DRAFT CONSUMER PROTECTION (DIRECT SELLING) RULES, 2021: A BOOST FOR THE DIRECT SELLING PLAYERS

This blog has been authored by Arushi Dokania a 4th year BBA LLB student at Jindal Global Law School.

Introduction

The recently introduced Draft Consumer Protection (Direct Selling) Rules, 2021 (‘Draft Direct Selling Rules’) is a breath of fresh air for consumers because direct selling entities such as Modicare, Oriflame, Tupperware, Amway etc. will now be required to follow regulatory guidelines. Unlike the former Consumer Protection Act, 1986, direct selling has been defined in the Consumer Protection Act, 2019 (‘CPA 2019’). Section 2 (7) of CPA 2019 clearly includes any person who purchases products or receives services via direct selling or through multi-level marketing under the definition of “consumer”. Though, under the CPA 2019, a framework for governing direct selling is yet to be established. The Department of Consumer Affairs has finally made significant efforts toward legitimizing the regulatory environment for direct selling firms in India with the recently proposed Consumer Protection (Direct Selling) Rules, 2021 (‘Draft Rules’).

Failure of the Model Framework for Guidelines on Direct Selling

Earlier in 2016, the Model Framework for Guidelines on Direct Selling (‘Model Framework’) was introduced and this provided the groundwork for the direct selling industry’s regulatory framework. The Model Framework was indeed a significant step towards differentiating between authentic direct selling systems and illegal pyramid schemes. Before the launch of this Model Framework, the direct selling industry was plagued by ambiguity about the authenticity of their entities.

The Model Framework was only advisory in nature that required states and the union territories to establish a mechanism to oversee the direct selling businesses and the direct sellers. Only a few states such as West Bengal, Chhattisgarh, Maharashtra, Sikkim, Punjab, Orissa, Karnataka and Himachal Pradesh issued guidelines based on the Model Framework. Moreover, the enforceability of the Model Framework and the state guidelines have been questioned because they have not been legitimised by the central or state legislations. In the case of Amway India Enterprises Pvt. Ltd. vs 1Mg Technologies Pvt. Ltd. &Anr., (‘Amway Case’), the Single Judge of the Delhi High Court ruled that the E-commerce forums such as Amazon and Flipkart cannot sell the products of Direct Selling Entities without their approval thereby holding the Model Framework to be binding. However, this decision was overruled by the Division Bench of the Delhi High Court in Amazon Seller Services Pvt. Ltd. and Ors. v. Amway India Enterprises Pvt. Ltd. and Ors.(hereinafter ‘Amazon Case’). In the Amazon case, it was held that the Model Framework was merely advisory in nature and is not binding. The Bench went on to note that “merely because the DSGs are notified in the Gazette, they do not attain the status of “law” within the meaning of Article 13 of the Constitution” therefore making the model framework unenforceable.

This problem will be solved by the proposed Draft Direct Selling Rules which will be released in accordance with the rule-making power of the Central Government under Section 94 and Section 101(2)(zg), in order to avoid unfair trading practices in direct selling business.The Draft Rules will apply uniformly across India and its violation will lead to penalties.

Analysis of the Draft Direct Selling Rules: A Sign of Relief

The Model Framework provided the basis for many of the key ideas found in the Draft Direct Selling Rules. The proposed regulations state that no direct selling business can advertise the “pyramid scheme’ or engage in “Money Circulation Scheme” while posing as a direct seller. The rules state that the network of direct selling should neither include any stipulation for direct sellers to earn remuneration or perks for recruiting new participants in their business other than as a result of their sales nor should it require any participant to make payments for entry fee or any other fee in relation to participation. The rules also state that no direct selling entity is required to buy goods or services in quantities and values that are greater than those that can be sold. All direct selling entities must provide a fair cooling-off period not amounting to less than 30 days to the participants so that they can discontinue in the business. An option of buy-back policy should be given for currently marketable products that are not unpacked.

Similar to the Model Framework, the Draft Direct Selling Rules also states the responsibilities and obligations of the direct selling businesses , under which all entities have to be properly constituted as a company, LLP or a partnership firm under the applicable Indian laws. The entity should also be the holder, owner or a licensee of a trademark or a service mark, giving the entity a unique identity in relation to the goods or services it provides. Direct selling entities are also required to keep an up-to-date website that includes information about the entity, product information such as pricing, refund, return, exchange, delivery, warranty etc. along with a consumer grievance redressal mechanism. Additionally, to protect consumer interests, the entities must provide transparent, concise and complete offer conditions to its customer base, including price, delivery, after-sales service, return policies and claims along with factual representations. Furthermore, they should ensure that deliveries are done timely, refunds and cancellation requests are taken care of, there is no indulgence in any kind of unfair trade practices and the data of its its customers is protected.

Direct selling businesses should keep a track of all the direct sellers in their network, enter into legal contracts with them and oversee their business practises. They should ensure that there is proper compliance with the regulations and penalties should be imposed on erroneous direct sellers. Moreover, all entities are required to maintain a record of such direct sellers who have regularly supplied faulty or fake goods or inadequate services and display such details on their respective websites and at its premises. Any complaints stemming from the business opportunities, sale of goods and services by its direct sellers are the responsibility of direct selling entities.

These Draft Rules suggest a similar criterion for direct selling entities as provided in the draft amendments of the Consumer Protection (E-Commerce) Rules, 2020 (‘E-Commerce Rules’) for the e-commerce entities. Both the Rules state that all direct selling entities operating in India must register with the Department of Promotion of Industry and Internal Trade (DPIIT); specialised executives such as a Grievance Redressal Officer must be appointed to handle consumer complaints and to ensure compliance with government directives.

The End of Battles between E-Commerce Forums and Direct Selling Entities

The implementation of these Draft Rules may put an end to the long-running feud between direct selling businesses and the e-commerce marketplaces. As per the Rules, an e-commerce forum can market or offer goods or services of a direct selling entity only with the latter’s written permission. The Rules re-enforce the decision in the Amway case. However, the Division Bench of the Amazon case noted that the aforementioned provision has been mirrored in the Draft Rules and that the provision will be open to dispute once the Draft Rules are adopted. An appeal has been filed in the Supreme Court against the judgement delivered in the Amazon case. It will be interesting to see how the Apex court rules on the case, particularly if the Draft Rules are adopted and put into effect while the appeal is pending.

Conclusion

The Draft Rules have been warmly received by all the parties involved including the Indian Direct Selling Association. The Rules appear to be consumer as well as industry friendly. It will bring in accountability and protect the ordinary man who may be persuaded to spend his hard-earned income in a direct selling business. The CEO of Amway India, Anshu Budhraja, said that these Rules will ensure satisfactory consumer experience. When these rules will be enforced, it will permit the direct selling entities to focus on expanding their businesses and shall also safeguard the consumers from unfair trade practices. The Draft Rules shall indeed pave the way for the direct selling business to be recognised as an essential sector of the Indian economy.