Preventing pyramids

After seven years on the drawing board (the first inter-ministerial committee on this sat in 2014), the Centre has finally notified rules for direct selling under the Consumer Protection Act. Although the idea is to curb fraudsters and Ponzi schemes, the guidelines have implications for all consumer firms using the direct route to vend products or services to consumers, sweeping into their ambit large global consumer firms such as Amway, Tupperware, Oriflame, and Avon. Though these large companies are all part of a self-regulatory body, there was a crying need for the government to frame rules for multi-level marketing (MLM) given the questionable entities that have entered the fray and duped gullible consumers, and the number of legal cases this sector has seen, including the bitterly fought Q-Net case which went all the way to the Supreme Court.

That the rules completely ban pyramid and money circulation schemes, which masquerade as ‘direct selling’ but in reality have Ponzi elements, is quite welcome. While there is nothing wrong with consumer firms choosing a direct-to-consumer model that disintermediates the distribution chain, saves them advertising costs and allows for more affordable pricing, this model assumes discomfiting characteristics when it acquires a pyramid character. Unlike a simple direct selling model where a consumer firm directly recruits sales agents to engage in door-to-door selling and takes responsibility for their pitches, pyramid schemes incentivise an initial set of sales agents recruited by the company to add on more and more indirect sellers through informal networks. This modus operandi results in the manufacturer having little control over the sales process. Sales incentives too are geared more towards adding a constant stream of new sellers to the pyramid, rather than closing sales with the end-consumer. Such MLM schemes have a reputation for luring unqualified recruits with promises of unrealistic ROIs and also hand consumers a raw deal by adding on multiple layers of distribution incentives to the product’s final price.

Apart from barring pyramid schemes, the rules specify a whole host of stringent do’s and don’ts for direct sellers such as not visiting a consumer’s premises without prior appointment, returns and refunds et al, which seem to be a bit of micromanagement. While it is good to tighten the screws on a sector that is crying to be regulated, the process mustn’t make it difficult for genuine players who comply with the laws of the land. Direct selling generated $179.3 billion in global retail sales and plays a key role in the health and well-being, beauty and household hygiene categories that have done exceedingly well during the pandemic. It has also emerged as an important source of gig work, with 7.4 million people engaged in it domestically at last count. In India, direct selling has been growing at a CAGR of 18 per cent with a 50 per cent participation from women. The government should lend an ear to representations from genuine industry players on the operational aspects, in the 90-day window for compliance.

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