28 July 2021
Unlike the erstwhile Consumer Protection Act, 1986, the Consumer Protection Act, 2019 (“CPA 2019”), has defined ‘direct selling’[1], and expressly included any person who buys products or avails services through direct selling or multi-level marketing within the definition of ‘consumer’.
However, a framework for regulating direct selling under the CPA 2019 has not been put into place till now. With the recently released draft Consumer Protection (Direct Selling) Rules, 2021 (“Draft Rules”), the Department of Consumer Affairs has finally taken demonstrable steps towards formalising the regulatory framework for direct selling entities in India.
Model Framework on Direct Selling: Failure to launch
The foundation for the regulatory framework for the direct selling industry was laid with the Model Framework for Guidelines on Direct Selling (“Guidelines”), notified on October 26, 2016. This was a noteworthy milestone for the industry in India, as until then, direct selling entities were riddled with uncertainty around the legitimacy of their business models, in the absence of a legal framework distinguishing genuine direct selling networks from illegal pyramid and ponzi schemes.
However, the Guidelines were in the nature of an advisory, requiring states/ union territories to formulate and implement a mechanism to monitor the activities of direct selling entities and direct sellers. In furtherance of the Guidelines, only certain states such as Chhattisgarh, Sikkim, Orissa, West Bengal, Maharashtra, Himachal Pradesh, Punjab and Karnataka notified guidelines, modelled on the Guidelines over a span of four years. Further, since the Guidelines and the state guidelines have not been issued or adopted as rules/ regulations under any central or state legislation, their enforceability has been in question. In Amazon Seller Services Pvt. Ltd. and Ors. v. Amway India Enterprises Pvt. Ltd. and Ors.[2] (“Amazon Case”), while dealing with questions pertaining to sale of products of certain direct selling entities on e-commerce platforms, the Division Bench of the Delhi High Court, held that the Guidelines were only advisory in nature and “merely because the DSGs are notified in the Gazette, they do not attain the status of “law” within the meaning of Article 13 of the Constitution” and were therefore not enforceable. This issue will now be addressed with the Draft Rules being issued, pursuant to the rule-making power conferred on the Central Government in terms of Section 94, read with Section 101 (2) (zg) of the CPA 2019, for the purposes of preventing ‘unfair trade practice’ in direct selling. The Draft Rules, when enacted, will be uniformly applicable across India, ensuring smoother implementation of the regulatory framework for the industry.
Overview of the Draft Rules: Hints of a second wind
The basic tenets contained in the Draft Rules have been derived to a large extent from the Guidelines. The Draft Rules clearly distinguish between ‘direct selling networks’, ‘money circulation schemes’ and ‘pyramid schemes’ and prescribe that a direct selling network should neither involve any provision for a direct seller to receive remuneration or incentives for recruitment/ enrolment of new participants in the network except as a result of sale of goods and services by them, nor require a participant to pay any entry/registration fee or cost of sales demonstration equipment or other such fees relating to participation. A direct selling entity is also precluded from requiring direct sellers to purchase goods or services, exceeding such quantum and values that can be expected to be sold or resold to consumers. A direct selling network has to allow a participant a reasonable cooling-off period (of not less than 30 days) to cancel participation in the direct selling business and should also provide for a buy-back or repurchase policy for ‘currently marketable’ goods, which are not unpacked, on reasonable terms.
Further, as was done under the Guidelines, the Draft Rules also list down duties and obligations of direct selling entities under which the direct selling entity is required to be appropriately incorporated as a company/ partnership firm/ limited liability partnership under the applicable laws of India; to be the owner, holder, licensee, of the trademark/ service mark, identifying the entity with the goods or services it sells or renders; and maintain an updated website with inter alia the details of the entity, management product information (including information relating to pricing, return, refund, exchange, warranty and guarantee, delivery, payment and shipment) and a grievance redressal mechanism for consumers.
Moreover, in order to protect the interests of consumers, direct sellers and direct selling entities will inter alia be required to ensure that they are providing clear, accurate and complete offer terms to customers with respect to price, terms of payment, return rights, terms of guarantee, after-sales service and delivery with factual descriptions, claims and illustrations being capable of substantiation; fulfilling orders within the specified delivery dates and facilitating cancellations and refunds as applicable on account of delays; not engaging in any misleading, deceptive or unfair trade practices or fraudulent activities/ sales or coercion or harassment; and taking appropriate steps for protection of personal information of the consumers.
Direct selling entities are required to maintain records of all direct sellers within its network, enter into legally binding contracts with them, monitor their business practices and compliance with the rules and take disciplinary action against errant direct sellers. Additionally, every direct selling entity is mandated to keep a record of and display on its website and at its premises, details of such direct sellers who have repeatedly offered defective or spurious goods or deficient services. Direct selling entities shall be liable for any grievances arising out of sale of products, services or business opportunities by its direct sellers.
Coming close on the heels of the draft amendments to the Consumer Protection (E-Commerce) Rules, 2020 (“Draft E-Commerce Rules”), these Draft Rules propose a number of similar requirements for direct selling entities as are proposed for e-commerce entities under the Draft E-Commerce Rules. These include, mandatory registration with the Department of Promotion of Industry and Internal Trade (DPIIT) (for every direct selling entity as well as every direct seller operating in its network) and appointment of dedicated executives like a Grievance Officer for consumer grievance redressal; a 24X7 nodal contact person for coordination with law enforcement agencies in relation to their orders and requisitions; and a Chief Compliance Officer who will be responsible for compliances under the CPA 2019 and the rules thereunder and shall be liable in any proceedings relating to any data or communication pertaining to the direct selling entity.
E-commerce platforms v. Direct Selling entities: End of the faceoff
The enactment of these rules may also bring an end to the long-drawn tussle between the direct selling entities and e-commerce marketplaces. The Guidelines provide that any sale or offer for sale of any product or service of a direct selling entity on an e-commerce platform must be undertaken only with the prior written consent from the respective direct selling entity. However, the Division Bench of the Delhi High Court in the Amazon Case had overruled the decision of the Single Judge bench, restraining e-commerce platforms like Amazon, Flipkart, Snapdeal and 1MG from listing products of direct selling entities like Amway, Modicare and Oriflame without their consent, holding that the Guidelines were not law and hence unenforceable in the court. Having said that, the Division Bench did take cognizance of the fact that the aforesaid provision has been replicated in the Draft Rules, formulated under the CPA 2019 and that once the Draft Rules are enacted, the provision will be open for challenge before a court of law. An appeal against the judgment of the Division Bench in the Amazon Case has been filed before the Supreme Court of India and it will be interesting to see the rulings of the apex court on the matter, especially if the rules are enacted and brought into force during the pendency of the appeal.
Concluding Remarks
The release of the Draft Rules has been welcomed by all concerned, including industry bodies such as Indian Direct Selling Association[3], and with good reason. The Draft Rules seem to provide enough safeguards not just for the consumers, but also to protect the gullible common man who may get swayed to invest his hard-earned savings in a direct selling business. When enacted, these rules will bridge the regulatory gap for the direct selling industry in India and contribute towards its growth, thereby benefitting all stakeholders viz. the direct selling entities, direct sellers and consumers at large.
For further information, please contact:
Mukul Sharma, Partner, Cyril Amarchand Mangaldas
mukul.sharma@cyrilshroff.com
[1] The CA 2019 defines “direct selling” to mean marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location.
[2] 2020(81)PTC399(Del)
[3]https://www.uniindia.com/idsa-welcomes-move-to-regulate-direct-selling/business-economy/news/2442892.html, https://www.financialexpress.com/industry/direct-selling-players-say-draft-norms-to-boost-sector/2285193/
