Is MLM Multi-Level Marketing Legal In India?

Published on 13 Mar 2020 by Shivi

MLM or Multi-Level Marketing has been a popular form of business in India for decades. With companies like Avon, Tupperware, Amway, Oriflame, etc. providing an easy way of income to the housewives, MLM has become a household name. However, when it comes to MLM frauds and scams, a majority of people in India are still unaware of whether MLM is legal in India or not, and what MLM actually means. This guide lays down the concept of Multi-Level Marketing, the legality of Multi-level marketing in India and what kinds of MLM businesses are illegal in India.

What Is Multi-Level Marketing?

Multi-Level Marketing or commonly known as MLM is a promotional business strategy wherein a salesperson of a company sells a product or service for the MLM business and recruits a new salesperson under them to branch out the sales of the MLM business’s products or services.

The Multi-Level Marketing or MLM business follows a hierarchical structure where the aim of the person on a high level is not just to sell the products or services, but to expand the hierarchy by recruiting more people under him/her. 

This creates a chain of selling and with more people recruited, a new branch of the pyramid is created. Under an MLM business, the profits of the initial salesperson continue to increase as the chain continues to grow. Therefore, Multi-Level Marketing is also known as network marketing or matrix marketing.

Is Multi-Level Marketing or MLM Legal In India?

Multi-Level Marketing or MLM is a legal form of business in India. However, there are numerous illegal and fraud MLM companies that operate in India that run a pyramid scheme to lure more people to buy their products and scam them for their money. A legal Multi-Level Marketing company is the one which operates under the legal procedure laid down by the government. 

However, in a large country like India, it is impossible to identity legal MLMs from illegal MLM. Therefore, it is important to identify a legal Multi-Level Marketing company by its features and methods of operations. Some of the key features of a legal Multi-Level Marketing company in India are:

  1. Legal MLM company offers a fixed time to its members to achieve financial benefit. Illegal MLM businesses usually offer quick, easy, and unbelievable money.

  2. A legal Multi-Level Marketing company offers high-quality products to its customers backed by a certificate of quality, whereas an illegal company does not provide any backing to the quality of products it offers. 

  3. A legal MLM company offers a fixed amount of commission or incentive to its members based on their sales performance. However, an Illegal MLM follows no bonus rules and offers lucrative and instant incentives to attract more people.

  4. A legal Multi-Level Marketing provides its members with a well-defined plan to sell their product, but no such plan or strategy is provided by an illegal MLM.  

When it comes to laws relating to MLM companies in India, previously, Multi-Level Marketing businesses were treated under the Prize Chits and Money Circulation Schemes’ (Banning) Act 1978. However, due to the rising number of MLM frauds in India, on 12 September 2016, the government introduced Model Guidelines for Multi-Level Marketing/ Direct Selling. The new guidelines include the following provisions:

  1. All direct selling companies in India shall submit an undertaking within 90 days from 12 September 2016 to the Department of Consumer Affairs.

  2. The company cannot force the consumer to purchase goods and services more than what they can afford to sell or consume.

  3. The participation must be strictly free. The company cannot ask for any participation fee like entry fee, registration fee, etc.

  4. A written contract must be provided to every participant in the business ‘regarding the material terms’ of the participation, drafted in accordance with section 10 of the Indian Contract Act, 1872.

  5. The company must lay down a refund policy and cancellation of membership.

  6. The company must establish a purchase and buyback policy.

  7. An MLM company must provide complete information about direct selling operations and policies to its direct sellers.

  8. The company must have a physical office for its operations.

  9. The Multi-Level Marketing company must clearly disclose the method of calculation of the remunerations.

  10. The MLM company must maintain a CIN with PAN and provide an identity card to the participant.

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Illegal Multi-Level Marketing or MLM in India

There are various kinds of illegal Multi-Level Marketing or MLMs that scam innocent people by offering quick money and attractive bonuses. The following are the kinds of illegal MLMs in India:

Prize Chits & Money Circulation Schemes 

Prize chits and money circulation schemes are considered as illegal under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The Act states that any scheme which assures quick and easy earning money through money chain or if someone demands money from another in order to invest it into a ‘money circulation scheme' means any scheme for making quick or easy money or for receiving any money or valuable thing as consideration for a promise to pay money, and such scheme is illegal in India

Pyramid Schemes

Pyramid schemes involve recruiting a new member at the next lower level of the pyramid to invest money to the initial recruiter. To receive returns on this investment, the new members are required to recruit more investors under them, forming a pyramid thereof. Pyramid schemes have been categorised as illegal by the Reserve Bank of India.

Ponzi Schemes

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors. This is similar to a pyramid scheme in the sense that both are based on using new investors' funds to pay the earlier backers.

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