Govt panel to take another shot at defining MLM firms

The tenure of the inter-ministerial committee, formed to look at what constitutes a genuine direct marketing networks, expired recently

The vexed issue of what exactly constitutes a genuine multi-level marketing (MLM) company has got complicated as draft guidelines formulated by the department of financial services (DFS) could not entirely resolve the issue.

To take a fresh look at the whole matter, the government has extended the term of an inter-ministerial committee, which expired recently, till April 30. DFS had issued draft guidelines as part of this committee. The panel will now look afresh at what exactly defines MLM, direct selling or network marketing companies and lay down clear guidelines on what distinguishes these companies from those indulging in money circulation activities and unlawful activities. According to the guidelines issued by DFS, an MLM company should not have any start-up cost. DFS has defined what are pyramid schemes (which involve money churning activities), but is not very clear whether all kinds of MLMs fall within the purview of this definition.

These are some of the discrepancies in the guidelines issued by DFS, which was objected to by the direct selling industry. In response to the draft guidelines, the direct selling industry has urged for a clear-cut definition on what constitutes legal direct selling. “As the issue remained unresolved, the committee’s tenure has been extended with a clear mandate to define MLMs and guidelines as to what distinguishes network, MLM and direct selling companies from those indulging in just money circulation,” a government official said, requesting anonymity.  

The inter-ministerial committee was first constituted by the department of consumer affairs in July last year after a series of litigations against MLM, direct selling or network companies in various courts across the country.

MLM companies got into a legal tangle as the law (Prize, Chits and Money Circulation Scheme (Banning) Act, 1978) didn’t have any clarity on what exactly makes legal network companies distinct from those indulge in money circulation activities. As the law was implemented through state governments, it became all the more difficult for enforcing agencies to interpret the existing law. The department of consumer affairs had initially tried to define what exactly was direct selling activities, but could not do as the legislation of 1978 fell within the purview of DFS. Following persistent complaints from affected parties, the department of consumer affairs raised the issue with DFS after which the inter-ministerial committee was formed to bring clarity on the matter.