Government issues model guidelines for states to curb Ponzi schemes

In the guidelines, the government has clearly defined legitimate direct selling and differentiates it from pyramid and money circulation schemes to help investigating agencies identify fraudulent players.

By: PTI | New Delhi | Updated: September 12, 2016 8:04 pm
Ram Vilas paswan, Union minister and LJP president, JNU row, kanhaiya kumar, kanhaiya kumar in tihar, kanhaiya kumar in jail, paswab condemns violence, paswan JNU, india news The ‘Direct Selling Guidelines 2016’ framework was released by the Food and Consumer Affairs Minister Ram Vilas Paswan and has been sent to the states and Union Territories for adoption. (Source: PTI)

To protect consumers from Ponzi frauds, the Centre on Monday issued model guidelines for states to regulate direct selling and multi-level marketing businesses while prohibiting pyramid structures as well as money circulation schemes.

The ‘Direct Selling Guidelines 2016’ framework was released by the Food and Consumer Affairs Minister Ram Vilas Paswan and has been sent to the states and Union Territories for adoption.

In the guidelines, the government has clearly defined legitimate direct selling and differentiates it from pyramid and money circulation schemes to help investigating agencies identify fraudulent players.

“Direct selling means marketing, distribution and sale of goods or providing of services as a part of network of direct selling other than under a pyramid scheme,” the guidelines said. They have also defined Pyramid Scheme. Money Circulation Scheme has the same meaning as defined under Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

To conduct direct selling business, the guidelines have prescribed many conditions that need to be complied within 90 days such as direct selling firms should be a registered legal entity.

They bar direct selling companies from charging any entry fee from agents or compelling them to buy back unsold stocks. These entities will have to enter into an agreement with direct sellers or agents, and give full refund or buy-back guarantee for goods and services sold to them.

“We are sending the model guidelines to all State governments. States can make some change as per their localised requirements. The guidelines were necessary for better growth in the direct selling business,” Consumer Affairs Secretary Hem Pande told reporters in New Delhi.

He said the guidelines will help protect consumers as direct sellers can now be identified, and goods exchanged.

The guidelines also mandate direct sellers to constitute a grievance redressal committee to protect consumers right.

It has also laid down remuneration system for the person engaged by direct selling firms on sharing of incentives, profit and commission.

The guidelines have also made provision for appointment of monitoring authority at both Central and state level to deal with the issues related to direct selling.

Prohibiting pyramid and money circulation schemes, they said: “No person or entity shall promote a pyramid scheme as defined in Clause 1 (11) or enroll any such person to scheme or participate in such arrangement in any manner whatsover in the garb of direct selling business.”

The guidelines also prohibit direct selling entities from using misleading and deceptive or unfair recruitment practices.

A direct selling entity should not ask direct sellers “to provide any benefit including entry fees and renewable fees or to purchase any sales demonstration equipment or material in order to participate in direct selling operations”.

The guidelines have also put conditions for contract between direct sellers and direct selling entity, saying that all such agreements should be in writing describing the material impact of the participation.

The agreement should not compel or induce the direct seller to purchase goods or services in an amount that exceeds an amount that can be expected to be sold to consumers within a reasonable period of time.

The contract should provide direct sellers a “reasonable cooling-off period” in which they can cancel it and receive a refund for goods and services purchased.

The guidelines have also specified certain obligations of direct sellers such as carrying identity card, and full disclosure of the good and services offered by the entity represented by them.

“The Direct Selling entity will be liable for grievances arising out of sale of products, services or business opportunity by its direct sellers,” the guidelines said.

The new guidelines mandate a seller to provide information about the name of the purchaser and seller, delivery date of goods, procedure of its return and its warranty.

The Consumer Affairs Ministry said in a statement that “state governments/ UTs may kindly take necessary action to implement the same”.

“It is envisaged in the guidelines that the State Governments will set up a mechanism to monitor/supervise the activities of Direct Sellers, Direct Selling Entity regarding compliance of the guidelines for Direct Selling,” it added.

Direct selling entity has been asked to submit an undertaking to the Department of Consumer Affairs within 90 days, stating that it is in compliance with these guidelines.

Shilpa Gupta, Director of Regulatory Services, PricewaterhouseCoopers, “Ministry of Consumer Affairs has truly created a milestone in approving the guidelines . Its a very progressive move towards a consumer driven regulatory era.”

“It would however be important that these guidelines also get statutory teeth and be anchored to the Consumer Protection Act itself. It would be crucial to define pyramid schemes under unfair trade practices and expose the consumer to his right to protection from such unfair trade practices. Adoption of these guidelines by the State governments, will further enable a conducive ecosystem for Direct Selling industry in India,” she added.

The process for framing a proper guidelines was started in 2013 by the government after the police had arrested the then Amway’s India Chairman William S Pinckney and two company Directors over allegations of fraud in Kerala under the Prize Chits and Money Circulation Schemes (Banning) Act.

The ministry had held round of discussions with all stakeholders to frame guidelines to make a clear distinction between genuine direct-selling companies and fraudulent Ponzi schemes.