What Is Multilevel Marketing (MLM)?
The term marketing (MLM) refers to a strategy used by some direct sales companies to sell products and services. MLM encourages existing members to promote and sell their offerings to other individuals and bring on new recruits into the business. Distributors are paid a percentage of their recruits’ sales. New recruits become the distributor’s network or downline and are, in turn, encouraged to make sales to earn money.
Many MLM schemes are legal, but there are also illegal operations that are run as pyramid schemes. This has cast some negative light on legitimate MLM businesses.
- Multilevel marketing is a legitimate business strategy used by some direct sales companies to sell products and services.
- Existing members are encouraged to promote and sell their offerings to other individuals and bring on new recruits into the business.
- Participants are paid a percentage of their recruits’ sales.
- Members at all levels receive some form of commission, which means the more layers there are, the more money people can earn.
- The FTC investigates MLM programs to ensure they don’t operate as pyramid schemes, which are illegal.
MODEL OF MARKETING:
- If any customer successfully books a plot from the company in their project and thereafter customer provides a reference contact per month for 12 months then the company will provide Rs.1,20,000 (per reference Rs.10,000, being one reference per month) to the customer who has provided 12 references regardless of it being successfully converted or not the relationship will be abided by the instrument of contract.
- That if any lead/reference provided by the customer is successfully converted into a customer then the contractor may continue the contract for the upcoming year and the company may extend the contract up to a maximum of 4 years.
- Therefore, Hypothetically if we understand the above model of marketing with example it would be as under:
- If a person namely “X” books a plot from the company and thereafter provides 12 references per year which are 1 reference per month to the company, the company will provide Rs.1,20,000 (per reference Rs.10,000, being one reference per month) to “X” for providing 12 references regardless of it being successfully converted or not.
- If any lead/reference provided by “X” is successfully converted into a customer then only the contract is continued for the upcoming year and the company may extend the contract up to a maximum of 4 years.
- Therefore, If “X”, book a flat for Rs.5,00,000 (Rupees Five Lakhs) and give company one reference for a month than what will happen in 4 years “X” will get Rs. 4,80,000 (Rupees Four Lakhs Eighty Thousand) (12 x 4) and the plot will cost Rs. 20,000 (Rupees twenty thousand) to “X” .
- Thus, the customer focuses on providing 12 genuine leads/references which convert into customers for the company, and it creates an incentive for both sides and it eventually creates a situation where a customer is eventually also playing the role of a marketing agent for the company.
In the above-mentioned context whether it amounts to multilevel marketing or not and whether it is permitted or illegal in India?
- Primarily, in MLM (Multi-Level-Marketing), the sale is networked from individual to individual. This system already existed in India and many other companies are doing the same business with individual networking systems. There is no place for intermediates in the MLM business model. A consumer purchases the goods directly from the distributors out of his own will. Furthermore, the consumer may become a distributor or remain a consumer himself.
- Also, the distributors get a commission for the sale he is undertaking. Such an independent distributor has the power not only to sell the products of the company but also to appoint other distributors under him. Finally, all of them can sell the company products and earn valuable points or commission through the sale.
- The principle underlying this system is instead of having the wholesale dealer or retailer, the network marketing system enables the consumer himself to be the distributor to venture into the marketing of the products.
- Finally, the profit is shared reasonably by the company to the distributors on the sale of every product and the distributors also become consumers of the products.
- Therefore, the above-mentioned model does not amount to multi-level marketing as the model does not depend upon the revenue earned by the customer as the company enters into an independent contract with customers. Thus, the company is not creating any type of hierarchy or tier but merely creating a lead mechanism.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978
- Further, Section 2 (c) of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 is as follows:
Section 2 (c) : “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;
- That none of the ingredients of Section 2(c) of the Act exists in the business carried on by the company as there is neither quick nor easy money nor payments received by the promoter or customers on promise of payment of money on the contingency relation or applicable to the enrollment of new members into the scheme.
- In State of West Bengal v. Swapan Kumar Guha, the Hon’ble Supreme Court made an in-depth analysis of Section 2(c) of the Act. A.N. Sen, J. who rendered the leading judgement interpreted and analysed the said provision as under:
- There must be a scheme;
- There must be members of the scheme;
- The scheme must be for the making of quick or easy money on any event or contingency relative or applicable to the enrollment of members into the scheme or there must be a scheme 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 enrollment of members into the scheme;
- The event of contingency relative or applicable to the enrollment of members into the scheme will however not be in any way affected by the fact whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscription.
- It was further opined by the Hon’ble court that any and every activity for the making of quick or easy money by itself would not fall within Clause (c) of Section 2 of the Act and that making of such quick or easy money must depend upon any event or contingency relative or applicable to the enrolment of members into the scheme.
- That the current model under which the company is carrying on the business is not comprehended by the provisions of Section 2(c) of the Act. That no customer/marketing agent will only get money on the enrollment of other members referred by him. That there is no compulsion or coercion on the members to refer to other members and that the model does not provide for payment of money on mere enrollment per se which alone attracts the definition of Section 2(c) of the Act. The model, therefore, cannot by any stretch of imagination be termed as a “money circulation scheme” within the definition of Section 2(c) of the Act.
- In Amway India Enterprises v. Union of India, 2007 SCC, the Hon’ble court laid down the proposition that, “it is proved that the scheme provides for easy/quick money to its distributors.” Furthermore, each member on his enrollment pays INR 4,400. Payment of INR 4,400 by a member on his enrollment and his future earnings through marketing/enrolling other members constitutes an event or contingency relative to his enrollment. The distributor gets all this money as a consideration for a promise made by the sponsor at the time of his enrollment.
- Thus as far as the member joining the scheme is concerned, both the ingredients of Section 2(c) of the Act, i.e., (a) making of quick or easy money, and (b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied.
- Concluding on the point of section 2(c) of the Act, the judgement in Paragraph 36 says, “from the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him.” …” We are, therefore, of the considered view that the scheme run by the petitioners squarely attracts the definition of “Money Circulation Scheme” as provided in Section 2(c) of the Act.”
- Thus, it crystallizes the model which is followed by the company in our context is not struck by Section 2(c) of the Act as no enrollment fees whatsoever are being paid by the customer for the purpose of enrollment into any of the schemes of the company. Therefore none of the ingredients as established by the provisions of Section 2(c) of the Act are satisfied.
Guidelines for Multi-Level Marketing in India
- That Initially, MLM companies and businesses were treated under the Prize Chits and Money Circulation Schemes Banning Act 1978. However, due to the rising number of multi level marketing frauds in India on 12 September 2016, the government introduced additional guidelines for MLM/direct selling. The following provisions are included in these guidelines:
- An Undertaking shall be submitted by each direct selling company to the Department of Consumer Affairs.
- A multilevel marketing company cannot force the consumer to buy the goods or services more in number than what they can afford to sell or consume.
- The participation of any individual is required to be free in a strict manner. The company shall not ask for any participation fee including fees for entry, registration, etcetera.
- A written agreement must be provided and signed by every participant in the business that would state the terms of participation in accordance with the Indian Contract Act 1872.
- The company is required to lay down a cancellation and refund policy regarding the membership.
- A purchase and buyback policy must be established by a company.
- A physical office for the company’s operation must be present in India.
- The MLM company shall provide full information regarding the direct selling operations and policies to its direct sellers.
- The MLM company is required to disclose in a clear and unambiguous manner, the methods of calculating the fees/remunerations/salaries.
- Thus, Primarily the model followed by the present company in the above-mentioned context, cannot be considered a multi-level marketing scheme or model, the company is having separate contracts with separate consumers if they are buying the plot for purpose of mere generation of leads and references, therefore, it does not fall in the categorization of Ponzi Schemes, Pyramid Schemes, Money Circulation, Chit Funds and not even barely into the ambit of multi-level marketing
I have spoken to many of my friends and acquaintances in my vicinity who are into this Multi-level marketing, and they find this business to be unique and attractive. The companies make tons of money by selling outrageously overpriced products every month to their captive audience buyers. Though MLM Scams have been on the rise in India, still people fail to protect their hard earned money from these scams, which is a sad truth.
Adv Sneh Purohit
Adv Insha Bhurani