• Starting MLM business in India

Dear Sir/Madam I Umesh Gowda C S from Hassan,Karnataka.I would like to start a MLM firm where i can sell products and services in binary system,but i heard and saw in some television programs that MLM in india is banned and illigal.I would like to know the legality of MLM.I wanted to start it becoz it can create lots of jobs and earning opportunity for unemployed youth as me.So i request you to is their any way that i can use binary system legally.thanking you.
Asked 4 years ago in Business Law from HASSAN, Karnataka
Dear Querist

Government guidelines for mlm companies in india
To regulate the sale of goods and services outside of retail establishments otherwise known as "Direct Selling (Multi Level Marketing)" and to provide for protection of consumers who purchase goods and services from direct sellers, following guidelines are issued with the approval of the Competent Authority. These guidelines will come into force from the date of publication in official Gazette and will remain in force till an appropriate legislation is enacted for the said purpose:-

1. Definitions:-

Direct Selling : Means marketing or sales of goods directly to the end user consumer using word of mouth publicity, display and/or demonstrations of the goods/products, and/or distribution of pamphlets. Explanation: Companies can open pick up points and delivery points for maintaining effective delivery system.
Direct Selling Entity : Means a business entity as recognized by law for the time being in force including but not limited to a Company duly incorporated under the Indian Companies Act, a registered Partnership Firm constituted under the Indian Partnership Act.
Direct Seller : Means a person who is authorized by the Direct Selling Entity to engage into the business of Direct Selling.
Consumer : An individual who buys goods or services for personal use and not for manufacture or resale and shall have the same meaning as provided under the Consumer Protection Act. 1986.
Goods/products : Goods/Products shall have the same meaning as defined in the Sale of Goods Act and section 3(26) of the General Clauses Act, 1897, that is, it shall include every kind of movable property other than actionable claims and money.
Sales Incentive : Sale incentive means share of profit payable to the Direct Seller for effecting sale of goods/products as stipulated in the contract between the Direct Seller and the Direct Selling Entity.
2. Conditions for Permissible Direct Selling:-

Should be a Direct Selling Entity, having sales tax/Vat, Income Tax, TDS and other license as may be required as per the law/regulations of its principle place of business.
Should have bank account with at least one nationalised bank.
Partnership Deed or Memorandum of Association should clearly state their nature of business. (Those who do not have such specific clauses should get their memorandum of Association or Partnership Deed, as the case may be, amended within 2 months from the date of publication of these Guidelines).
Pay sales incentive at the agreed rate within the agreed period.
Shall display names and Identification numbers of their authorized Direct Sellers in the official websites.
Should have a consumer grievance cell that should ensure redressal of consumer grievances within 7 days from the date of making such complaints.
Website should provide space for registering consumer complaints hassle free.
3. Appointments/Authorisations:-

Direct Selling Entity shall appoint/authorise Direct Sellers upon receipt and scrutiny of application in a prescribed format.
An agreement recording terms of such appointment should be executed between the Direct Selling Entity and Direct Seller.
No application should be considered unless such applicant is eligible to enter into a contract under the Indian Contract Act.
Each Direct Seller shall be allotted Unique Identification Numbers before granting license/permission to start Direct selling.
Direct Selling Entity should not give incentive to any persons for joining of Direct Sellers.
4. Prohibition:-

Payment of incentive by whatever name it is called unrelated to their respective sales volume.
Supply/Distribution of goods with the knowledge that such goods/products are inferior or exceeded its validity period as per the manufacturer.
Direct Selling Entity/Direct Seller will not indulge in money circulation scheme or any act barred by the Prize Chits and Money Circulation Scheme (Banning) Act, I978.
5. General Conditions:-

MRP of the goods should be visibly displayed on the package.
Accounts of individual Direct Sellers shall be maintained properly and should be made available through World Wide Web.
Sales incentive should be distributed to the respective Seller on or before the agreed due dates.
Goods sold by the Direct Selling entity should carry guarantee/warranty of the manufacturer. However consumer should be given opportunity to exchange/return the goods if he finds any manufacturing defect or the product purchased is not useful for the purpose it was meant, within 30 days from the date of purchase, provided any seal/protection on the product is kept unbroken.
6. Information Readiness (Ready Information file):-

Every Direct Selling Company should maintain a file with all relevant documents that include:
Certificate issued by Registrar of Companies, MOA and MOM.
Xerox copies of TIN, DIN of Directors, TAN, PAN.
Certificate of Sales Tax, Service Tax, CST Registrations.
Copies of all Sales Tax Returns filed with the authorities.
Copies of Service Tax Returns filed with the authorities.
Copies of IT Returns of company filed with the authorities.
TDS Statements of Distributors and respective challans paid.
Every Direct Selling Company should maintain KYC/KYDS (Know Your Customer/Know Your Direct Sellers) as a mandatory process. Specific formats are to be provided on their websites to be available for all at any time.
7. Grievance Redressal Mechanism:-

Every Direct Selling Company must have a complaint redressal mechanism to address any problem of their customers/Direct Sellers.
8. Breach of Guidelines:-

The sale activities not following the above guidelines shall not be considered as Direct Selling and would be dealt appropriately under relevant provisions of existing laws.
Kerala Is The First Indian State Who Has Made MLM Guidelines For MLM Companies In India
Nadeem Qureshi
Advocate, New Delhi
4875 Answers
225 Consultations

4.9 on 5.0

Kerala Became first Indian state to set guidelines for MLM firms. All this came after series of MLM scams happened in Kerala. Gullible people lost to the tune of thousands of crore in MLM investment schemes. In one such MLM scam, a company called Tycoon Empire International scammed is said to be around around Rs.1000 crore. After such scams, Kerala Chief Secretary led a committee and probed the activities of multilevel marketing agencies.

Registration or Membership
The agencies should not charge membership fee or registration fee or force customers to buy any product before enrolling him or her as member.
Product, Sales and Commission
If customer was not satisfied by the product the agency ought to return the money withing 30 days.
The customer should be given freedom to examine the sample of the product prior to making purchase.
It will be mandatory on the part of the agencies to give details regarding the organisation and the products to the customers.
Commissions paid to direct sellers should be in tune with the quantity product sold.
The agencies should take advance permission for selling in various areas. They should issue clear records of the sales to the customer
ID Card
The agency representatives should carry Photo Identity Card like PAN Card, DL or other Card issued by Government agency.
Customer Supports
The agency should have a parmanent system to solve complaints or problem related to their products and adequate information should be provided to the customers regarding this facility.
Website and Software
The agencies should have their own Websites on which they sould put all details regarding their products, services and all detail regarding the business. The agencies should provide all activity's detail to particular customer related to them.
They should maintain a regularly updated website giving details of their products, services, price, and other details, besides information on their companies
Financial Trasaction
All financial transaction of the company should be properly accounted for and the agencies should take prior permission when they engage in business activities in any organisation.
The agencies should be a registered firm by any government organisation. They should have trademarks or licences.
Devajyoti Barman
Advocate, Kolkata
13119 Answers
174 Consultations

5.0 on 5.0

1)MLM is a concept of selling product, not money generation. So there should be no scheme or offer to return high income without any sale.

2) You must register your company legally. either  as Pvt. Ltd.,partnership firm.

3)You must give a receipt or bill or invoice to your member with authorised signature

4) Create a concept in which your member is not satisfied with your products or service, he can return product and get refund . 

5) Proof of the name, address and activity of the concern, like registration certificate,  certificate /licence issued by the Municipal authorities under Shop and Establishment act, sales and income tax returns, CST / VAT certificate, Licence issued by the registering authority 

6) states like Rajasthan , Kerala have come out with detailed MLM guidelines . you can access these guidelines on the net .
Ajay Sethi
Advocate, Mumbai
46645 Answers
2759 Consultations

5.0 on 5.0

Referring to this type of marketing, the Supreme Court of India in the case of Kuriachan Chackko and others vs. State of Kerala (2008) 8 SCC, stated that "the promoters of the scheme very well knew that it is certain that the Scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that "Paul can be robbed to pay Peter" but ultimately when there is a large mass of Peters they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money. If it is so, it could be said to be a case for application of Section 420 (Cheating) with Section 34 (Joint Liability) of the Indian Penal Code, of course, at this stage."Supreme Court of India in an MLM case of Kuriachan Chako in 2007 to come to a conclusion on whether one can run an MLM scheme legally .Apart from this, the Supreme Court also confirmed that the Scheme falls under the mischief of Prize Chits & Money Circulation Schemes (Banning) Act, 1978.The Division Bench of High Court comprising Justice Goda Raghuram and Justice Ramesh Ranganathan of and hora Pradeep while disposing a number of petitions of onFriday i.e. 30-07-2010, the Division Bench of the Andhra Pradesh High Court disposed of afresh three more writ petitions filed by Gemini Techno Marketing Pvt Ltd, Win Win Vartaka Pvt Ltd, and Dew Soft Overseas Pvt Ltd. The Division Bench stated that multilevel marketing (MLM) is a vicious circle and it would be difficult to come out of it.It Stated that all multilevel marketing businesses attract the mischief of Prize Chits & Money Circulation Schemes (Banning) Act, 1978 and hence illegal.

MLM scheme that depends on commission from future enrolments into the scheme to pay existing members, is illegal in india.
Jeshma Mohandas KP
Advocate, Kozhikode
567 Answers
1 Consultation

4.5 on 5.0

1. MLM is not banned or declared illegal in India but has been put lot of restrictions in conducting the business,

2. PONZY schme to generate deposite from the masses in a pyramid style of revenue model is illegal ans such Companies are not given validation by the SEBI,

3. Recent arrest of the CEO of AMWAY is the result of not following regulations laid down for running MLM operation,

4. So, before starting your MLM operation, be sure that you will be able to conduct your said business with the regulated way and will still look that lucrative as it used to appear before those regulations were put in to effect.
Krishna Kishore Ganguly
Advocate, Kolkata
18741 Answers
452 Consultations

5.0 on 5.0

1. Do not rely on hearsay. MLM has not been banned in India. It has just been regulated by some states by framing guidelines respecting the manner in which MLM business is to be conducted. Some owners misused the system and cheated people of their hard earned money, so governments were compelled to regulate the MLM business. 

2. Before you commence your business with the object of earning huge profits out of MLM schemes you should get your terms and conditions drafted in such a manner that they are just and reasonable and preserve the rights of the members. The scheme should be such that it is in consonance with the law of the land. On a collective reading of the scheme it should be sans any deceit. Get the contract drafted by a lawyer to be on a safer side as you may not be able to bear with the huge loss which you may incur when you may become subject to multiple court cases by the dissatisfied members, besides getting involved in cheating, fraud, money laundering charges.
Ashish Davessar
Advocate, Jaipur
23092 Answers
639 Consultations

5.0 on 5.0

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