THE REGULATION OF MULTI-LEVEL MARKETING COMPANIES IN INDIA: A

CHALLENGE SURMOUNTABLE BY A NEW LEGAL FRAMEWORK

Narayan Prasad*

Direct selling has been a common practice in market since the dawn of civilisation and it has
also been a popular source of income for a substantial segment of the masses since.
However, it assumed the form of an industry since the last hundred years. In the mean time,
companies also developed a new complicated technique of marketing products and services
called „Multi-level Marketing‟ purporting it to be a corporate model of direct selling but
actually designed to make fortune out of the monies of consumers and those participating in
the technique-applied-schemes. Such companies did not take long to start playing in India
and duping crores of rupees from the lot of credulous common people. The recent exposures
bear glaring testimonies to their fraud-playing. India being home to millions engaged in and
dependent on direct selling cannot afford multi-crore-frauds being played on its
impoverished masses. Indian laws, on the other hand, do not have sufficient tentacles to
handle and regulate these multi-level marketing companies. The present legal instrument of
„money circulation scheme‟ held by Prize Chits and Money Circulation Scheme (Banning)
Act, 1978 falls drastically short of checking propriety of their marketing schemes. Against
this backdrop, this essay first attempts to explain peculiarities and intricacies of the schemes
floated by these companies. Then, it critically analyses the present legal arrangements in this
behalf preparing ground for urgent need to take stock of deficiency in law. Subsequently, it
makes a visit of direct selling norms and legal regulatory frameworks in other pertinent
jurisdictions of the world and recommends streamlining the regulation of multi-level
marketing companies in India taking cues from those frameworks. Finally, the author
concludes the essay advocating the need of enacting a direct selling legislation and bringing
multi-level marketing in its fold.

* A Fourth Year student of „Rajiv Gandhi National University of Law, Punjab, Patiala‟ (B.A.LL.B Course)
Current Address: Rajiv Gandhi National University of Law, Punjab, Sidhuwal Village, Patiala-147001 (Punjab)
Permanent Address: Ramesh Prasad, Manpur Pehani, P.O. Buniadganj, Gaya- 823003 (Bihar)
Email Id: nryn.prasad@gmail.com
Contact No.: 8195044273
India being a colossal market and a fast growing developing economy recently happens to see
its people being duped by multi-level marketing („MLM‟) companies and other like entities.
The spiralling growth of the multi-level marketing companies in recent years and the
numbing scale of their unscrupulous billing have developed into a thorn in the side of the
Indian Government. Myriad MLM, chit fund, pyramid and ponzi schemes are reportedly
being found defrauding common people to the tune of several crores of rupees1. Particularly,
MLM companies are defrauding the government under the guise of doing direct selling
business. Since they camouflage their schemes with the garb of direct selling and keep
duping the gullible participants, the author equates these companies with “wolfs in sheep‟s
clothing”.

Direct selling is, in simple terms, the marketing and selling of products directly to consumers
away from a fixed retail location. Modern direct selling includes one-on-one demonstrations,
sales made through the party plan, and other personal contact arrangements as well as internet
sales. In India, direct selling sector is one of the fastest growing non-store retail formats,
recording a double-digit growth in the post-reform period.2 This industry has grown at 22 per
cent during 2011-12 with its sales revenue expanding from ` 52,294 million in 2010-11 to `

1
See News, Multi-level Marketing – in need of cognate regulation, THE TIMES OF INDIA, Dec. 30, 2011,
http://articles.timesofindia.indiatimes.com/2011-12-30/jaipur/30572051_1_mlm-frauds-multi-level-marketing.
(Report - Recently, two such frauds came to light where the citizens lost an estimated ` 500 crore when two
MLM investment companies, Gold Sukh and Eve Miracle, duped people of Rajasthan and Madhya Pradesh. The
modus operandi of both was similar - spreading their schemes amongst gullible investors and running away
when new joining stopped.); see also News, Producer arrested for MLM racket, THE TIMES OF INDIA, Aug. 12,
2011, http://articles.timesofindia.indiatimes.com/2011-08-12/hyderabad/29879818_1_plots-customers-mlm.
(Report - Three persons, including a Telugu film producer, were arrested on Thursday for duping 38,500 people
in a multi-level marketing (MLM) racket by collecting ` 132 crore (1320 million) from them.); see also
Debashis Babu, The Biggest ongoing financial scam, BUSINESS STANDARD, Dec. 3, 2012, http://www.business-
standard.com/article/opinion/debashis-basu-the-biggest-ongoing-financial-scam-112120300115_1.html. (Report
- City Limouzine, a Mumbai-based Ponzi scheme, folded three years later. It had collected a whopping ` 6,000
crore (60 billion) from gullible investors. Those who were entrapped by its promise of high returns included
policemen, officers of the income tax department and the Reserve Bank of India; Stock Guru India is supposed
to have collected ` 1,000 crore from investors, after promising them extraordinary returns; Speak Asia, which
asked participants to pay money to fill some silly surveys, apparently collected some ` 1,300 crore and went
belly up; A few years ago, Gold Quest was a rage, selling “numismatic coins” for ` 30,000. It was shut down,
but has reappeared as Quest Net and then as QNet. If it goes bust, it will possibly take down thousands of crore
with it.); see also News, AP: Nine promoters of MLM firm held in fraud case, BUSINESS STANDARD, July 17,
2013, http://www.business-standard.com/article/pti-stories/ap-nine-promoters-of-mlm-firm-held-in-fraud-case-
113071701088_1.html. (Report- In their crackdown on unscrupulous multi-level marketing (MLM) schemes,
police have arrested nine promoters of a firm for allegedly duping investors by promising them lands on
investments. Police froze deposits totalling ` 10.3 crore in as many 145 bank accounts of the firm.).
2
ARPITA MUKHERJEE ET AL., INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS
(ICRIER), Executive Summary to the Report, SOCIO-ECONOMIC IMPACT OF DIRECT SELLING: NEED FOR A
POLICY STIMULUS (Mar. 18, 2011), available at http://www.idsa.co.in/images/pdf/Executive-Summary-SEIR-
Report.pdf (The Report prepared by ICRIER was sponsored by “Indian Direct Selling Association” and the
“World Federation of Direct Selling Associations”).
63,851 million during 2011-12.3 Moreover, estimates point that direct selling business in
India would reach a size of ` 108.43 billion by 2014-15 and a whopping ` 340 billion by
2019-20 on the back of increased consumer spending.4 The industry has contributed
significantly to self-employment generation over the years. This is evident from the fact that
while direct selling is a relatively new industry in India, yet in just 16 years, it has provided
additional opportunity and livelihoods to over 4 million Indian households.5 According to
what Forum for Direct Selling Companies and Consumers of India claim, the annual billing
of multi-level marketing is approximately ` 200 billion and almost 4,000 companies and 70
million distributors are connected to this business.6 This is what gives rise to the matter of
concern. Where such a huge number of distributors are engaged, it is basically the distributor
class that happens to get swindled by the multi-level marketing companies.7 Consumer class
fall victim to their deception when the companies market products of inferior utility and
quality at inflated price, which they generally have to do to draw more profits so as to sustain
the scheme ostensibly for as long as possible. Before delving deep into legal arrangements in
India to check deceptive multi-level marketing, it is important to understand its tenor and
modus operandi.

Understanding MLM and its Modus Operandi

One of the biggest problems with „multi-level marketing‟ is furnishing a precise definition
that could address the different forms it can assume but, nonetheless, a typical MLM scheme
can be understood. A typical MLM is a marketing approach adopted by some companies
(called MLM companies) by which products are distributed or sold through a multi-layered
chain of distributors or simply participants who are obliged to buy products from the
company and sell them or distribute them either directly to consumers or to distributors for
sale to consumers as well as they are lured to recruit a few persons into the scheme taken to

3
PHD CHAMBER OF COMMERCE AND INDUSTRY, INDIAN DIRECT SELLING ASSOCIATION: ANNUAL SURVEY
2011-12, at 9, 24, 33 (Released on Mar. 22, 2013), available at
http://webcache.googleusercontent.com/search?q=cache:http://www.phdcci.in/admin/admin_logged/banner_ima
ges/1374650545.pdf&safe=active.
Shilpa Gupta, Direct Selling – An Avant-Garde Model, BLOG (Feb. 11, 2013, 2:30 PM), http://blog.ficci.com/
direct-selling-india/2891/; see also News, Survey pegs direct selling industry at Rs 10, 840 crore by 2014-15,
THE ECONOMICS TIMES, Aug. 7, 2013, http://articles.economictimes.indiatimes.com/2013-08-
07/news/41168043_1_direct-selling-industry-idsa-amway-india.
5
Gupta, Id.
6
News, Govt. Guidelines for MLM and Direct Selling Companies, MLMNEWSPAPER.COM, June 19, 2013,
http://www.mlmnewspaper.com/2013/07/indian-mlm-act-2013-news.html.
7
Distributors include direct sellers, sales representatives and agents and independent sale consultants.
be their respective downlines.8 In return, they are rewarded by a captivating payout plan both
for the volume of sale or distribution of products as well as for the recruitments they and their
downlines make.9 In effect, this kind of modus operandi creates a downline of distributors
and a hierarchy of multiple levels of payments in the form of a pyramid. There may be
stipulations as to minimum quantity of products to be sold and minimum number of
recruitments to be made to qualify for payout plan. High entry fee is the characteristic feature
of an MLM scheme. Participants are led to believe that they can quickly recoup their
investment from the commissions and other payments and then start making huge profits.
However, their future dooms all their hope to all but loss. On account of its peculiar
characteristics, multi-level marketing has gained, besides „direct selling‟, other
nomenclatures, namely, pyramid selling, product-based pyramid scheme, pyramid
distribution sales scheme, multi-level distributionship, network marketing10 and referral
marketing or referral sales scheme11.

To simplify, for instance, A, B and C is induced into an MLM scheme by X who is at fourth
level. As per stipulations, every participant may have to induce 3 members and make sale of
atleast 20 units of products per month to qualify for commission. Then, the commission of X
shall depend on his own sale and recruitments, those of A, B and C at fifth level, those of
recruits of A, B and C at sixth level and so on.

Theoretically, the ad infinitum recruitment process in a pyramidal chain is going to exhaust

the pool of potential participants and thus at the end of the day the process shall end up with
saturation or an “equilibrium” short of saturation, in which the number of persons dropping
out balances the number of new recruits.12 Practically speaking, the more the chain

8
„Downline‟ connotes to those individuals the direct sales-person or a distributor has recruited, or recruits of
recruits.
9
Payout plan may include direct or indirect payments in the form of commission, compensation, discount,
bonus etc.
10
See RICHARD POE, WAVE 3: THE NEW ERA IN NETWORK MARKETING 7-8 (1995) (Poe in his work suggests the
following definition of Network Marketing: “Network Marketing is any method of marketing that allows
independent sales representatives to recruit other sales representatives and to draw commissions from the sales
of those recruits.”).
11
Donald Daniels, Toward a Uniform Approach to Multilevel Distributorships, 8 U. MICH. J.L. REFORM 546
(1974-1975) (Giving reference to Commonwealth v. Allen, 404 S.W.2d 464 (Ky. 1966) and Norman v. World
Wide Distributors, Inc., 202 Pa. Super. 53, 195 A.2d 115 (1963), Daniels in his work explains that referral sales
schemes generally involve the sale of goods at inflated prices to purchasers who are promised commissions for
the solicitation of other purchasers.).
12
Ger-Ro-Mar, 84 F.T.C. 95, 147, n.8 (1974) (Opinion of Commission) (…[T]hose individuals who make this
dream world “stable equilibrium” possible by leaving the program without exerting the requisite effort to
succeed, have still been deceived, because they have been led erroneously to think that they could have
succeeded with effort, although they eventually chose not to act on the deceitful premise. And they may also
have lost their investment, though respondents would claim this was so because they did not exert the effort
progresses, the greater difficult the recruiting would be and thus the more the chances of the
participants to lose their money would grow if income is primarily predicated on recruitment,
the attribute being typical of a deceptive MLM scheme.13 According to an expert‟s empirical
analysis, there are inherent flaws in any MLM scheme, since all assume unlimited
recruitment of endless chains of participants – and a payout plan that is recruitment-driven,
top-weighted, and financed primarily by incentivized purchases of the participants
themselves.14 On the basis of his study of numerous working MLM companies across the
world, he characterises an MLM scheme by five unhealthy attributes which he calls red flags.
These red flags are: mandatory obligation of recruitment, primacy of recruitment over sale,
„pay to play‟ requirement with participants the primary buyers, reward committed to be paid
on more distributor levels than are functionally justified, company payout per sale for the
total of all upline participants together equal to or exceeding that for the person selling the
product.15 The study also reveals that nearly 99.7 percent of participants of an MLM scheme
lose money.16 From this study, the inevitable pragmatic conclusion that surfaces is MLM
schemes are inherently flawed and deceptive.

Juxtaposing MLM Schemes with Ponzi and Pyramid Schemes

As a matter of fact, the scourge of MLMs is so muddling that many a time in news reports,
their schemes are wrongfully styled as or confused with ponzi schemes or pyramid
schemes.17 It is crystallized hereby that an MLM scheme is intertwined with selling and

required to recoup it.); see also Michael D. Quinlan, Comment, Ger-Ro-Mar, Inc., No. 8872 (F.T.C., July 23,
1974), 9 SUFFOLK U.L. REV. 1406, 1415 (1974-1975) (Quinlan rephrases the aforementioned opinion of the
Federal Trade Commission furnished in this case as: “…[T]he fact that saturation may not have already
occurred was irrelevant. It was not the possibility of saturation which created the deception but, rather, the
misrepresentation that the program afforded a reasonable business opportunity to each entrant.”).
13
Frank Mays Hull, Pyramid Marketing Plans and Consumer Protection: State and Federal Regulation, 21 J.
PUB. L. 445, 464 (1972).
14
Dr. Jon M. Taylor, who was once a seller for an MLM company, is one of the most renowned persons having
studied and postulated on Multi-level Marketing. Dr. Taylor has studied MLM industry for 18 years and
analyzed more than 500 MLM companies. He maintains the website MLM-thetruth.com and offers a free e-
book there authored by himself. The citation for his e-book is: JON M. TAYLOR, THE CASE (FOR AND) AGAINST
MULTI-LEVEL MARKETING (2011).
15
JON M. TAYLOR, THE 5 RED FLAGS: FIVE CAUSAL AND DEFINING CHARACTERISTICS OF PRODUCT-BASED
PYRAMID SCHEMES, OR RECRUITING MLM‟S, at 7, 9-11, 13 (2006) (Report for Consumers, Regulators, and
Legislators).
16
See Chapter 7: MLM‟s Abysmal Numbers, in JON M. TAYLOR, THE CASE (FOR AND) AGAINST MULTI-LEVEL
MARKETING (2011).
17
See Tim Worstall, Sorry Mr. Ackman, Herbalife Is Indeed An MLM But Not A Ponzi, FORBES, July 26, 2013,
http://www.forbes.com/sites/timworstall/2013/07/26/sorry-mr-ackman-herbalife-is-indeed-an-mlm-but-not-a-
ponzi/; see also Vivek Kaul, Why „Amway‟ Case Is Similar To A „Ponzi Scheme‟?, INDIA NEWS NETWORK, May
28, 2013, http://hyd-news.blogspot.in/2013/05/why-amway-case-is-similar-to-ponzi.html; see also News,
Dubious ponzi & MLM Schemes, MONEYLIFE, Feb. 1, 2013, http://www.moneylife.in/article/dubious-ponzi-
mlm-schemes/30489.html.
marketing i.e. there must be a product or commodity for marketing. On the other hand, a
ponzi scheme is just a form of investment scheme whereby individuals are fooled by
unscrupulous promoters who promise extraordinary returns which are actually paid out of
investments of later investors.18 Thus, a company in the garb of a legitimate MLM company
can run a ponzi scheme. This is what a company namely Gold Sukh was caught doing when
in November, 2011 it allegedly duped over ` 200 crore from nearly 200 thousand investors
on the promise of 27 times returns in just 18 months.19 Now, if it is so, then it certainly raises
eyebrows at having an attribute of a ponzi scheme in an MLM scheme. The authors
contemplate that if return in a particular MLM scheme is promised to be high, then that
certainly is to come more from the fund made out of enrolment charges of recruits, which
have to be set high to give high returns, than from the profits made out of the sale of
products. Thus, in ultimate analysis, a fraudulent MLM scheme certainly reeks of a ponzi
scheme.20 Adverting to a pyramid scheme, it is basically indicative of the form of a scheme
that stresses on the amount of money a participant can make on the recruitment of others to
participate in the plan who form the downline of the recruiter21. The key features of a
pyramid scheme are, one, hierarchy of recruits and their downlines and, two, payment by the
promoter in return for the right to recruit other investors into the scheme. Sometimes, in such
schemes investors are offered products to sell or distribute. Such schemes are then termed
product-based pyramid schemes whereby rewards for recruitments are unrelated to sale of the
product to ultimate users.22 Pyramid schemes make their money from fees paid by new
recruits, or by loading inventory23, or training aids on them. High entry costs are a tell tale
sign of a pyramid scheme.24 Thus, a pyramid scheme can run without any product.
Noticeably, it may be said that owing to high enrolment fee, stipulations for recruitments and

18
JOSEPH BULGATZ, PONZI SCHEMES, INVADERS FROM MARS, & MORE EXTRAORDINARY POPULAR DELUSIONS
AND THE MADNESS OF CROWDS 11-45 (1992).
19
Deepak Mondal, Sleight of Hand, MONEY TODAY, Mar. 2012, available at
http://businesstoday.intoday.in/story/accounting-fraud-investment-schemes-ponzi-scheme-high-
returns/1/22665.html (Money Today is online partner of Business Today.).
20
TAYLOR, supra note 16 at p. Ch.8- 33 (Dr. Taylor notices that MLMs quickly evolve into Ponzi schemes,
requiring the opening of new markets in foreign countries and/or new product divisions to repay earlier
investors, as happened with Amway (now Quixtar) and Nu Skin (which became IDN, then Big Planet and
Pharmanex).).
21
Hull, supra note 13 at 451.
22
TAYLOR, supra note 16 at p. Ch.2- 40 (Definition of Product-based Pyramid Scheme); see also hallmarks of a
product-based pyramid scheme drawn by F.T.C. in In re Amway Corp., 93 F.T.C. 618, 715 (1979).
23
It is unethical of promoting company to make money more from the inventories being sold to new recruits
than from legitimate sales to ultimate consumers; See R. Croft et al., Shifting the Risk: “Buyback” Protection in
Network Marketing Schemes, 23 JOURNAL OF CONSUMER POLICY Issue 2 at 177-191 (2000), for a discussion on
inventory issues in an MLM scheme.
24
Direct Selling Association of Australia, Consumer Advice, http://www.dsaa.asn.au/illegal-schemes.asp (last
visited Apr. 17, 2013).
formation of downlines, commission depending on recruitments, overall return primarily
coming from recruitments, high upfront loading of products and the like, an MLM scheme
essentially bears the attribute of a pyramid scheme.25 This is why they are also styled as
pyramid selling.

Present Legal Arrangement to Fathom the Legitimacy of MLM Schemes

The main law in India that presently helps us piece together the legitimacy of the operations
of multi-level marketing companies and the schemes they run is the Prize Chits and Money
Circulation Schemes (Banning) Act, 1978 („PCMC Act‟). The act contains, to deal with
MLM schemes, an instrument, namely, “money circulation scheme” defined as

“[A]ny scheme, by whatever name called, for the making of quick or easy money, or
for the receipt of any money or valuable thing as the consideration for a promise to
pay money, on any event or contingency relative or applicable to the enrolment of
members into the scheme, whether or not such money or thing is derived from the
entrance money of the members of such scheme or periodical subscriptions”26

The scope and ambit of the expression was carved out by the Hon‟ble Supreme Court in State
of West Bengal v. Swapan Kumar Guha27. Y.V. Chandrachud, C.J. had ruled that two
conditions must be satisfied before a person can be held guilty of an offence under section 4
read with sections 3 and 2(c) of the Act. In the first place, it must be proved that he is
promoting or conducting a scheme for the making of quick or easy money and secondly, the
chance or opportunity of making quick or easy money must be shown to depend upon an
event or contingency relative or applicable to the enrolment of members into that scheme. 28 It
was further clarified in Kuriachan Chako case29 that section 2(c) nowhere provides that a
member of the scheme must himself enroll other members and only in that eventuality, the
provision of the Act would apply. It is immaterial that by whom such members are enrolled.
It may be by members, by promoters or their agents or by gullible sections of the society suo
moto.30

25
See James A. Muncy, Ethical Issues in Multilevel Marketing: Is It a Legitimate Business or Just Another
Pyramid Scheme?, 14 MKTG. EDUC. REV. Number 3 (2004).
26
See Prize Chits and Money Circulation (Banning) Act, 1978, § 2(c).
27
State of West Bengal v. Swapan Kumar Guha, AIR 1982 SC 949 : (1982) 1 CompLJ 217 (SC) : 1982 (1)
SCALE 38 : (1982) 1 SCC 561 : (1982) 3 SCR 121.
28
Id. ¶ 7.
29
Kuriachan Chacko & Ors. v. State of Kerala, JT 2008 (7) SC 614 : 2008 (9) SCALE 787 : (2008) 8 SCC 708.
30
Id. ¶ 33.
The courts have yet scanned the schemes of MLMs by this very instrument and unfortunately
have showed proclivity to declare them illegal without going into the intricacies involved
because of introduction of product or service. It seeks to ban, inter alia, any scheme where
payment is contingent upon facilitating enrolment of another member into the scheme. 31
Moreover, not even a single judgment has laid down any distinction between legitimate and
illegitimate multi-level marketing schemes nor has pressed upon need for amendment or for a
new legislation for MLM.

The Madras High Court in V-Can Network Pvt. Ltd. v. The Home Secretary32 declined the
writ application of the petitioner company purportedly making lawful network marketing of
three of its products – Ozone water purifier, Magnetic bed and Companion (a multipurpose
foldable table) – each for ` 5,990.33 The purchaser of the products became distributors on
accumulation of 600 value points and then he became an independent distributor and became
eligible to avail discount upto 30 percent of the sale price of the product.34 The scheme
warranted every member/distributor to pay membership fee and if they induce and enrol more
members into the scheme, he would get a minor share of the ill-gotten wealth of the petitioner
company. The respondents also placed ample materials to show that their products were made
by few laymen unscientifically and the cost of each product did not exceed ` 500.35 Though
the court stopped short of considering the vires of the case, the observations made by the
court clarify that the court could have pronounced the scheme as illegal, had it been in a
position to adjudicate on the merits of the case.

Again, in M/s Apple FMCG Marketing v. Union of India36, the Madras High Court declared
the so-called multi-level marketing scheme run by the petitioner illegal and in violation of
section 2(c) of PCMC act, 1978. The scheme in question required the new entrant to fill up a
form with three distributors‟ names through whom he got into the scheme and their
placement. Then, he had to purchase one or more starter kit of company‟s products for stated
price; the starter kit was valued at ` 550, ` 1000 and so on. He must sell the product to two
other persons and get their application form filled up and sent to the company; those two

31
See Act, supra note 26, § 3; see also View expressed by Chandrachud, J. in Swapan, supra note 27, reiterated
in Id. ¶ 23.
32
V-Can Network Pvt. Ltd. v. The Home Secretary, II (2004) BC 182 : [2004] 118 CompCas 280 (Mad) : 2003
CriLJ 3971 (W.P. Nos. 2908 and 4144 of 2003, W.P.M.P. Nos. 3650 and 5221 of 2003) (Decided on Feb. 13,
2003).
33
Id. ¶ 3.
34
Id.
35
Id. ¶ 9.
36
M/S Apple FMCG Marketing v. Union of India, 2005 WritLR 115 : 2005 Indlaw MAD 16 (W.P. No. 22674
of 2004 and W.P.M.P. No. 27411 of 2004) (Decided on Jan. 7, 2005).
persons in turn had to purchase starter kits from the company and in turn they must sell and
enroll two other persons each. Each new entrant should purchase the starter kit from the
company and in turn enroll two other persons. This way the chain had to progress.37 When it
was to go to ten stages in this manner, the person who sold first would get a commission. The
honourable court observed that 65 per cent of the sale price was earmarked for paying
commission. That is, if the goods are sold at ` 550, their actual price is only ` 188. The court
termed the scheme as money circulation scheme reasoning that getting such a commission
contingent on enrolment of large number of subsequent members is nothing but getting quick
or easy money.38 Secondly, the person did not get the value of money he paid.39 Though the
above observations made by the learned single judge was declared uncalled for in the
common judgment on two subsequent writ petitions of 2007 on procedural grounds40, they
were legally correct in author‟s view.

In Amway India Enterprises v. Union of India41, the company floated a multi-level marketing
scheme stipulating a maze of rules and conditions. A person became distributor by
purchasing a business kit of ` 4,400 out of which ` 1,800 stood towards product literature and
subscription fee to be credited directly in the account of Amway.42 To continue with business
and maintain position in line of sponsorship, the agreement of distributorship was to be
renewed after every one year for a non-refundable fee of ` 995.43 The income of a typical
distributor generated from two streams, namely, retail profit from selling products and
performance based incentives in the form of commission on certain contingencies. One of
such schemes floated by the company was called as 9-6-3 whereby one distributor had to
enrol 9 members first and then those members would enrol 6 members each and further each
such member would enrol 3 members each.44 There were slabs of rate of commission ranging
from 3% to 21%.45 The rate of Commission entitled to a distributor depended on the slab in
which business volume (BV) of products sold by him plus that by his downline group fell.
Each product was assigned a unit amount as point value (PV) and monetary figure as

37
Id. ¶ 7.
38
Id. ¶ 20.
39
Id. ¶ 26.
40
RMP Infotech Pvt. Ltd. and Ors. v. M/S Apple FMCG Marketing Pvt. Ltd. and Ors., 2007 Indlaw MAD 1675
(W.P. Nos. 18879 & 18880/07) (Decided on Dec. 20, 2007)
41
Amway India Enterprises v. Union of India, 2007 Indlaw AP 768.
42
Id. ¶ 11.
43
Id.
44
Id. ¶ 5.
45
Id. ¶ 24.
business volume (BV).46 A typical distributor to be eligible to get commission must
distribute, purchase or sell products worth 50 PV (1 PV=45 BV) i.e. nearly ` 2,000 every
month.47 Thus, the income of a distributor came by subtracting from commission earned by
him the aggregate of commission earned by his downline group. 48 The court held that
subscription fee, mandatory renewal for a price and mandatory condition of sale per month
for being eligible to get commission and the promise of payment of commission itself being
contingent on the business turned out by the downline members49 all squarely satisfy the
description of quick/easy money under s. 2(c). It may be noted that Amway scheme floated in
US was quite different from that floated in India and the former had been held by the FTC of
US as not an illegal pyramid scheme.50

Failings of Present Legal Arrangement

A. Deficiency and Inadequacy of PCMC Act

By analysing the aforementioned judgments, while it seems that the honourable courts rightly
censored the schemes in question run by the MLM companies as per existing law, they have
not yet furnished clarity on the first condition of s. 2(c) i.e. the scheme must be being
promoted for making quick or easy money. This is what MLM companies are raising clamour
against. According to them, the scheme is aimed at selling products and not at making quick
or easy money and the rule of recruitment inter alia is engaged into the scheme for the same
purpose so as to expand the marketing of their products. The existing law simply outlaws any
rule of recruitment or enrolment if it is financially incentivised. The clause does not even
express, raise or specify its disagreement with pyramidesque recruitment process nor does it
leaves any scope for equity and reasonableness in such rule. It is noteworthy that if an MLM
scheme derives income „primarily‟ from the sale of products rather than from recruitment, it

46
Id.
47
Id. ¶ 11.
48
Id. ¶ 25.
49
Id. ¶ 36.
50
In re Amway Corp., 93 F.T.C. 618, 710-16 (1979) (FTC reasoned that because of three consumer protection
safeguards in its company policies: (1) it bought back goods of terminating distributors, (2) it required
distributors to have sales to at least ten customers per month, and (3) it required distributors to sell seventy
percent of the products they purchased each month to non-distributors, Amway was not a pyramid scheme. The
FTC drew a rule of practice out of it and termed it as „Amway Safeguards Rule‟ which was unfortunately
abusable. Cf. Webster v. Omnitrition Int‟l, Inc., 79 F.3d 776, 783-784 (9th Cir. 1996), cert. denied, 117 S. Ct.
174 (1996) (The appellate court decision pointed out that the Amway safeguards do not immunize every
marketing program. The court noted that the “70% rule” and “10 customer rule” are meaningless if commissions
are paid based on a distributor‟s wholesale sales (which are only sales to new recruits), and not based on actual
retail sales. The court also noted that an inventory buy-back policy is an effective safeguard only if it is actually
enforced.).
would not be good in law because the section proscribes recruitment absolutely if it is
financially incentivised. Again, even if a participant is paid for his own recruiting
performance only where there is no contingency, no hierarchy and no scope for the formation
of a pyramid scheme, this rule would still run afoul of s. 2(c) in its literal sense. Precisely
putting, the courts have failed to draw a dividing line, through interpretation of s. 2(c),
between illegal money circulation scheme and legitimate MLM scheme or atleast legitimate
recruitment process.

The author submits that the instrument of „money circulation scheme‟ is itself inappropriate
to form the touchstone for scanning MLM schemes, all the more so because the clandestine
offence of deception and misrepresentation in the promotion of an MLM scheme is not
addressed in the definition of „money circulation scheme‟.51 The PCMC Act is punitive law
and not preventive law or a blend of the two. It is in this very sense that the Act proves quite
deficient. To put it clear, the Act does not authorise any government body nor does it
constitute a body and empower it to regulate the floating and operation of such schemes in
market before they cause huge financial setback to gullible public.

B. Infirmity of Securities and Investment Laws

Unlike USA, Indian securities and investment laws fail to nab multi-level marketing
companies. Multi-level marketing companies, being companies, are mostly registered under
the Indian Companies Act, 1956. This act, however, provides nothing exhaustive to
understand the legitimacy of the operations of Indian multi-level marketing companies.

As per regulatory mechanism of securities and investment in India, if an entity raises or pools
fund from public or market, SEBI regulations comes into picture. However, SEBI seems to
be handicapped in bringing MLM companies in its fold because their making money could
not be seen clearly either through the lens of security or through the lens of collective
investment scheme. Test for „securities‟ under securities laws is whether the scheme involves
an investment of money in a common enterprise with the profits to come from the efforts of
others so that whenever an investor relinquishes control over his funds and submits their
control to another for the purpose and hopeful expectation of deriving profits therefrom, he is
in fact investing his funds in a security.52 Such test contains three elements: the investment of

51
Offences under §§ 3 and 4 of Prize Chits Money Circulation (Banning) Act, 1978 r/w § 2(c) of the Act have
been investigated in tandem with offence of cheating under § 420 of Indian Penal Code, 1860 which requires
false representation followed by inducement and deceitful delivery of property to constitute the offence. See,
e.g., Abdul Arshad v. State of Kerala, 2011 (4) RCR(Criminal) 451.
52
Investment Co. Institute v. Camp, D.C.D.C., 274 F. Supp. 624, 642.
money, a common enterprise, profits or returns derived solely from efforts of others. 53 An
MLM scheme tramples down the third element as return depends not only on the efforts of
the promoters of the scheme but also on the efforts of distributors participating in the scheme
and those of their downlines. Unlike USA, Indian courts have not accorded liberal
interpretation to the word „solely‟ in the definition of securities.54

Then, MLM schemes do not currently fall under the purview of collective investment scheme
as they pose the form of a marketing scheme involving sale and distribution of products or
services, and enrolment fees collected from the participants are not meant to be utilised with a
view to make profits or income for the participants.55

Besides, it would be absurd to categorise the enrolment charge as „deposit‟ defined in

Companies (Acceptance of Deposits) Rules56 as deposit carries with itself the attribute of
withdrawal or return. If SEBI thinks of chaining the MLM companies, it would, as recent
news reports also underline, need more powers and greater legal base to take regulatory hold
of MLM companies.57

Thus, it can be gathered that the entire design of an MLM scheme places itself in the grids of
impunity if law of money circulation scheme is not applied for the reason of obscurity. It is
therefore proposed that such schemes should be scanned instead by means of sound and
established norms of direct selling (emphasis supplied). This would be synchronous with
contention of MLM companies that their schemes work on the line of direct selling and that

53
Felts v. National Account Systems Ass‟n, Inc., 469 F. Supp. 54, 63 (N.D. Miss. 1978); A. RAMAIYA, GUIDE
TO THE COMPANIES ACT, 84 (17th ed. Part I 2010).
54
SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.), cert. denied, 94 S. Ct. 117 (1973) (The
Ninth Circuit accorded liberal interpretation to the word “solely” in the definition of “securities” in order to take
hold of investment schemes where investors have to employ marginal efforts and are ultimately duped. The
Court held that the word “solely” should not be read as a strict or literal limitation on the definition of an
investment contract, but rather must be construed realistically, so as to include within the definition those
schemes which involve in substance, if not form, securities. This decision essentially changed the perception of
the word “solely” in SEC v. Howey, 328 U.S. 293 (1946) to “substantially.” Earlier, District Court Judge in this
case had proposed the standard that an investment contract exists if people other than the investor are
empowered to perform “those essential managerial efforts” which affect the failure or success of the enterprise.
Essentially, either of the interpretations suggests the same. Notably, the Supreme Court did not explicitly
affirmed the Ninth Circuit decision in Turner case and denied certiorari nor did it reversed the same and
reaffirmed the strict letter of law set forth in Howey but it may be argued that the denial of certiorari was an
implicit affirmation of the court of appeals‟ ruling.); see also Joseph P. Whitford, Pyramid Scheme Regulation:
The Evolution of Investment Contracts as a Security under the Federal Securities Law, 25 SYRACUSE L. REV.
690 (1974).
55
The Securities and Exchange Board of India Act, 1992, § 11AA(2).
56
See Companies (Acceptance of Deposits) Rules, 1975, Rule 2(b).
57
See News, SEBI seeks „well-defined‟ norms for money-raising schemes, THE INDIAN EXPRESS, Dec 13, 2012,
http://www.indianexpress.com/news/sebi-seeks-welldefined-norms-for-money-raising-schemes/1044831/; see
also News, SEBI may get greater powers to check money-pooling frauds, THE HINDU, Apr. 27, 2013,
http://www.thehindu.com/business/Industry/sebi-may-get-greater-powers-to-check-moneypooling-
frauds/article4660545.ece.
direct-selling business does not envisage promoting or conducting any scheme for the making
of quick or easy money by enrolment of distributors as mentioned in the Act. It seems
pertinent to the author to visit those very norms. It will be seen that direct-selling norms can
better censor deceptive MLM schemes than existing instrument of „money circulation
scheme‟. Further, the author finds that anti-MLM regulations across the world have been
framed placing relevant direct selling norms as checkpoints.

Direct Selling Norms

Direct selling norms are more or less same across the world. The author shall refer to relevant
norms of newly revised ICC International Code of Direct Selling58 and their corresponding
norms laid down by Direct Selling Association of the US (DSA) and Indian Direct Selling
Association (IDSA). On the first hand, all the three codes condemn any deceptive, false,
unethical or unlawful consumer or recruiting practice.59 Secondly, they clearly censure
referral selling.60 Then, they are majorly critical of unreasonably high entrance fees, training
fees, franchise fees, fees for promotional materials or other fees related solely to the right to
participate in the business.61 They also insist that any fees charged to become a direct seller
should relate directly to the value of materials or products provided in return.62 The DSA
code of US cautions that high entrance fees can be an element of pyramid schemes in which
individuals are encouraged to expend large upfront costs without receiving product of like
value. These fees then become the mechanism driving the pyramid and placing participants at
risk of financial harm.63 With regard to inventory purchase, the codes proscribe inventory
loading in unreasonably large amounts.64 One of the most crucial norms of direct selling is
the buyback requirement according to which on termination of relationship between the direct
seller and the company or independent salespeople, the company is required to repurchase

58
News, ICC Releases Revised Direct Selling Code, DIRECTSELLINGNEWS, May 1, 2013,
http://directsellingnews.com/index.php/view/icc_releases_revised_direct_selling_code (International Chamber
of Commerce (ICC) released on Apr. 30, 2013 its newly revised International Code of Direct Selling which was
developed in close co-operation with the World Federation of Direct Selling Associations (WFDSA),
representing the basis for direct selling governance worldwide. The webpage also makes available the newly
revised code).
59
ICC International Direct Selling Code, art. B1 and art. C2; Code of Ethics of Direct Selling Association
(DSA), §§ A(1)(a) and (d); Code of Ethics of Indian Direct Selling Association (IDSA), Rule 2.1 and 3.2.
60
Id. art. B19 (ICC Code); Id. § A(1)(e) (DSA Code); Id. Rule 2.11 (IDSA Code). (Art. B19 of ICC Code reads
as “Consumers should not be induced to make a purchase based upon the representation that they can reduce or
recover the price by referring prospective customers to the direct sellers for similar purchases, if such reductions
or recovery are contingent upon some uncertain, future event.”).
61
Id. art. C5 (ICC Code); Id. §A(10) (DSA Code); Id. Rule 3.7 (IDSA Code).
62
Id.
63
See explanatory paragraph to Id. § A(10) (DSA Code).
64
ICC Code, supra note 59, art. C7; DSA Code, supra note 59, § A(9); IDSA Code, supra note 59, Rule 3.9.
any unsold but currently marketable inventory in the possession of that seller on reasonable
commercial terms which include the repurchase of marketable inventory within twelve
months from the salesperson‟s date of purchase at not less than 90 percent of the
salesperson‟s original net cost less appropriate set offs and legal claims, if any.65 The DSA
Code of US has specifically made pyramid or endless chain schemes actionable and subjected
them to the Code administrator for the determination of their legitimacy.66

Regulatory Frameworks in Other Jurisdictions of the World

MLM companies have cropped up in various countries of the world. Over and above, some of
the MLM companies have their business spread in multiple countries. In almost all of such
countries, the need for their regulation has or had been strongly felt. Different countries have
approached in different ways to rein in their unlawful activities. For instance, Canada
regulates them under Competition Act. A few countries such as Singapore, Vietnam,
Thailand, Malaysia, Hong Kong plus some states of USA have enacted specific direct selling
laws to curb the illegitimate part of this business practice and bring them under state
regulation.

A. United States of America

The USA has a quasi-federal regulation system to check the activities of MLM companies.
Regulation comes at state level through state laws and at federal level through Federal Trade
Commission (FTC) and Securities and Exchange Commission (SEC). A few states have
enacted anti-pyramid statutes include Georgia, Louisiana, Maryland, Massachusetts,
Wyoming, Alabama, Arizona, Florida, Idaho, Illinois, Mississippi, Missouri, New Mexico,
North Dakota, Oklahoma, Tennessee, Texas and Utah.67 The statutes of first five of these
states specifically regulate multi-level marketing companies. These states do not ban any
MLM entity but the statutes just place restrictions on their activities. One of the most
important of these restrictions is the buyback requirement, which grants distributors the right
to cancel “contracts of participation” for any reason and at any time and requires that the
company repurchase inventory and sales materials from the distributor at a price not less than
90 percent of the distributor's original net cost, as well as refund fees paid by the distributor.

65
ICC Code, supra note 59, art. C8; DSA Code, supra note 59, § A(7); IDSA Code, supra note 59, Rule 3.8.
66
DSA Code, supra note 59 § A(6) of DSA Code of US (The Code bases the definition of an “illegal pyramid”
on existing standards of law as reflected in the matter of Amway, 93 FTC 618 (1979) and the anti-pyramid laws
of Kentucky, Louisiana, Montana, Oklahoma, and Texas.).
67
Sergio Pareja, Sales Gone Wild: Will the FTC‟s Business Opportunity Rule Put an End to Pyramid Marketing
Schemes?, 39 MCGEORGE L. REV. 83, 104 (2008).
In addition, these five states prohibit companies from representing that distributors have or
will earn stated dollar amounts.68 It may be noted that these checkpoints squarely flow from
direct selling norms discussed above.

At the federal level, there is no anti-pyramid statute in the United States. However, in this
concern, there is one provision, namely section 5, in the FTC Act that prohibits „„unfair or
deceptive acts or practices in or affecting commerce.‟‟69 The FTC has used and construed the
said provision in many of its decisions to check commercially detrimental business schemes
including pyramid schemes and MLM schemes.70 For instance, in In re Koscot
Interplanetary, Inc.71, the Commission characterized a pyramid sales scheme as a plan in
which a participant pays money to the company and in return receives (1) the right to sell
products, and (2) the right to earn rewards for recruiting other participants into the scheme
that are unrelated to product sales.72 The approach of the Commission to pyramid sales
schemes has evolved from first treating the schemes as lotteries, to an approach based on an
“inherent deception theory”73, as exemplified by Ger-Ro-Mar, Inc.74, Holiday Magic, Inc.75,
and Koscot Interplanetary, Inc.76. It may be observed that the statutory parameters for
regulation by FTC are even much more generic than those for the same in India under s. 2(c).
The author contemplates that the former has wider scope and ambit of interpretation and the
later has to be interpreted within the boundaries of the narrower specifications held in the
definition of „money circulation scheme‟ actually being inconsistent with the concept of

68
Id.
69
See Letter from James C. Miller III, Chairman of FTC, FTC Policy Statement on Deception, appended
to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984), to John D. Dingell, Chairman, Committee on Energy
and Commerce, U.S. House of Representatives (Oct. 14, 1983), available at
http://www.ftc.gov/bcp/policystmt/ad-decept.htm
70
See, e.g., Ger-Ro-Mar, supra note 12 (The F.T.C. for the first time in an adjudicative action determined
whether an open-ended, multi-level marketing program was in violation of § 5 of the Federal Trade Commission
Act regardless of the particular representations made in promoting that program. It was ruled that pyramid sales
schemes are inherently unfair and deceptive. Proof of actual failure to achieve promised earnings is unnecessary
in case of a pyramid sales scheme because the earnings claims inevitably will prove to be false by the mere
operation of the plan. A business method having only the capacity and potential for deception can violate § 5.
However, the case went to Second Circuit Court of Appeals which insisted that the finding of potential
deception must be supported by substantial evidence, study or analysis in the record that would realistically
establish so.); Holiday Magic, Inc., 84 F.T.C. 748 (1974); In re Koscot Interplanetary, Inc., 86 F.T.C. 1106
(1975); In re Amway Corp., 93 F.T.C. 618 (1979).
71
Koscot, supra note 70 at 1181 (The Commission noted that pyramid sales schemes are not commercially
feasible ventures because the mere presence of a lucrative right to sell distributorships or franchises encourages
both the company and the participants to pursue this aspect of the scheme to the neglect or exclusion of the sale
of products to consumers.).
72
Id. at 1180.
73
Ralph E. Stone and Jerome M. Steiner, Jr., The Federal Trade Commission and Pyramid Sales Schemes, 15
PAC. L.J. 879, 884 (1983-1984).
74
Ger-Ro-Mar, supra note 12.
75
Holiday, supra note 70.
76
Koscot, supra note 70.
multi-level marketing. Apart from this, the Consumer Protection Act, 1986 of India has
conceptually similar provision defining „Unfair Trade Practice‟ which contains an inclusive
list of prohibited practices but not an entry therein refers directly or indirectly to the practice
of recruitment.77 If recruitment-driven sales schemes were challenged under this head, a need
for an explicit entry vis-à-vis deceptive recruitment practice would have been terribly felt in
India. However, laying such an entry would have gone against the rule of legislation as it
would have transgressed the ambit of the act and consumerism owing to the fact that
recruitment is a distinct business practice quite unrelated to consumerism and sale-purchase.
On the other hand, in principle, deceptive recruitment practice in business can be construed
well within the meaning of „Unfair Trade Practice‟.78

Then, the SEC has successfully used its statutory mechanism to prosecute pyramid selling of
MLM companies.79 In some cases, the SEC has been able to show that a pyramid was an
“investment contract” or “participation in a profit sharing agreement” and thus, a security.80
Once it overcame this hurdle, it was relatively easy to show that the promoters were
unlicensed securities brokers engaged in selling unregistered securities.81

B. Canada

In another approach of regulation of MLM, Canada provides for Multi-level marketing plan
and pyramid scheme of selling in its Competition Act.82 The Act explains the differences
between multi-level marketing plans and schemes of pyramid selling, and sets out the
responsibilities for operators and participants in these types of plans. Such responsibilities

77
The Consumer Protection Act, 1986, § 2(r).
78
See Koscot, supra note 70 at 1180-81.
79
Statutory mechanism of federal securities laws of USA include Securities Act of 1933, § 17 (a), 15 U.S.C. §
77q (a) (1971); Securities Exchange Act of 1934, §§ 10 (b), 15 (c)(1), 15 U.S.C. §§ 78j (b), 78o (c)(1)
(deceptive acts or practices in the sale of a security are prohibited); SEC Rules 10b-5, 15cl-2, 17 C.F.R. §§
240.10b-5, 240.15cl-2 (1974); see statement concerning applicability of securities laws to multilevel
distributorships and other business opportunities offered through pyramid sales plans, Exchange Act Release
No. 9387, 36 Fed. Reg. 23289 (Nov. 24, 1971).
80
See Howey, supra note 54 (The Court in this case stated that the definition of a security embodies a flexible
rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes
devised by those who seek the use of the money of others on the promise of profits. However, the test the
Supreme Court developed in this case failed to prosecute pyramid selling schemes. It was in Turner, supra note
54 at 481, when the Ninth Circuit expressed the policy of the courts to view realistically the terms “solely” and
“from the efforts of others” in the definition of „securities‟ in order to encompass those schemes which involve
securities in substance if not in form); see SEC v. Koscot Interplanetary Inc., 497 F.2d 473 (5th Cir. 1974) (The
Court adopted the test from Turner); see also Eric Witiw, Selling the Right to Sell the Same Right to Sell:
Applying the Consumer Fraud Act, the Uniform Securities Law and the Criminal Code to Pyramid Schemes, 26
SETON HALL L. REV. 1635, 1641-1643 (1995-1996).
81
SEC v. Int‟l Load Network, Inc., 770 F. Supp. 678 (D.D.C 1991), aff‟d, 968 F.2d 1304 (D.C. Cir. 1992) (SEC
called MLM schemes as „financial distribution networks‟).
82
The Canadian Competition Act, §§ 55 and 55.1 (Canadian competition legislation, first enacted in 1889,
predates the Sherman Act.).
include timely disclosure of information and representations made by a MLM company or
any participant of the scheme regarding compensation actually received by typical
participants in the plan or compensation likely to be received by typical participants in the
plan, having regard to any relevant considerations.83 The act explicitly constructs the meaning
of „scheme of pyramid selling‟ in terms of receipt of consideration for recruitment of another
participant and sale and supply of product for commercially unreasonable price.

C. Singapore

An epitome of MLM regulation through enactment of specific statute is exhibited by

Singapore. MLM activities in Singapore are governed by the Multi-level Marketing and
Pyramid Selling (Prohibition) Act administered by the Ministry of Trade and Industry. 84 The
original Multi-Level Marketing and Pyramid Selling (Prohibition) Act was first passed in
1973. In June 2000, the Parliament of Singapore approved an amendment to the Act to widen
the definition of pyramid selling to catch all business schemes that were multi-level in
nature.85 Section 2 of the act sets out the definition of the “multi-level marketing scheme or
arrangement” and “pyramid selling scheme or arrangement”86. Section 3 of the Act declares
unlawful the promotion or participation in any such scheme or arrangement. In June 2000, the
government of Singapore issued „Exclusion Order‟ to exclude legitimate businesses from the
Act, such as insurance companies, master franchises, and direct selling companies which
fulfil certain criteria.87 The said Order was subsequently amended in 2001 introducing certain
rules for direct selling companies in respect of safeguards, behavioural checks and sharing of
commission.88 In the opinion of the author, these rules form the defining characteristics of a
legitimate multi-level marketing.

83
Id. § 55(2).
84
Ministry of Trade and Industry Singapore, Multi-level Marketing and Pyramid Selling, Oct. 16, 2007,
http://www.mti.gov.sg/legislation/Pages/Multi-level%20Marketing%20and%20Pyramid%20Selling.aspx.
85
Id.
86
Multi-level Marketing and Pyramid Selling (prohibition) Act, 2000, § 2 (Sing.).
87
Ministry, Supra note 84.
88
The amendment in 2001 brought following rules for direct selling companies in respect of safeguards,
behavioural checks and sharing of commission:
Safeguards - A participant cannot be required to provide any benefit or acquire any commodity in order to
become a participant in the scheme, other than the purchase of demonstration equipment which is not for resale,
at no more than cost price and for which no commission can be given out. A legitimate multi-level marketing
scheme would not impose a financial risk on salespersons. For example, salespersons should be entitled to full
refunds, under reasonable commercial terms, for any inventories kept or purchased by them which are not sold
to end consumers, so long as the inventories are returned within a period of 60 days.
Behavioural checks - The companies must not misrepresent the scheme as get-rich-quick opportunities, and
should not use fraud, coercion, harassment, or unconscionable means to force people to join the scheme. Instead,
the companies should focus their efforts on promoting the quality and features of the products. If a company
Besides, Malaysia, inter alia, has also enacted a comprehensive specific act called Direct
Selling Act, 1993 which bans pyramid schemes. UK regulates them under the Fair Trading
Act and Trading Schemes Act.89 It can be observed that successful legal frameworks for
MLM companies in other countries have been worked out placing direct selling norms as
checkpoints.

Government Actions

In the backdrop of fraudulent MLM schemes being run in the guise of direct selling business
and hoodwinking crores of rupees from common people, government intervention is
imminently desirable. Before the central government actions, two states – Rajasthan and
Kerala – have cracked down on the MLM activities by laying down guidelines for direct
selling companies.90 However, the guidelines attend more to direct selling activities than to
those of MLM companies. What the guidelines have done more than the s. 2(c) of PCMC Act
is that they have characterised the payment for inducement of members as enrolment fee and
outlaws it if independent of volume of sale or distribution of goods and services. Like PCMC
Act, they also do not lay down anything for the regulation of MLM. It was in July, 2012
when central the government woke up to the issue and broke into action by constituting an
inter-ministerial Committee to consider the matter and to propose norms to rein in MLM
companies.91 The committee is a seven-member committee headed by the Consumer Affairs
Secretary. It has members from departments like consumer affairs, financial services,
financial intelligence, corporate affairs, revenue and the Reserve Bank of India.92 Quite
recently, Union Minister for Corporate Affairs has stated that with the objective of
distinguishing ponzi schemes from MLM schemes, the government has started working on

wishes to show potential participants the earning potential, they must keep records of the maximum, minimum,
mean, mode and median earnings of their salespeople in the past.
Sharing of commission - It is all right for a salesperson to share commissions from several layers of salespersons
recruited by him. However, such commissions must be generated by sale of the product or service in question,
and not through the recruitment of additional participants into the scheme.
89
UK accommodates MLM regulatory stipulations in their Fair Trading Act, 1973, Trading Schemes Act, 1996,
Trading Schemes Regulations 1997 and, most importantly, Consumer Protection from Unfair Trading Practices
Regulations 2008.
90
Industries Department, Rajasthan Gazatte, Notification No. F5(2)Ind/1/2012 (Oct. 5, 2012), available at
http://rajind.rajasthan.gov.in/MLM_Notification_5.10.2012.pdf; Kerala Gazette, Notification No. 190/2011
(Sept. 12, 2011).
91
Ministry of Consumer Affairs, Food & Public Distribution, Government of India, Inter Ministerial Committee
to Consider the Issues Relating to Direct Selling and Multi- Level Marketing, PRESS INFO. BUREAU, July 24,
2012, http://www.pib.nic.in/newsite/erelease.aspx?relid=85482.
92
News, Government constitutes committee to frame laws for direct and network marketing, THE ECONOMIC
TIMES, July 21, 2012, http://articles.economictimes.indiatimes.com/2012-07-21/news/32776703_1_idsa-chavi-
hemanth-money-circulation-schemes.
framing separate and clear set of norms for MLM companies. 93 On the other hand, concerned
businessmen have given the government an ultimatum of unrest in case the government fails
to bring separate law for MLM companies.94

The newly enacted Companies Act, 2013, though, comes down on companies with a firm
hand by providing for stringent punishment for fraud and defining fraud elaborately, such
provision is even more generic and appears to be deterrent in nature rather than to be
regulatory.95

Charting out an Effective Legal Framework

If one goes through the mechanism of MLM regulation of India and other jurisdictions, one
would be inclined to conclude that India lacks an effective regulatory mechanism for taking
over the reins of MLM companies. An omnibus legislation to govern the operations of multi-
level marketing companies is inexistent. There is no one law that forms an exhaustive code in
itself to regulate multi-level marketing companies. The author submits that the extant
approach of checking such schemes under PCMC Act with the lone instrument of „money
circulation scheme‟ is completely defective and inadequate since the Act does not envisage
the involvement of product and marketing thereof and secondly, it is merely punitive in
nature and does not constitute a regulatory framework to check such schemes in their
incipiency. To put tersely, the Act does not address the peculiarity of an MLM scheme. It
may be said that the definition is fit to check a pure money-circulation scheme or an
investment scheme devoid of any product or commodity. The decisions of Courts are solely
based on eying and interpreting only the recruitment part of the scheme of the company as the
existing law in this behalf demands.

Strictly speaking, India does not have any comprehensive legislation, legal provision, or
policy that can scrutinize the legitimacy of an MLM scheme, not even of a direct selling
scheme. To resolve the situation, there are three modes of approach. One, India can redefine
„money circulation scheme‟ to incorporate the peculiarity of MLM scheme. Second, like
Canada, it can accommodate provisions addressing MLM scheme in some existing acts, for
instance, Companies Act, Competition Act or Consumer Protection Act. Third, like

93
News, MLM guidelines Rules Soon, MLMNEWSPAPER.COM, June 18, 2013, http://www.mlmnewspaper.com/.
News, Govt guidelines soon to differentiate genuine, ponzi schemes: Sachin Pilot, BUSINESS LINE, July 15,
2013, http://www.thehindubusinessline.com/industry-and-economy/govt-guidelines-soon-to-differentiate-
genuine-ponzi-schemes-sachin-pilot/article4917238.ece.
94
News, Indian MLM Act 2013 News, MLMNEWSPAPER.COM, June 19, 2013, www.mlmnewspaper.com.
95
See The Companies Act, 2013, § 447.
Singapore, Vietnam, Thailand, Malaysia, Hong Kong and some states of USA, it can enact
specific legislation for the regulation of such companies. The authors personally see the
former solution as not good enough since an MLM scheme is not purely a money-making
scheme and it is next to impossible to frame an exhaustive definition of „money circulation
scheme‟ that can alone scan the legitimacy of a direct selling scheme, a multi-level marketing
scheme, a ponzi scheme, a pyramid scheme or any other form of easy money making scheme.
The second solution also does not seem to be workable since the situation is just specific to
direct selling industry and to accommodate the whole lot of norms pertaining to direct selling
in the existing Companies Act, Consumer Protection Act or any other would simply amount
to setting the act in two distinct premises. The author favours the third mode of resolution.
The author is of the opinion that it is undemanding to distinguish between product-based
scheme and no-product scheme. Then, in the light of the fact that MLM schemes purport to
work on the line of direct selling and that successful regulation of MLM in other jurisdictions
has been possible through the route of direct selling norms, it would be appropriate for India
to regulate product-based schemes and companies by enacting an exhaustive code for both
direct selling and multi-level marketing in one. This shall also fulfil the longstanding demand
of direct selling industry in India.96 The solution shall be materialized by setting out an
exclusive definition of MLM scheme or pyramid selling scheme and by constituting a new
body or empowering an existing regulatory body like SEBI or National Consumer
Commission to regulate companies involved in direct selling or MLM. The authors
recommend making such enactment in this regard in line with foreign legislations,
particularly, Singapore legislation, and direct selling norms prescribed by ICC or any other
direct selling institution. Such step shall cover all the intricacies and peculiarities of the
problem. Given the gravity of the menace, any such legislation must provide for stringent
sentencing by way of mandatory imprisonment and exemplary fine commensurate with the
toll of deception.

Further, any entity venturing into direct selling business must be required to register itself
with the regulatory body constituted or empowered for this purpose under the new law,
furnish details of the payout plan of the scheme, timely disclose information regarding
earning made by a typical participant of the act and intimate the body if its billing reaches a
particular amount.

96
Id.
Conclusion

MLM schemes pose a mortal threat to the fast growing direct selling industry in that they
shake the confidence of consumers, lead to de-motivation of the direct sellers and above all
adversely affect the reputation and image of genuine market players as a whole. With internet
facilitating easy communication and marketing, such schemes have become much more
deleterious and injurious with potential to disturb and hamper the entire economy of the
country. Though ponzi schemes and no-product pyramid schemes are easy to detect and bring
them under the authority of law as they can conveniently be subjected to the instrument of
„money circulation scheme‟ under PCMC Act, difficulty surrounds in case of MLM schemes,
especially when they are fraudulently product-based, which find their haven in the vacuum of
law due to the peculiarities held in legal nature of enrolment charges, the marketing nature of
the schemes and often utility of the product involved. To iron out this difficulty and to rein in
these wolfs in sheep‟s clothing, it is suggested to chart out a sound and effective regulatory
framework and accordingly enact a fresh piece of legislation, specifically designed to
regulate direct selling and multi-level marketing industry, defining pyramid scheme
exclusively so that one knows what is prohibited. In this connection, the author reiterates cues
must be taken from the international legislations, particularly from Singapore legislation and
direct selling codes of ICC or any other to streamline the regulation of multi-level marketing
companies in India.