• Usually, in an illegal affiliate marketing scheme, the plan works on the basis that it is an opportunity to make quick and easy money, whereas such is not the case in a legal MLM.

What to do if you are scammed by a fraud MLM Company in India?

A lot of multi-level marketing companies have been found to be illegal after people who became the victim of the MLM fraud and MLM scams brought the companies’ illegal affairs out in the open to the notice of authorities. One such was, Qnet - the infamous company that was charged with fraud as a Multi-Level Marketing (MLM) company in India. 

If you’ve also fallen victim to such multi-level marketing frauds in India, you can always take the help of the law! 

• Firstly, you can send a notice, drafted by a lawyer to the MLM company if it has taken your money and is not returning it
• You can also file an FIR against the fraud MLM Company and let the police initiate a criminal case against them
• A complaint with the Registrar of Companies can be filed, if the company is working illegally and violating company laws

Who can help you here?

In the advent of such a situation where you are scammed by a multi-level marketing illegal company, it is best to consult a good lawyer near you, who can help you understand what approach and steps would be right. 

To get connected with expert lawyers in India and get the best consultations, you can approach MyAdvo and we’ll help you find an expert and provide assistance in filing a complaint against any fraud MLM company in India. Just ask a legal question at consult@myadvo.in or call at +91-9811782573.

MyAdvo is one of India’s leading legal-tech service facilitator, working with the aim of making legal simple. We act as Client's legal concierge providing technology solutions for Lawyer Discovery, Price Discovery and Case updates. With a huge network base of 10,000+ advocates across 500+ districts in India, you can seek MyAdvo for all your diversified legal needs and requirements and get the best legal remedies. 

References 

• Federal Trade Commission report on MLM
• Ficci Report on Direct Selling Market in India