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MLM refers to multi-level marketing. It is also known as a pyramid selling scheme, network marketing, and referral marketing. As of 2015. According to a FICCI report compiled by KPMG in 2015, direct selling is a Rs 75 billion market in India. Direct selling is a legitimate business with significant tax revenue and self-employment opportunities across the country.
Multi-level marketing is a marketing strategy mostly used by pyramid-structured companies to sell products and services, where employees act as both sellers and buyers, and the revenue of the MLM company is then distributed to this non-salaried workforce.
This is done so that MLM companies in India or the world maintain a steady number of sales, while the burden of selling and delivering the product/services is not put on the workforce alone. Some of the best MLM companies in India include Amway, Avon, Marieke, Forever Living, etc. which started in the Indian market to increase direct sales and provide employment opportunities for housewives, retired persons, and unemployed people.
What is Multi-Level Marketing (MLM) in India?
Multi-level marketing in India is a broad term given to marketing that takes place through distributor networks such as pyramid schemes or direct selling schemes in India.
It is employed by companies employing direct selling strategies under Direct Selling Guidelines 2016 to encourage their existing distributors to recruit new distributors by paying commissions on new distributors’ sales to existing distributors. Some well-known network marketing companies like Tupperware use network marketing strategies.
The scheme of earning commission-based remuneration and perquisites based on the performance of the network marketer was seen as a cost-effective way of earning from home and has provided opportunities for MLM businesses in India. This business works on a direct selling model where the buyer buys the product directly from the company instead of involving any middleman.
However, thanks to the weak regulatory framework in India, the MLM industry is riddled with fraudulent practices, and schemes offering quick bucks that bring negativity to the entire sector.
What is the legality of MLM in India?
Network marketing is legal in India. So are multi-level marketing schemes, except for some businesses that are classified as illegal multi-level marketing, as they are done to trap innocent consumers investing in MLM schemes, and are sold directly by investors. And there is no actual trading in services or promoters. Rather, there is just a promise that the investor will get a return. However, such promises never materialize and this leads to huge losses for the investors.
The following schemes of MLM India are considered illegal:
Pyramid schemes
A pyramid scheme in Indian law is described as a scheme where the organizer builds a pyramid structure starting with one person, who represents the tip of the pyramid.
A person recruits another person who works under him. And this person is required to invest a certain amount which is paid to the initial recruiter
To get a return on their investment, the new member has to recruit more investors who invest a certain amount, forming a chain of pyramids.
Recently, the Reserve Bank of India (RBI) issued a statement cautioning investors against pyramid scheme frauds that promise high returns and run on hefty membership fees.
RBI said MLM, chain marketing, or pyramid structure schemes promise easy or quick money on enrollment of members. The RBI advised that the public should not be lured by promises of high returns offered by multi-level marketing companies running network marketing, chain marketing, or pyramid structure schemes in India.
Money circulation scheme
Money Circulation Scheme as defined under section 2© of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
It states, “Any scheme which assures quick and easy earning of money through money chain or if one solicits money from another to invest it in ‘Money Circulation Scheme’, then it means any scheme for making money quickly or easily or for obtaining any money or something valuable for the promise of money,”
“in respect of any event or contingency applicable to or applicable to the enrollment of members in the scheme, whether or not such money or thing is derived from the admission money of the members of such scheme or periodical subscription”
Money Circulation Schemes or Money Chain Businesses are not legal in India.
Ponzi schemes
A Ponzi scheme is a fraudulent investment scheme and a type of MLM fraud that promises high rates of return to its investors.
Returns are paid to old investors by employing the cash flows of new investors. Thus, the scheme depends on a continuous flow of new investments and falls apart when the flow of investors stops.
It is essential to understand the difference between a Ponzi scheme and any other type of multi-level marketing scheme such as a pyramid structure.
In a Ponzi scheme, there is a single person who controls the fund and simply transfers money from one person to another without making any actual investment of the money.
Once the investor’s confidence is gained and other investors start putting in money, the fraudster vanishes with all the investment
On the other hand, a pyramid scheme is structured in such a way that the person starting the scheme will recruit some investors and the job of those investors will be to recruit further investors.
What is the difference between legal and illegal MLM in India?
A new multi-level marketing scheme is launched every other day. While some MLMs are legit, there are actually honest businessmen; Some MLMs engage in fraud involving swindlers who lure gullible audiences to rob them of their money.
It can be difficult to identify real or fake multi-level marketing in India. But there are some ways to know the difference between legal and illegal network marketing in India, such as:
A common feature of the MLM scheme which is not legal in India is that a very high rate of return is promised but in most cases, there are no underlying goods or services which have any value
On the other hand, a legal multi-level marketing company like Tupperware in India is built through the actual sale of products
In illegal network marketing schemes, commissions are paid to agents simply for roping up other agents or investors. Whereas, in a legal scheme, the distributors are paid a commission on the actual product sales of the agents they have associated with.
There is usually an unreasonably high rate of return for which there is no scientific explanation in illegal MLM schemes. On the other hand, a scheme in MLM is when a scientific basis is established for compensating its agents and distributors
Usually, in an illegal affiliate marketing scheme, the scheme works on the premise that it is an opportunity to make quick and easy money, whereas, in a legal MLM, this is not the case.
What To Do If You Are Scammed By A Fraudulent MLM Company In India?
A lot of multi-level marketing companies have been found to be illegal after MLM fraud and victims of MLM scams brought the illegal cases of the companies to the notice of the authorities. One such was Qnet – the infamous company that was accused of fraud in India as a Multi-Level Marketing (MLM) company.
If you too have been a victim of such multi-level marketing fraud in India, you can always take legal help.
Firstly, you can send a notice prepared by a lawyer to the MLM company if it has taken your money and is not returning it
You can also file an FIR against the Fraudulent MLM Company and let the police initiate a criminal case against them
If the company is operating illegally and violating the company laws, a complaint can be filed with the Registrar of Companies
Who can help you here?
In the advent of a situation where you are getting scammed by a multi-level marketing illegal company, it is best to consult a good lawyer near you, who can help you understand which approach and steps would be right.
eStartIndia will help you to draft all types of legal documents and provide legal advice from the comfort of your home at a very affordable cost.
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