ISSUE III : Consumer Protection (Direct Selling) Rules, 2021: Legitimising the Industry

Issue III | January 2022

1.          Introduction

The Consumer Affairs Ministry notified the Consumer Protection (Direct Selling) Rules, 2021[1] (DS Rules) on December 28, 2021. They have been notified pursuant to the rule making power of the central government under section 101(2)(zg) read with section 94 of the Consumer Protection Act 2019 (“Act”), that deals with preventing unfair trade practice in direct selling industry. These rules apply to (a) all goods and services bought or sold through direct selling; (b) all models of direct selling; (c) all direct selling entities (“DS Entities”) that offer services and goods to consumers; (d) all forms of unfair trade practices in direct selling and (e) to all DS Entities not established in India but offering goods or services to consumers. DS Entities are required to comply with the new norms within 90 days of the publication of the notification in the official gazette, i.e. by March 28, 2022.

In this post, we provide an overview of the key features of the DS Rules and the obligations that DS Entities and directs sellers must comply with going ahead.

2.         Difference between Model Guidelines 2016 and DS Rules 2021  

The DS Rules, 2021 are an expansion of the Model Framework for Guidelines on Direct Selling (“Guidelines”) released by the Consumer Affairs Ministry in 2016. However, they are distinct from the Guidelines in two key aspects. First, the Guidelines were advisory in nature and required states/ UTs to formulate and implement a mechanism to oversee the direct selling industry. As a result, the Guidelines were  unenforceable. Their enforceability was further impaired in Amazon Seller Services Pvt. Ltd. V. Amway India Enterprises Pvt. Ltd.[2] Where the division bench of the Delhi High Court, while dealing with questions pertaining to sale of products of certain DS Entities on e-commerce platforms, held that merely because the Guidelines were notified in the Gazette, they do not attain the status of “law” within the meaning of Article 13 of the Constitution.The DS Rules on the other hand, have statutory backing of the Act and have been notified by the central government by exercising their rule making power to prevent unfair trade practice in the industry. Consequently, the DS Rules apply uniformly across India and its violation will lead to penalties under the Act. 

Further, unlike the Guidelines, the DS Rules do not per se establish a regulatory framework for the direct selling industry. They do not deal with setting up and conduct of the direct selling business in India or list out terms and conditions to be captured in the agreement between the DS Entities and direct sellers as was present in the Guidelines. Rather, the DS Rules provide legitimacy to the direct selling industry and lay down responsibilities of DS Entities and direct sellers to protect the rights and interest of consumers, reduce fraudulent schemes, aid them in making wise choices and establishing a system of checks and balances in the direct selling industry. Despite this the DS Entities and direct sellers must keep the Guidelines as best practices that needs to be followed by the industry stakeholders.

3.         Key Features of the DS Rules

3.1        Obligations of DS Entities: The DS Rules imposes several obligations on the DS Entities which are as follows:

  • Legal entity: it must be registered under the Companies Act, 2013 or if a partnership firm, under the Partnership Act, 1932, or if an LLP then under the LLP Act, 2008.
  • Physical office: it must have at least one physical locationas its registered office within India.
  • No pyramid schemes: it shall not engage in promoting pyramid schemes[3] or any money circulation scheme and must make a self-declaration to this effect and that it has complied with the provisions of the DS Rules.
  • Website: it must maintain and regularly update its website with details as prescribed in the DS Rules. All information posted on the website should be duly certified by a Company Secretary.
  • Trademark: it must own, hold, or be the licensee of a trademark, or any other identification mark identifying the entity with the goods and services it sells.
  • Trade licenses: it must obtain and keep all applicable trade registrations and licenses, such as PAN, GST registration.
  • Contract with direct sellers: have prior written contract with its direct sellers selling its goods or services and the terms of such agreement shall be just, fair and equitable, containing adequate cooling-off periods.[4]
  • Records: maintain a record of all its direct sellers, including their ID proof, address proof, e-mail and such other contact information and ensure that they have verified identities and physical addresses. There is no requirement to keep these records physically, giving the leeway to DS Entities to continue the practice of storing the information electronically.
  • Packaging and labelling: all products must comply with declarations under the Legal Metrology Act, 2009.
  • Data localization: store sensitive personal data as defined under section 43A of the Information Technology Act, 2000 within India and take steps to ensure protection against its misuse.
  • Grievance redressal: establish an adequate grievance redressal mechanism for consumers and display the name, contact details of the grievance redressal officer on its website, and the details shall also be prominently printed on the product information sheet or pamphlet. The officer must acknowledge the receipt of any consumer complaint within 48 working hours and redress the complaint within 1 month from the date of receipt. In case of delay of more than a month, the reasons for the delay, and the actions taken on the complaint, must be informed to the complainant in writing.
  • Complaint filing: establish a functional mechanism for filing complaints by consumers through its offices or branches or direct sellers through post, telephone, e-mail, or website or in person.
  • Nodal officer: appoint a nodal officer responsible for ensuring compliance with the provisions of the Act.
  • Advertisement: ensure that the advertisements depict the actual characteristics, access and usage conditions of goods or services and shall not falsely represent itself as a consumer and post reviews about its goods or services or misrepresent their quality or features.
  • provide details of direct sellers on the request of consumer for effective dispute resolution.
  • become a partner in the convergence process of the National Consumer Helpline of the central government.

3.2       Information to be provided on the website: Every DS Entity has to provide the following information on its website: (a) its registered name, registered address and of its branches; (b) contact details, including e-mail address, line and mobile numbers of its customer care and grievance redressal officers; (c) a ticket number for each complaint lodged so that the complainant can track the status of the complaint; (d) information relating to return, refund, exchange, warranty and guarantee, delivery and shipment, modes of payment, grievance redressal mechanism; (e) information on available payment methods, their security, applicable fees or charges procedure for cancellation and the contact information of the relevant payment service provider; (f) total price of any goods or service, along with its break-up price showing all charges, including delivery charges, postage and handling charges, conveyance charges and the applicable tax; and (g) correct and complete information at pre-purchase stage such as name of seller, description & estimated delivery, including mandatory declarations under Legal Metrology (Packaged Commodities) Rules, 2011 etc.

3.3       Obligations of Direct Sellers: Every direct seller must:

  • provide accurate and complete information of about himself, the DS Entity, goods or services, prices, payment terms, credit terms, returns, exchanges etc.
  • provide order form to the consumer at the time sale, identifying himself and DS Entity and containing complete description of goods or services, details of complaint redressal mechanism of DS Entity etc.
  • carry identity card or prior appointment from consumer before visiting his premise.
  • not provide or sell any literature or sales demonstration equipment provided by the DS Entity.
  • not make a claim which is not in consistent with the claims of the DS Entity.
  • ensure protection of sensitive personal data of consumers, and have adequate safeguards to prevent access to, or misuse thereof.
  • comply with the requirements of applicable laws, rules and regulations for sale of a product.
  • ensure that actual product delivered to the buyer matches with the description of the product given.

3.4       Record Keeping: The DS Rules make it mandatory for every DS Entity to maintain either manually or electronically at its registered office, all documents and records, as are required for the conduct of direct selling business. These include (a) constituent documents of the DS Entity, (b) PAN and TAN, (c) IT returns, GST registration and returns, (d) balance sheet and audit report, (e) register of direct sellers; (f) certificate of Importer-Exporter code (in case of imported goods),  (g) FSSAI License for manufacture or sale of food items; (h) License and registration issued under the Drugs and Cosmetics Act, 1940 for manufacturing or selling drugs, including Ayurvedic, Siddha and Unani drugs and Homoeopathic Medicines; and (i) Certificate of Registration of Trademark.

3.5       Application of e-commerce rules: The direct sellers as well as the DS Entities using e-commerce platforms for sale of their products and services have to comply with the requirements of the Consumer Protection (e-Commerce) Rules, 2020. These requirements are based on securing the interest and rights of the consumer and includes providing accurate information of products and services, grievance redressal mechanism etc.

4.         Monitoring by State Government: For ensuring compliance of these rules by DS Entities and direct sellers, the DS Rules provide that every State Government shall set up a mechanism to monitor or supervise the activities of the industry. This implies that going ahead we can expect some state specific regulations to ensure that the provisions are adhered to by the industry.

5.         Conclusion

The DS Rules are a positive step not just from the consumer’s perspective but also for the direct selling industry. They go a long way in legitimising and providing consistency required for the growth of the sales-oriented industry that has been troubled with controversies in the past. While the enactment of codified rules is indeed a positive step, it needs to be coupled with providing adequate training and education to law enforcement agencies on how the direct selling business works; relationship between direct sellers and DS Entities; what is allowed/not allowed in order to mitigate the risks against the direct selling business. For instance, direct sellers often expect large payments for selling products of the DS Entities and when their expectations are not met, they threaten the DS Entities with criminal action and arm twist them into paying more money. As a result, directors and management of DS Entities are summoned to police stations due to FIRs registered by aggrieved consumers and direct sellers alleging that their business is, in fact, a pyramid scheme. With a binding legal framework in place, hopefully such practices will reduce and the sector will also begin to attract a lot more investment than it currently does.

Author

Rishi Sehgal


[1] See:  https://consumeraffairs.nic.in/sites/default/files/232214.pdf (accessed on Jan 4, 2022)

[2] 2020 SCC OnLine Del 454

[3] Rule 3(i) defines pyramid scheme as a multi layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and the enrolled subscribers a lower position, resulting in a multi-layered network of subscribers with successive enrolments.

[4] Cooling-off period refers to the time period within which a participant can cancel the agreement with the DS Entity without resulting in any breach of contract or levy of penalty.

 

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