The Ministry of Consumer Affairs, Food and Public Distribution has issued the Consumer Protection (Direct Selling) Rules, 2021 (‘Rules’) on 28 December 2021 to regulate and monitor the activities of direct sellers and direct selling entities. The Rules aim to increase transparency and protect consumers’ interest by ensuring access to information through enhanced disclosure requirements for direct selling entities.
The Rules provide a period of 90 (ninety) days to existing direct selling entities to ensure compliance with the provisions of the Rules.
Prior to the Rules, direct selling entities were governed by a set of guidelines that were issued in 2016.
This update highlights the key provisions under the Rules and regulatory framework governing the direct selling entities.
Meaning of Direct Selling
The Consumer Protection Act, 2019 (‘Act’) defines the term ‘direct selling’ as marketing, distribution and sale of goods or provision of services through a network of sellers, other than a permanent retail location.
The Rules further define the terms ‘direct selling entities’ and ‘direct sellers’ as follows:
Direct Selling Entity: The principal entity that sells or offers to sell goods or services through direct sellers but does not engage in a pyramid or money circulation scheme.
Direct Seller: A person authorized by a direct selling entity through a legally enforceable written contract to undertake direct selling business on a principal-to- principal basis.
Applicability of the Rules
The Rules apply to:
- All goods and services bought or sold through direct selling.
- All models of direct selling.
- All direct selling entities offering goods or services to consumers in India.
- All forms of unfair trade practices across models of direct selling.
- A direct selling entity that is not established in India but offers goods or services to consumers in India.
The Rules provide that any person who has been convicted or bankrupt during the last 5 (five) years prior to his association with the direct selling business or a person of unsound mind shall not be engaged in the direct selling business.
The Rules provide that each direct selling entity shall: (a) if a company, be incorporated under the Companies Act, 2013; (b) if a partnership firm, be registered under the Partnership Act, 1932; (c) if a limited liability partnership, be registered under the Limited Liability Partnership Act, 2008. Additionally, the Rules require every direct selling entity to have a minimum of 1 (one) physical location as its registered office within India.
Obligations of the direct selling entities
The Rules provide an exhaustive list of requirements for direct selling entities. Some of the key obligations are set out below:
Maintenance of records: The Rules require direct selling entities to mandatorily maintain records, at its registered office, of corporate documents such as certificate of incorporation, charter documents, registration documents including permanent account number, goods and services tax registration, documents relating to tax returns and financial reports, business licenses and registrations, documents relating to intellectual property, etc.
Self-declaration: The direct selling entities are required to make self-declaration regarding its compliance with their provisions of the Rules. Such entities are also required to declare that they are not engaged in any pyramid or money circulation scheme.
Updated Website: Each direct selling entity must maintain an updated website and provide relevant information in a clear and accessible manner, prominently displayed to the users its name and office address, customer care contact and details of grievance officers, information relating to the product, prices, grievance redressal mechanism, etc.
Contract with direct sellers: A direct selling entity is required to have a prior written contract with its direct sellers authorizing them to sell their goods/ services. The Rules provide that terms of such a contract must be just, fair, and reasonable. In addition to a written contract, a direct selling entity is also obligated to ensure that all its direct sellers have verified identities and physical addresses, basis which it is required to issue identity cards to such direct sellers.
Other obligations: The Rules also mention other obligations such as handling of sensitive and personal data, establishing grievance redressal mechanism, liabilities with respect to advertisements of goods or services, prohibiting entities to falsely represent as a consumer and post reviews or mispresent the quality of goods/ services, appointing nodal officers, maintaining records of direct sellers and other particulars, etc.
Obligations of direct sellers:
The Rules require every direct seller to observe inter alia following requirements:
- Execute prior written contract with the direct selling entities for undertaking sale of, or offer to sell, goods or services.
- Provide accurate and complete information to prospect, demonstration of goods and services, prices, credit terms, payment terms, returns, exchange, refund, guarantee, after-sale services, etc.
- Obtain appropriate registrations and trade licenses and comply with applicable laws.
- Take appropriate steps to protect sensitive personal information provided by the consumers in accordance with applicable laws.
The Rules specifically prohibit direct sellers from the following:
- To visit premises of any consumer without identity card, prior appointment or approval.
- To provide any literature to a prospect, which has not been approved by the direct selling entity.
- Require a prospect to purchase any literature or sales demonstration equipment.
- To make any inconsistent claim in pursuance of a sale which is not authorized by the direct selling entity.
Duties of direct selling entities and direct sellers
The Rules lay down comprehensive list of duties for direct selling entities and direct sellers. Some of the key duties involve:
- To make clear offer terms to enable the consumer know the exact nature of the offer being made and provide accurate demonstration and explanation of goods or services being offered including price and other terms.
- Must not resort to any misleading, deceptive, or unfair trade practices and not represent direct selling as a form of market research to the consumers.
- Adhere to the provisions of the Rules while offering any guarantee, warrantee, after-sales services.
- Must comply with the packaging norms. Delivery must be ensured within the proposed delivery date and cancellations/ returns/ refunds must be in accordance with the detailed guidance provided under the Rules.
- Must not indulge in fraudulent activities or misleading representations, mis-selling of products or services to consumers, use of any fraudulent, coercive, unconscionable or unlawful means or cause harassment for promoting direct selling business.
- Must not charge any entry or subscription fee or refuse to take back spurious goods or deficient services and undertake appropriate steps for processing refunds.
Prohibition with respect to schemes
The Rules prohibit direct selling entities and direct sellers from promoting a pyramid scheme or enrolling any person to such scheme or participate in such arrangement, in the garb of doing direct selling business. The Rules also prohibit participation in money circulation scheme in the garb of doing direct selling business.
Applicability of e-commerce rules
The Rules specifically provide that the direct sellers and direct selling entities using e-commerce platforms for sale are required to comply with the provisions of the Consumer Protection (e-Commerce) Rules, 2020.
The Rules provide that in case separate regulations are notified under the Reserve Bank of India Act, 1934 regulating direct selling entities which are governed under these Rules, the provisions of such regulations shall prevail over these Rules to the extent of inconsistency.
Additionally, in case of contravention of these Rules by the direct selling entities and the direct sellers, penalties prescribed under the Act would be applicable.
Kajal Tandon also contributed to this article.
The introduction of the Rules is a positive step and reflects an active approach on behalf of the government to protect the interest of the consumers and keep a check on the unfair trade practices.
It also strengthens the regulatory framework and provide clarity to the direct selling businesses in terms of compliances and disclosure requirements.
The Rules puts an obligation on the state governments to establish a mechanism for ensuring compliances of these Rules by the direct sellers and direct selling entities. This move may lead to enhanced compliance at the state levels by the direct selling businesses.