What is Multi-Level Marketing Company (MLM Company)?

MLM (Multi-level marketing company) is a marketing promotional strategy in which a sales person sells the products or services for particular MLM business and recruits new sales promoters under his/ her downline to further sales of products and services. this is a system of marketing in which a hierarchal pattern is followed where The sales promoters are organized in a pyramid structure. The aim of salesman is just not to sell the product, but also to lure some more people to carry on the chain of selling the product further, and the chain goes on and on. Here the profits of the initial salesperson continuously increase as the chain grows on. This is also known as multi-level marketing, network marketing, matrix marketing, etc.

Why It Is Called Direct Selling

Direct Selling is an alternate form of distributing products and services. Instead of using traditional distribution channel (manufacturer – distributor – wholesaler – retailer – consumer), Direct Selling companies sell their products and services directly to consumers. That is why it is called ‘Direct Selling’.

When these consumers or customers like their products and services, naturally they start sharing it with others. Direct Selling companies pay you when people buy their products and services from your recommendation.

But the awesomeness doesn’t stop there, you are given an option to build a team of distributors (generally consisting of happy consumers recommended by you and those you recommend and those they recommend and so on…). Contrary to common misconception, you are not paid to recruit people, you are paid depending on the total sales volume generated by your entire team. Instead of spending money on traditional advertisements & other marketing methods, Direct Selling companies rewards their consumers turned distributors for their word of mouth advertisement effort.

Unfortunately, most people are unaware of the clear definition of this industry, and frequently confuse it with pyramid schemes recruiting people to earn money.

How to Start MLM Business

To start a new MLM company you need to register the company under the specific Act of your country law and follow the guidelines of the law and also discuss with your Company Secretary for certification and other formalities. Decide the products or services you want to sale and choose the best MLM compensation plan as per your business strategy.

There are various types of MLM plan in MLM business industry like Forced Matrix, Binary Plan, Australian Binary, Stair-Step Plan, Uni-Level Plan, Generation Plan, Board MLM Plan etc.

Why Indian Laws Against MLM

There is a law made for regulating chit fund and money circulations in India which is “The Prize Chits And Money Circulation Schemes (Banning) Act, 1978”. This ACT is Made TO BAN THE PROMOTION OR CONDUCT OF PRIZE CHITS AND MONEYCIRCULATION

According to this law money circulation scheme means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the 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

Government guidelines for MLM companies in India

To regulate the sale of goods and services outside of retail establishments otherwise known as “Direct Selling (Multi Level Marketing)” and to provide for protection of consumers who purchase goods and services from direct sellers, following guidelines are issued with the approval of the Competent Authority. These guidelines have come into force from the date of publication in official Gazette and will remain in force till an appropriate legislation is enacted for the said purpose.

Basic MLM Guidelines by the Governments are as follows:

1. Definitions:-

Direct Selling: Means marketing or sales of goods directly to the end user consumer using word of mouth publicity, display and/or demonstrations of the goods/products, and/or distribution of pamphlets. Explanation: Companies can open pick up points and delivery points for maintaining effective delivery system.

Direct Selling Entity: Means a business entity as recognized by law for the time being in force including but not limited to a Company duly incorporated under the Indian Companies Act, a registered Partnership Firm constituted under the Indian Partnership Act.

Direct Seller: Means a person who is authorized by the Direct Selling Entity to engage into the business of Direct Selling.

Consumer: An individual who buys goods or services for personal use and not for manufacture or resale and shall have the same meaning as provided under the Consumer Protection Act. 1986.

Goods/products: Goods/Products shall have the same meaning as defined in the Sale of Goods Act and section 3(26) of the General Clauses Act, 1897, that is, it shall include every kind of movable property other than actionable claims and money.

Sales Incentive: Sale incentive means share of profit payable to the Direct Seller for effecting sale of goods/products as stipulated in the contract between the Direct Seller and the Direct Selling Entity.

2. Conditions for Permissible Direct Selling:-

(i) Should be a Direct Selling Entity, having GST No., Income Tax, TDS and other license as may be required as per the law/regulations of its principle place of business.

(ii) Should have bank account with at least one nationalised bank.

(iii) Memorandum of Association should clearly state their nature of business.

(iv) Pay sales incentive at the agreed rate within the agreed period.

(v) Shall display names and Identification numbers of their authorized Direct Sellers in the official websites.

(vi) Should have a consumer grievance cell that should ensure redressal of consumer grievances within 7 days from the date of making such complaints.

(vii) Website should provide space for registering consumer complaints hassle free.

3. Appointments/Authorisations:-

(i) Direct Selling Entity shall appoint/authorise Direct Sellers upon receipt and scrutiny of application in a prescribed format.

(ii) An agreement recording terms of such appointment should be executed between the Direct Selling Entity and Direct Seller.

(iii) No application should be considered unless such applicant is eligible to enter into a contract under the Indian Contract Act.

(iv) Each Direct Seller shall be allotted Unique Identification Numbers before granting license/permission to start Direct selling.

(v) Direct Selling Entity should not give incentive to any persons for joining of Direct Sellers.

4. Prohibition:-

(i) Payment of incentive by whatever name it is called unrelated to their respective sales volume.

(ii) Supply/Distribution of goods with the knowledge that such goods/products are inferior or exceeded its validity period as per the manufacturer.

(iii) Direct Selling Entity/Direct Seller will not indulge in money circulation scheme or any act barred by the Prize Chits and Money Circulation Scheme (Banning) Act, I978.

5. General Conditions:-

MRP of the goods should be visibly displayed on the package.

Accounts of individual Direct Sellers shall be maintained properly and should be made available through World Wide Web.

Sales incentive should be distributed to the respective Seller on or before the agreed due dates.

Goods sold by the Direct Selling entity should carry guarantee/warranty of the manufacturer. However consumer should be given opportunity to exchange/return the goods if he finds any manufacturing defect or the product purchased is not useful for the purpose it was meant, within 30 days from the date of purchase, provided any seal/protection on the product is kept unbroken.

6. Information Readiness (Ready Information file):-

Every Direct Selling Company should maintain a file with all relevant documents that include:

Certificate issued by Registrar of Companies, MOA and MOM.

Xerox copies of GST, DIN of Directors, TAN, PAN.

Certificate of GST Registrations.

Copies of all GST Returns filed with the authorities.

Copies of IT Returns of company filed with the authorities.

TDS Statements of Distributors and respective challans paid.

Every Direct Selling Company should maintain KYC/KYDS (Know Your Customer/Know Your Direct Sellers) as a mandatory process. Specific formats are to be provided on their websites to be available for all at any time.

7. Grievance Redressal Mechanism:-

Every Direct Selling Company must have a complaint redressal mechanism to address any problem of their customers/Direct Sellers.

8. Breach of Guidelines:-

The sale activities not following the above guidelines shall not be considered as Direct Selling and would be dealt appropriately under relevant provisions of existing laws.

Conclusion: Indian Government laws are not against the MLM Business since, it is the basis of providing employment opportunities to a large no. of people but since, the government has seen a no of business concerns doing the business of CHIT Fund Companies etc., hence, it keeps an eye over such MLM Business. But if any of the MLM company go by the laws of the State and does his business in a systematic way, there are no restrictions all around.

The author is a legal consultants with a no. of MLM companies and hence written this article on basis of his experience being earned from such companies.