Direct sellers face identity crisis as law skips definition

Written by Ashish Sinha | Indu Bhan | Indu Bhan | Updated: May 29 2013, 09:05am hrs
With the arrest of Amway India CEO William S Pinckney and his two senior colleagues by the Kerala Police on Monday, the spotlight is back on the need for a separate law to regulate direct selling companies. While the government has repeatedly stated that the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, under which the Amway officials were held, does not apply to direct selling firms, in the absence of any specific laws to distinguish such firms from chit funds, various state governments often resort to it.

In fact, an inter-ministerial body comprising representatives from the consumer affairs ministry, the department of financial services, the corporate affairs ministry, RBI, Sebi and the Indian Direct Selling Association has been tasked with bringing out a clear demarcation between chit funds and direct sellers. However, so far, nothing has come out of this panel.


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The panel has been working since July 2012.

Way back in 2002, the then finance minister Jaswant Singh, responding to a question in Parliament, had supported a separate set of regulations for direct sellers. In the UPA government too, different corporate affairs ministers have underlined the need for coming out with a separate set of laws for such firms. For instance, last year, the then corporate affairs minister Veerappa Moily had said that clarity and distinction between direct sellers and those involved in money-related schemes will be made while reviewing both the Chit Fund Act of 1982 and the PCMCS Act.

The arrest of Amway executives is neither an isolated incident nor the first one.

In January, the Kerala Police arrested executives from three direct selling companies Modicare, K Link and DXN under the same law, which was basically enacted by the Parliament to curb chit funds and ponzi schemes.

In the past, similar arrests and legal cases have taken place across Andhra Pradesh, West Bengal, Kerala, Rajasthan and many more states.

In 2008, following a complaint filed by an Amway distributor in Andhra Pradesh, the state government invoked the PCMCS Act and banned Amway. The company resumed operations in the state after moving the Andhra Pradesh High Court, but the case is still pending. Such incidents have become routine across states because of governments inability to distinguish between chit funds and direct-selling companies, said Chavi Hemanth, secretary general of IDSA.

According to a senior corporate lawyer, the confusion at the state-level arises from the fact that even direct-selling companies come in various kinds. The PCMCS Act should be enforced on entities that deal in enrollment of a vertical chain of investors/agents dealing in intangible assets like promise of higher returns and not on those who deal in tangible assets like goods and FMCG products like Amway or Oriflame. But it is happening as direct sellers are not protected under any law currently, the lawyer said.

Supreme Court lawyer MR Shamshad said the government should draft separate legislation on direct-selling companies to ensure more accountability as it would differentiate genuine players from fly-by-night operators. These companies can be asked to register themselves with the RBI, which in turn, can secure guarantees from these operators to ensure repayment to the investors in case they disappear or siphon off the money from one entity to another, he said.

According to Rajiv Bansal, a senior corporate lawyer, there is a need to have a comprehensive law as some direct-selling chains involve issues related to imports, money-laundering, violation of Fema and conversion of black money into white.

Last month, a Ficci report compiled by economist Bibek Debroy on Direct Selling Industry in India pointed out that an amendment is needed to the PCMCS Act, making a clear distinction between direct sellers and those engaged in circulation of money/chit funds/ponzi schemes.

With individual state governments having their own interpretation of existing laws, regulation for the sector has become more complex, says Hemanth of IDSA. By introducing words like products and services in the definition of direct sellers and by keeping a mandatory cooling-off period for consumers in which, if the products are returned and money refunded, the government can easily demarcate direct sellers from others like chit fund entities, the IDSA secretary general told FE.

Direct Dilemma

* Direct sellers oppose chit fund Act for multi-level marketing companies

* Say states misusing law as central government has no clarity

* Lawyers say within MLM space, companies promote Ponzi schemes

* Only two states have guidelines for direct sellers Kerala & Rajasthan

* IDSA says amending chit fund Act will be a faster solution to problem

* Similar cases against MLM cos in AP, Kerala, Rajasthan & W Bengal