Is Multi-Level Marketing (MLM) Legal in India?
MLM companies in India include Amway, Avon flouted the Indian market with a bid to increase direct sales. With the growth in MLM marketing companies in India, the question is MLM legal or is MLM illegal has been raised.
By Apeksha Pandita in Default or Fraud
Oct. 31, 2018, 12:15 p.m.
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MLM is what multi-level marketing is famously known as. Also referred to as pyramid selling, network marketing, and referral marketing.
It’s 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 in India or any other place 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 put on the workforce.
Some of the best MLM company in India include names like Amway, Avon, MaryKay, Forever Living, and the likes, which floated the Indian market with a bid to increase direct sales and provided employment opportunities that aimed at housewives, retired persons, and unemployed people.
Work from home has always been a lucrative opportunity for everyone!
The multi-level marketing or MLM business plan really hit the Indian business industry back in 1995 with global MLM company Oriflame being the flagbearer of network marketing in India. Soon Tupperware 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 in India of so many multi-level marketing companies, let’s understand MLM in depth and read below to know the legality of multi-level marketing in India.
What is Multi-level Marketing (MLM) in India?
Multi-level marketing in India is legal and is the broad terminology given to marketing which takes 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 guideline 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 company such as Tupperware use a network marketing strategy.
As per DSN report, the top ten MLM company in India include of:
|2.||Avon Products Inc.||$5.70B|
The scheme of earning commission based remuneration and perks depending upon the performance of network marketer was seen as a cost-effective method of earning from home and has provided for opportunities under the MLM business in India.
People have become millionaires while many didn’t receive the expected financial proceeds against these schemes. This business works on the direct selling model where the buyer directly purchases a product from the company, instead of involving a middleman.
However, there is a major MLM legal issue in India that is encountered with the protection of consumers. Often marketing scams in India by such companies are done against the innocent public to rob them of their money, where consumers are left with no legal remedy.
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What is the legality of MLM in India?
Network marketing is legal in India and so are multi-level marketing schemes, except for certain businesses which 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 materialise and render huge loss 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 not considered legal:
- A pyramid scheme in Indian law is described as the scheme where the organiser builds a structure of pyramid which starts with one person, who represents the tip of the pyramid.
- This person recruits another person under him, who is required to invest a certain amount which is paid to the initial recruiter.
- In order to make returns on his 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 promise high returns and run 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 in India 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 ‘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.
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- 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 with the money.
- Once the investor gains confidence and other investors start investing money, the person committing the fraud disappears overnight 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.
- A chit fund has been defined under the Chit Funds Act, 1982 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 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; and some are involved in MLM frauds having con men, who lure a gullible audience to rob their money.
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It might get difficult to identify a genuine or fake multi level marketing in India. List of companies are into network marketing and there is a way 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 and in most cases, but 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 is MLM legal in India, 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 list of multi level marketing companies has been found to be illegal after people who became victim to 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 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.