Direct sellers seek distinct law to regulate direct selling firms
Courtesy: Economic Times, New Delhi – 3 Jun, 2013
NEW DELHI: The recent controversy surrounding the Saradha group and other such companies (like SpeakAsia and StockGuru) has put the direct selling or multi-level marketing (MLM) companies under fire, with some people going to the extent of saying that the MLM business model itself should be banned in India.
However, genuine direct selling companies allege harassment by government authorities – probing chit funds irregularities and Ponzi schemes – for no fault of theirs. And the recent arrest of three Amway India officials, including MD and CEO William S Pinckney, has only added fuel to the fire, inviting condemnation from the entire India Inc – including Ficci and IDSA (Indian Direct Selling Association) – and has put the spotlight back on the separate law to regulate direct selling firms.
Industry sources say that although several efforts are being made by the government and concerned agencies to put in place a system for defining and regulating MLM companies, but nothing concrete is in place yet. Even the inter-ministerial committee, which was formulated by the Department of Consumer Affairs in July 2012, is yet to give clarity on what constitutes MLM firms and how to distinguish networking and marketing companies from entities involved in money circulation activities. And with individual state governments having their own interpretation of the existing laws, regulation for the sector has become more complex. Sources, who do not wish to be named, say that with focus solely on drawing guidelines to define MLM companies, a large number of legitimate companies are being victimized in the absence of definitive rules and guidelines. Many also believe that not all kinds of MLM companies fall within the purview of the current guidelines.
“The lack of clarity and coordination between several agencies and government departments has resulted in the proliferation of illegal networking and Ponzi schemes, which has tarnished the image of the entire industry. And by painting the entire sector and all players with one brush, more harm is being done to the sector as well as the investors,” claim sources. This explains why there is a need for stricter regulations of MLM in India, which will help weed out illegal businesses.
“Network marketing is quite a legitimate business. So how can someone compare it with Ponzi, pyramid or other such fraudulent schemes? And how can someone say that direct selling is illegal just because of the wrongdoing of some fly-by-night operators,” asks A Sengupta, MD, Daehsan Trading India Pvt Ltd.
Direct selling, in fact, is a $153.7-billion industry globally and supports millions of people. In India alone, over 30 million people are said to be working with direct selling companies as independent direct sellers, almost 70% of which are women. The legitimate direct selling industry in India, which comes under MLMs, is estimated at Rs 6,000 crore, according to the Indian Direct Selling Association (IDSA).
“However, just because India is so new to the established form of direct selling and multilevel marketing — as it is known in other parts of the world – and also since there is no specific guidelines for the direct selling industry, there exists some confusion in the market over the nature and role of direct selling,” says Koyalgeet Kaur, Ex Head, IDSA, and CEO of Arrowhead Consulting Inc.
Explaining further, she says direct sales of multi-level marketing simply means sales of good and services through the independent business person (known as distributor) to the end consumer. However, “if seen closely, there is really no difference between retail and direct sales because in both cases the products are sold at a convenient location to end consumers,” she says.
In retail investment is high and not everyone maybe be able to open a retail outlet. In direct sales, however, anyone can start the sale of products from home without making any investment in monetary form except for the effort to learn and understand the products as well as offer them to the end consumers who may like those products.
If we look back in the recent past in India, a fantastic example is Eureka Forbes, which started by offering vacuum cleaners to the aspiring consumers at their homes – through a demonstration. At that point in time no one knew about a vacuum cleaner. However, the company sales skyrocketed and the Eureka Forbes salesmen became family- trusted friends. Eureka Forbes continues to enjoy the trust and sales from the Indian consumer even today.
“The new kind of MLM and direct selling companies are no different from the Eureka Forbes model except that here commissions are based on sales whereas in Eureka Forbes’ case 10% remains fixed income for sales people (employees) and 90% as commissions,” explains Kaur.
Another closely associated example is that of the insurance industry. For over 70-80 years insurance in India has been sold through the direct distributor route, which is through people who become an agent and then explain the products/services to people who are keen to use insurance products for various reasons. Companies such as Max New York Life and LIC all sell through agents who work on 100% commission basis. “It’s the same model as that of any global direct selling company except the fact that in the new form of direct selling a distributor can even make teams under him – by recruiting more independent distributors and by helping them by training and supporting them,” Kaur says.
A clear cut law similar to that which exists in the insurance industry or the NBFC industry has helped these industries attract foreign investment and grow multiple times by offering earning opportunities and excellent products to customers in India. Such clear cut guidelines or a short concise law on this industry will not only safeguard the interest of investors, but also protect the business interests of legitimate MLM or non-MLM corporates.
“In countries such as Singapore and Malaysia where clear cut law exists for direct selling, the industry has done wonders. In countries such as the UK, the US and Canada where district laws are applicable and the court system is very strong, MLM companies are well recognised by Better Business Bureau and other governmental organisations as partners in progress of people and the country,” says Kaur.
Such law will also help in safeguarding the interest of investors and protecting the business interests of legitimate corporates. A safe and regulated financial environment will help MLM companies to devise strategies and advisories to protect investors, thereby creating and promoting a culture for growth.