Centre’s Regulation of Direct Selling

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This topic of “Centre’s Regulation of Direct Selling” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.

What is direct selling?

  • Direct selling refers to the sale of products, in a non-retail environment, directly to the consumers.
  • Such sales take place at homes, workplaces, online and other non-store locations.
  • In this system, intermediaries like wholesalers and regional distribution centres are eliminated.

What are the highlights of the new rules?

  • In 2021, the Centre notified the Consumer Protection Rules 2021, applicable to all goods and services transacted through direct selling, companies (including those not established in India) offering goods and services to consumers through direct selling model.
  • The rules mandate direct selling entities like incorporations (under Companies Act, 2013), partnership firms (under Partnership Act, 1932) and limited liability partnerships (under LLP Act, 2008) be registered under the respective statute.
  • The rules prohibit direct selling entities from promoting pyramid schemes or enrolling persons to such schemes under the guise of direct selling. It prohibits companies from participating in money circulation business under the guise of direct selling business.
  • The rules direct state governments to establish a mechanism for supervision of entities involved in direct selling.
  • It is now mandatory for direct selling entities to have atleast 1 physical location in India as its registered office and for companies to make a self-declaration that a direct selling entity has complied with these rules.
  • These entities are required to have a prior written contract, with its direct sellers, authorizing them to sell its goods or services. The contract is to have just, fair and equitable terms of agreement.
  • The entities are required to verify the identities and physical addresses of its direct sellers. Identity cards and documents are to be issued only to such verified sellers. The entities are required to maintain a record of its sellers and are liable for grievances rising out of their product’s sale by their direct sellers.
  • The entities are required to establish a mechanism for taking complaints from consumers, through its direct sellers, offices or branches- either in-person or via post, telephone or online medium.
  • Upon request from the consumers, entities are required to furnish information regarding any of its direct sellers from whom the consumer had made a purchase, for grievance redressal.
  • The entities are required to ensure that the advertisement for their goods and services are consistent with the actual conditions, characteristics and access of the same.
  • Entities are prohibited from falsely representing themselves as consumers and posting reviews on their products and services.
  • The entities are also required to maintain a record of information for identification of delisted sellers. This list must be publicly accessible on the entity’s website.

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Why is this significant?

  • These rules have taken shape after 7 years being spent at the drawing board. The 1st inter-ministerial committee convened in 2014.
  • The rules’ objective is to tackle Ponzi schemes and fraudsters. In addition to this, the rules have implications for consumer firms, including the large global players like Amway, Oriflame, Tupperware and Avon, that use direct selling to cater to its consumers.
  • While these large firm are part of a self-regulating system, there was a need for rules governing MLM (multi-level marketing) as questionable players have duped consumers and led to several legal cases such as the Q-net case.
  • The rules completely prohibit money circulation schemes and pyramid schemes, which masquerade as ‘direct selling’. This is a step in the right direction.
  • Though there isn’t anything wrong with firms using the direct-to-consumer model that removes intermediates from the distribution chain, saves advertising costs and allows for affordable pricing, concerns arise when the model acquires a pyramid character.
    • In simple direct selling model, a consumer firm recruits sales agents for door-to-door sales and takes responsibility for their sales pitches. In case of a pyramid scheme, the initial set of sales agents are incentivized to add increasing number of indirect sellers via an informal network. Here, incentives are geared towards adding more sellers to the pyramid, rather than actually selling the product.
    • In such a pyramid structure, the manufacturer has little control over the sales process.
    • These schemes have a reputation for luring recruits, often unqualified ones, with promises of unrealistic returns on investments (ROIs). The many layers of distribution incentives present a raw deal on the product’s final price to the consumer.

What is the way ahead?

  • The rules specify several stringent do’s and don’ts for direct sellers- such as not visiting the consumers without prior appointment. There is a concern about the government micromanaging the sector here.
  • It is good to tighten the leash on a poorly regulated sector, but the rules mustn’t end up making the process difficult for genuine players.
  • Direct selling has an important role in several categories like health, well-being, cosmetics and household products. It accounted for $179.3 billion in global retail sales.
  • It is also an important avenue for gig work. Some 7.4 million people are engaged in it.
  • Direct selling has been growing at 18% CAGR and sees 50% participation from women.
  • In this light, the government would do well to lend an ear to representation on operational aspects from the genuine players of the sector.

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