Globally, producers reach out to their consumers through multiple formats, and direct selling is one of them. India, with a large consumer base, offers tremendous potential for direct selling companies to invest in manufacturing and for direct sellers to take up self-employment opportunity. The Indian direct selling industry has grown at a compound annual growth rate of 12 per cent from around Rs 10,000 crore in 2015-16 to Rs 18,000 crore in 2020-21.
According to a survey by the Indian Direct Selling Association (IDSA), this industry provides livelihoods to around 8 million Indians. Many direct selling companies have set up manufacturing in India and some have even begun exports. Yet, the sector is unable to reach its potential. Globally, direct selling is a $190 billion industry, while in India it is merely $3 billion. This is because of regulatory uncertainty resulting from lack of definitional clarity, much of which is linked to the lack of understanding of the business model.
The journey towards transparent regulation
Efforts to create a transparent regulation date back to more than 15 years back. Unlike countries such as Malaysia, India did not have a direct selling regulation. Consumer complaints against this industry have often been booked under provisions of the Prize Chit and Money Circulation (Banning) Act 1978, which did not distinguish genuine direct selling companies from pyramid and ponzi schemes, nor had referred to the direct selling model. Simply put, direct selling is a form of marketing and retailing of goods or services directly to consumers, through personal contact. It is a form of non-store retail format.
Direct selling companies like Modicare, Herbalife, and Oriflame are structured exactly the same manner as say global FMCG multinationals, except for the last-mile delivery of product to consumer. Here, it is through individuals amongst whom the sale commission and retail discounts are apportioned, as their earnings. It differs from the pyramid and ponzi schemes, which are not sustainable and always collapse, promising quick money on enrolment of members. The earnings of direct sellers depend on product sales. Yet, it took years several years across different ministries and departments to understand this format and even today the Consumers Protection (Direct Selling) Rules 2021 fails to distinguish between direct selling and pyramid schemes.
In 2009-10, direct selling industry started working with the government to come up with an acceptable definition and regulatory transparency. A survey-based study by ICRIER researchers in 2010, pointed out that the scope for India to attract investment in this sector is huge and the regulatory gap are preventing investments. The report presented global best practices, which India can adopt. After this report, in 2009-10, an inter-ministerial group (IMG) constituting of representatives from Department of Consumer Affairs, Department of Financial Services, Central Economic Intelligence Bureau, Ministry of Corporate Affairs, RBI and SEBI was formed to draft model rules on multi-level marketing companies, with an aim to distinguish genuine direct sales from disguised money circulation schemes.
This committee made Department of Consumer Affairs the repository of complaint, as internal trade was under this department. An inter-ministerial committee (IMC) was set up in July 2012 and one of its conclusions was that the 1978 Act should be amended to bring direct selling under its ambit. The debate on regulating this sector continued and a second IMC constituting of the Ministry of Commerce and Industry, Consumer Affairs, Corporate Affairs, Law and Ministry of Finance concluded that the model guidelines for this sector should be issued. In September 2015, the Indian Institute of Corporate Affairs released a White paper on “Regulation of Direct Selling in India “, which included draft legislation. A few Parliamentary Standing Committees also supported the need for transparent regulation.
Finally, in 2016, the Direct Selling Guidelines were notified by the Department of Consumer Affairs. After this, industry became hopeful and the sector received investment to the tune of around Rs 5,000 crore. The notification of the Consumer Protection Act 2019, which for the first time provided a legal definition of direct selling, further boosted investor confidence.
However, despite extensive industry consultations, the Consumer Protection (Direct Selling) Rules 2021, omitted the key definition of Network of Sellers, taking the entire regulatory framework back to 15 years, where it started trying to distinguish between a genuine direct selling company and pyramid scheme. In a country where there are genuine players, and fly-by-the light operators, such regulatory gaps make it difficult for the policymakers to distinguish between the two and monitor consumer grievances. At the same time, the industry continues to face a distrust and uncertain business environment.
Need for regulatory clarity and transparency
An unclear or non-existent definitions of Network of Sellers implies that the direct selling industry will continue to face hurdles and will not be able to realise its true potential. This has led to situations where executives and direct sellers have been arrested, accused of running money circulation schemes and of money laundering. While it is left to the accused to prove their innocence, the process – often dragging over a decade – itself is not aligned to government objective of improving ease of doing business. To attract investment into the sector and create self-employment opportunities, the Consumer Protection (Direct Selling) Rules 2021 needs to be suitably amended/revised to provide the definitional clarity on Network of Sellers.
The author is Professor, ICRIER (arpita@icrier.res.in). Views expressed are personal.
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