Report on Direct Selling Industry in India

Direct selling in India:

Appropriate Regulation Is the Key
Author:Bibek Debroy
FICCI
Indicus Analytics
April, 2013
CONTENTS
Executi ve Summary ................................................................. 3
Section 1: Deni ng direct sel li ng ........................................... 6
Section 2: The Numbers ........................................................ 11
Section 3: Si ngle l evel , Mul ti Level and Pyrami d .............. 15
Section 4: Second Best Sol uti on ............................................ 20
Section 5: First Best Sol uti on ................................................. 23
Section 6: Concl udi ng Note Way Forward ...................... 27
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Exrcu1ivr SuMMnnv
This paper sets the base for a good understanding of the
di rect sel l i ng model , i ts advantages, and i ts l i mi tati ons, and
how government pol i cy needs to deal wi th this growi ng
empl oyment opportunity for the masses. It argues that
good and sustai nabl e growth ori ented government
pol i cy needs to protect the i nterests of the consumers and
al so promote cost reduci ng, and e ci ency enhanci ng
activi ti es of employment generati on. It shows that this i s
possibl e si mpl y by appropri atel y di erentiating between
the desirable and the undesirable.
The paper rst makes clear that the way data are
col lected by the Government of Indi a itsel f provides
a good indi cati on of what Di rect Sel l i ng (DS) i s, and
what it i s not. All sales of goods that are not through a
physi cal l ocati on such as stores, stal l s and marts, and
also not through mail order, internet, etc. In other words,
Di rect Sell ing i s the residual and involves selli ng usual ly
through expl anation and demonstrati ons by a di rect
sel l er and not through any other means.
Wi thi n the DS model there may be a multi-level
marketing (MLM) model however that is very dierent
from the pyrami d schemes that the Government needs
to protect consumers agai nst. (These pyrami d or Ponzy
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schemes involve promises of abnormal returns/benets)
To contrast, the DS model even i f i t is in the MLM mode
i s about sal es of goods and sometimes services.
These deni ti onal i ssues are i mportant to be coded in al l
current and future pol i cy and l egi sl ation i f Indi a i s to ful ly
benet from the e ci ency enhanci ng and empl oyment
generati ng advantages of DS and of MLM. And
international evi dence shows that there are benets.
DS through MLM i s a form of di si ntermediati on and
has the obvi ous advantage of reducti on in transaction
costs and bri dgi ng the gap between consumer prices and
manufacturer prices, faci li tated by the use of technology.
It is because of thi s that as countri es move up the
devel opment l adder (as reected by per capi ta income)
direct selli ng i ncreases in importance. The benets are
further enhanced when we consider the i mpact as an
addi tional source of employment, often to untrained
and otherwi se unempl oyabl e persons and also often to
women.
I ndi a needs to operate at the central l ev el . I t needs
to amend the Pri ze, Chi ts and Money Ci rcul ati on
Schemes (Banni ng) Act, maki ng the di sti ncti on cl ear.
Fi rst, di rect sel l i ng, i ncl udi ng mul ti -l ev el marketi ng,
has to be defi ned. Second, there has to be an expl i ci t
qual i fi cati on expl ai ni ng that di r ect sel l i ng i s not to
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be i nterpreted as a money ci rcul ati on scheme. Thi rd,
a pyr ami d scheme has to be defi ned, so that one
knows what i s bei ng prohi bi ted. Thi s wi l l protect
di rect sel l i ng compani es, pr otect consumers and al so
make the task of enfor cement easi er.
Other than deni ng and al l owing di rect sel l ing and
deni ng and prohi bi ti ng pyrami d schemes, a formal
regi stration system should be put i n place, there need to be
wrien contracts between the di rect sel l er and the di rect
sel l i ng company that make the rel ati onshi p transparent
and speci fy sal es practi ces i n the ethical domai n.
Overall , India needs a more systematic pol i cy on DS that
is based on i ts own consti tutional structure and al so the
real i ties and idi osyncracies of the Indi an economy. Fast
growing countries such as Thail and, Malaysia, Korea,
Indonesi a, Chi na, Vi etnam, Japan, Tai wan and Si ngapore
al l have a speci c statute that regul ates, and more
important, facilitates direct selling.
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Src1ioN 1: DrriNiNc oinrc1 srttiNc
There i s no unambi guous deni tion of di rect sel l i ng.
Deni tions can be of three types and they dont necessari ly
overlap.
First, there is a statistical ki nd of denition. For
example, consi der the Uni ted Nati ons Central Product
Cl assi cati on (UNCPC). In the current versi on 2 of thi s
1
,
the 2-di git code 62 stands for retai l trade services and
the further classications 621 and 622 are retail trade
servi ces through speciali zed and non-speciali zed stores.
Everything else (623, 624, 625) is a residual category and
can be i nterpreted as di rect sel l ing.
2
623 is explained as,
This group incl udes:- mail, catalogue or Internet sal es
servi ces by stores that accept orders of new goods by
mail ,telephone, e-mail, etc., and shi p or del iver products
to the customers door. 624 i s expl ained as, Thi s group
i ncl udes:- retai l trade sal es through vending machines;
- retail trade services of market stalls- retail trade
servi ces of door-to-door sales or direct sales, dened as
1 hp://unstats.un.org/unsd/cr/regi stry/docs/CPCv2_explanatory_notes.pdf
2 However, Socio-Economic Impact of Direct Selling: Need for a Policy Stimulus,
Arpi ta Mukherjee, Tanu M. Goyal, DivyaSatija and NirupamaSoundarajan,
ICRIER, undated, equates direct sel ling with code 624.
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a method of consumerproduct and servi ces di stri bution
via sales i n a person-to-person manner/way from a
xed retail l ocati on pri mari ly through i ndependent
sal espeopl e and di stri butors who are compensated
forthei r sal es and for thei r marketi ng and promoti onal
servi ces, based on the actual use orconsumpti on of such
products or services. Fi nally, 625 is explained as, This
group i ncludes:- retai l servi ces of commi ssi on agents
who negoti ate retail commercial transactions for a fee or
acommission; - services of electronic retail auctions. The
Indian statistical counterpart is the 2008 version of the
National Industrial Classi cation (NIC).
3
At the 2-digi t
l evel , 47 covers retai l trade, wi th the excepti on of motor
vehicl es and motor-cycl es. Sub-di vi ded further, 471
through 478 are sal es through stores, stal ls and marts.
Everythi ng el se (479) i s a residual category and comes
under direct selling. The code 479 is dened as, retail
trade not in stores, stal ls or marts . One can sub-di vi de
a bit further, but that is at best articial. For example,
4791 is dened as retail sale via mail order houses or
via Internet and explained as, In retail sale activities
in this cl ass, the buyer makes his choice on the basi sof
adverti sements, catalogues, i nformati on provi ded on a
websi te, modelsor any other means of advertising. The
customer pl aces his order by mai l, phone or over the
3 hp://mospi.nic.in/mospi_new/upload/nic_2008_17apr09.pdf
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Internet (usual l y through speci al means provi ded by
awebsi te). The products purchased can be ei ther di rectly
downl oaded fromthe Internet or physi cal l y del i vered to
the customer. This leaves 4799 as a residual category
of other retai l sal es not through stores, stall s or marts
and interpreted as, This cl ass i ncludes retail sal e of
any kind of product i n any way that i s noti ncl uded i n
previ ous classes (by di rect sal es or door-to-door sal es
persons, through vending machi nes etc.), direct sel l i ng
of fuel (heating oil, re woodetc.), delivered directly to
the customers premises, acti viti es of non-storeauctions
(retai l ), retai l sal e by (non-store) commi ssion agents.
Subject to that point about unnecessary silos i n a seamless
word, 4799 rather than 479 then becomes a denition
of di rect sel l i ng i n the Indi an context, at l east from the
statistical point of vi ew.
The second ki nd of deni ti on i s one formul ated by
di rect sel li ng associ ati ons. Regi onal and country-
speci c associ ations or federati ons often have their own
deni tions. Si nce this is paper i s about India, lets sti ck to
the Indi an Di rect Sel l i ng Associ ati ons (IDSA) deni tion.
4
Di rect Sel li ng means the marketi ng of consumer
products/services di rectl y to the consumers general ly i n
thei r homes or the homes of others, at thei r workpl ace
4 hp://www.idsa.co.in/WhatIsDi rectSelling.html
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and other pl aces away from permanent retai l locati ons,
usual ly through explanation or demonstrati on of the
products by a direct sell er. But for the qualication
usual ly through , this corresponds to 4799.
Stati sti cal deni ti ons, or those arti cul ated by federati ons
and associati ons, dont amount to l aw and pol i cy. For that
purpose, one has to look at speci c legislati on and the
probl em i n Indi a i s that none exists. Thi s i s partl y because
of the Seventh Schedul e. Entry 33 i n the Concurrent List
talks about trade and commerce and specically mentions
the products of any i ndustry where the control of such
i ndustry by the Uni on i s decl ared by Parl i ament by law to
be expedient i n the publi c i nterest, and i mported goods
of the same kind as such products. However, subject to
thi s, trade and commerce withi n the State i s i n the State
l i st. Thi s has l ed to arti ci al compartments between FDI
i n wholesal e and FDI i n retai l and FDI in multi -brand
and FDI i n si ngle-brand. Such compartmentali zati on
is impossible to enforce and i s certain to be vi olated,
del iberatel y, or inadvertentl y. It is not just devel oped
countries like the United States and the United Kingdom
that have specic statutes on di rect sel l i ng. So do
developing countries like Thailand, Malaysia, Korea,
Indonesi a, Chi na, Vi etnam, Japan, Tai wan and Si ngapore.
Uni on-State relati ons do not come i n the way of a specic
statute on di rect sel li ng ei ther. There are i nstances (l and,
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l abour, contract farmi ng, educati on) where the Uni on has
formul ated model l egi slati on as a templ ate for States to
adopt, or alternativel y, enacted such l egi slation. Nor is
the Seventh Schedul e cast i n stone. Down the years, i t has
been amended several ti mes. We wil l return to this point
later.
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Src1ioN 2: Tur NuMnrns
The ori gi ns of I ndi as di rect sel l i ng i ndustry are dated
to 1995 or 1996, 1996 bei ng the year when I DSA was
formal l y establ i shed. I DSA membershi p i s not the
best i ndi cator to determi ne the i mportance of di rect
sel l i ng. For i nstance, I DSA di rectl y has 18 members
and i ndi rectl y, more than 1 mi l l i on i ndependent
sal espeopl e. However, the number of di rect sel l ers
i s esti mated to be al most 4 mi l l i on i n 2010-11.
5
For
that same year, sal es revenue was esti mated at 1149
mi l l i on US dol l ars, accounti ng for 35.8% of non-store
retai l sal es, 4.41% of organi zed retai l sal es and 0.07%
of GDP. These numbers are subject to a caveat. The
I ndi an economy has an organi zed/formal segment
and an unorgani zed/i nformal segment. The Nati onal
Commi ssi on for Enterpri ses i n the Unorgani zed Sector
(NCEUS) was set up i n 2004 and one of i ts reports had
a very good di scussi on of deni ti onal and stati sti cal
i ssues i n anal yzi ng I ndi as i nformal economy.
6
For purposes of thi s paper, l et us use the terms
5 The Indian Direct Selling Industry, Annual Survey 2010-11, PHD Chamber of
Commerce and Industry and IDSA, 2012.
6 Report on Conditions of Work and Promotion of Livelihoods in the Unorganized
Sector, NCEUS, 2007, hp://nceuis.nic.i n/Condition_of_workers_sep_2007.pdf
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organi zed and formal synonymousl y, just as the terms
unorgani zed and i nformal are used synonymousl y.
Outsi de of agri cul ture, i nformal i ty can be dened i n
one of three di erent ways. Fi rst, there i s a deni ti on
i n terms ofexempti ons from payi ng i ndi rect taxes.
Second, there i s a deni ti on i n terms of smal l -scal e
i ndustry(SSI ) or MSME (mi cro, smal l and medi um
enterpri ses). Thi rd,there i s a deni ti on i n terms of
l abour l aws. That i s, an enterpri se i s unorgani zed i f i t
uses power and empl oys fewer than 10 peopl e or does
not use power and empl oys fewer than 20 peopl e.
7
Wi thout gei ng i nto the ni y-gri y of those deni ti ons,
there are an esti mated 407 di rect sel l i ng compani es
i n I ndi a, of whi ch, 157 (38.6%) are i n the organi zed
sector.
8
Thi s has i mpl icati ons for enforceabi l i ty of l aw
and regul ati ons, though i n any process of economi c
devel opment, there i s a natural transi ti on from the
unorgani zed/i nformal to the organi zed/formal . Wi th
that caveat, for the organi zed sector, most revenue i s
from segments l i ke wel l ness, cosmeti cs and personal
care, home i mprovements, home care and househol d
goods.
9
And most revenues occur i n the South, fol l owed
by the West, the East and the North, i n that order.
7 Strictly speaking, this is a Factories Act denition.
8 Ibid.
9 Ibid.
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There are reasons for the increase in the importance
of di rect sel l ing. As an addi ti onal channel , it can l ead
to di sintermedi ati on, reducti on i n transacti on costs
and bridgi ng the gap between consumer prices and
manufacturer prices, faci li tated by the use of technology.
Urbanization, i ncome and consumption growth, higher
female work participation rates and dual i ncome families
increase the importance of transaction costs and their
decl ine. Fi gures are often ci ted about the importance of
direct selli ng i n providi ng employment, especial ly to
women, and i ts contri buti on to tax revenue.
10
Whil e true i n
principle, this is a counter-factual. The contribution to tax
revenue i s based on a premi se that growth occurs i n the
organized sector, not the unorganized. Thi s i s a plausible
asserti on, but not axi omati c. Si mi l arly, the empl oyment
creati on argument i s also based on the assumpti on that
there is a net creation of sales, not a di version of sales from
conventi onal channel s to di rect modes. However, we do
know that as countries move up the per capita i ncome
l adder, di rect sel li ng i ncreases i n i mportance. Thi s has
not onl y happened i n devel oped country markets l i ke the
Uni ted States, Japan, Germany, Uni ted Ki ngdom, France,
Australia and Singapore, but also in emerging markets
like Brazil, Korea, Russia, Malaysia, Argentina, South
Afri ca, Indonesi a and Hong Kong. Therefore, l ogi cal l y,
10 See both the ICRI ER and PHD reports mentioned earli er.
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three propositions do fol low. First, direct selling is going
to i ncrease i n importance i n Indi a. Second, i t wi l l provi de
an additional source of employment, often part-time and
often to women. Third, i ts contributi on to tax revenue wil l
also increase. As has been said earlier, these are empirical
propositi ons, not theoreti cal. Whi l e these observations are
based on cross-country numbers, a l imi ted survey i n the
PHD study also i ndi cates a positive correlation between
use of di rect sell i ng and monthly househol d income.
11
Often, law and regulation do not keep pace with economic
devel opment, but follow it. That seems to be happening
i n Indias direct sel l i ng i ndustry too.
11 Ibid.
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Src1ioN 3: SiNctr-trvrt, Mut1i-trvrt
nNo rvnnMio
We begin this section wi th three answers from
Parl i amentary questi ons, since they hi ghli ght the nature
of the problem. The questions do not maer, since they
are obvi ous enough. The rst was LokSabhaUnstarred
Question No. 4875, dated 20/12/2002. Proposals were
received from the Indi an Di rect Sel l i ng Associ ati on as
well as M/S Fronti er Trading etc. requesti ng to enact a
separate legislation to cover di rect selli ng/multi-level
marketi ng/network marketi ng. The mai n contenti on of
the representati on was that members of Di rect Sel ling
Associ ati on are bei ng targeted due to vagueness of the
Pri ze Chi ts and Money Ci rcul ati on Scheme (Banning)
Act, 1978 i n di stingui shi ng between Pri ze Chi t Funds
and genui ne agenci es i nvol ved i n di rect marketi ng.
This maer was examined in detail i n consultation with
concerned Ministri es. The need for a separate l egi sl ation
was not felt in view of the fact that there were adequate
provisions in the Sale of Goods Act, 1930 (for regulating
the sal e of goods); the Indi an Contract Act, 1872 (for the
sale of services) and the Consumer Protection Act, 1986
(to promote and protect the rights of the consumers).
The provi si ons of the Pri ze Chits and Money Circul ation
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Scheme (Banni ng) Act, 1978 seek to ban the promoti on or
conduct of Pri ze Chi ts and Money Ci rculati on Schemes.
The provisions of this Act had come up for scrutiny
before the Honourable Supreme Court of Indi a who have
ruled that the Network Marketing Plan and direct sale
of goods and servi ces by the di rect sel l i ng compani es do
not fal l wi thi n the mi schi ef of the aforesaid Act. The Sal e
of Goods Act and the Indi an Contract Act dont real l y
constitute the problem. But in so far as the Consumer
Protection Act and the Prize Chits and Money Circul ation
Scheme (Banning) Act are concerned, especi al l y the
laer, this answer in 2002 clearly fai led to anticipate the
problems due to court i nterventi ons. Second, there was
LokSabhaUnstarred Question No. 4062, dated 23/08/2005.
As per Indi an Di rect Sel l i ng Associ ati on (IDSA) there
are more than 200 direct sel l i ng rms openi ng
12
i n Indi a
and most of them are small and regional players. The
rms account for over 50% of all goods sold through
direct selli ng route i n India. The direct sell ing rms are
predomi nantly unorgani zed and the i nformati on on the
approvals taken by such rms i s not avai lable. The IDSA
i s a sel f regul ati ng i ndustry associati on that mandates
i ts members to operate wi thin the stri ct provi si ons of
a Code of ethics prescribed by the World Federation of
Di rect Sel li ng Association. The Code of ethics sets out
12 Sic, probably meant to be operating .
17 Indicus White Paper Series
fai r and ethi cal pri ncipl es that i nduce a congeni al and
heal thy envi ronment for the di rect sel l i ng i ndustry.
Consumers are protected against i llegal or unethi cal
practices through the enforcement of the Code. So far, so
good and i ndeed IDSA does have a Code of Ethics.
13
But
that code i s onl y bi nding on members and membership
cannot be mandatory. That apart, as the answer itself
acknowl edges, el ements of direct sell ing do take place
vi a the unorgani zed channel mode, even i f its share i n
revenue is not proportionate, and enforcement of any
law or regulation for the unorganized sector is di cul t.
Thi rd, there was LokSabhaUnstarred Questi on No. 4683,
dated 7/8/2009. During 2003, Department of Consumer
airs had recei ved requests from Indi an Di rect Sel l ing
Association and other persons for enacting a separate
legislati on to cover Direct Sell ing/Di rect/Network/Multi -
Level Marketi ng. In consultati on wi th the Mi ni stry of
Law, Department of Consumer Aai rs has issued a leer
to al l the Chief Secretaries of States and Union Terri tori es
clarifying that if the Direct/Network/Mul ti-Level
Marketi ng Companies do their activities l awfull y, then
thei r acti vi ti es would not aract any of the provi si ons of
the Prize, Chits and Money Ci rcul ati on Schemes (Banning)
Act, 1978. The Central Economi c Intel ligence Bureau, the
i nvestigating agency deal ing wi th economi c oences, had
13 hp://www.idsa.co.i n/images/pdf/CodeOfEthics.pdf
18 Indicus White Paper Series
drawn aenti on of the Department of Consumer Aai rs
to the fact that companies usi ng pyrami d schemes to sel l
thei r products were taki ng shel ter under thi s l eer to
protect themsel ves from possibl e legal action. I n further
response, Department of Consumer Aai rs cl ari ed to
al l the States and Uni on Territori es that the i nstructi ons
issued earlier di d not cover pyramid structure marketing
scheme. Reserve Bank of India has also separatel y clari ed
that i t is for the State Governments to seek advi ce of their
Law O cers/Publi c Prosecutor to deci de whether any
given scheme aracts the provi si ons of the Prize, Chits
and Money Ci rcul ati on Schemes (Banning) Act, 1978.
There is thus recognition that there is a doubl e ki nd of
problem. First, stated explici tly, compani es indulging
i n pyramid structure marketi ng schemes were cl aimi ng
exemption from the Prize, Chi ts and Money Circul ation
Schemes (Banni ng) Act. Second, left i mpl ici t and not
expli citly stated, si nce direct selli ng can al so be multi -
level, companies indulgi ng i n mul ti-level marketing
were bei ng equated wi th those that dabbl ed i n pyrami d
structures. In pyramid structures, peopl e are persuaded to
joi n and pay money, because they gai n from the payments
made by people who joi n later. In practice, it shouldnt
be di cul t to di stingui sh between the two. For i nstance,
there i s often no cl ear product in a pyrami d structure and
commi ssions are pai d on regi strati on and entry fees, not
19 Indicus White Paper Series
on sal es of products. Even if there i s a product, i t may be
of dubi ous val ue. Havi ng sai d this, does the Pri ze, Chi ts
and Money Circul ation Schemes (Banni ng) Act cl early
di sti nguish between the two, wi thout having to go in for
judi cial i nterpretati on?
20 Indicus White Paper Series
Src1ioN 4: Tur srcoNo-nrs1 sotu1ioN
I n the present context, the rel evant part of the Pri ze,
Chi ts and Money Ci rcul ati on Schemes (Banni ng) Act
i s the bi t that concerns money ci rcul ati on schemes .
The rel evant part i s Secti on 2C of the deni ti ons. Thi s
states, Money ci rcul ati on scheme means any scheme,
by whatever name cal l ed, for the maki ng of qui ck or
easy money, or for the recei pt of any money or val uable
thi ng as the consi derati on for a promi se to pay money,
on any event or conti ngency rel ati ve or appl i cabl e to
the enrol ment of members i nto the scheme, whether or
not such money or thi ng i s deri ved from the entrance
money of the members of such scheme or peri odi cal
subscri pti ons. The questi on to ask i s the fol l owi ng.
Gi ven the cl ause on any event or conti ngency rel ati ve
or appl i cabl e to the enrol ment of members etc , i s i t
i mmedi atel y obvi ous that thi s statute does not appl y
to mul ti -l evel marketi ng schemes? The answer has to
be i n the negati ve. Therefore, an amendment i s needed
to the Pri ze, Chi ts and Money Ci rcul ati on Schemes
(Banni ng) Act, maki ng the di sti ncti on cl ear. Fi rst,
di rect sel l i ng, i ncl udi ng mul ti -l evel marketi ng, has
to be dened. Second, there has to be a qual i cati on
21 Indicus White Paper Series
expl ai ni ng that di rect sel l i ng i s not to be i nterpreted
as a money ci rcul ati on scheme, as l ong as there i s
no pyrami d structure i nvol ved. Thi rd, a pyrami d
scheme has to be dened, so that one knows what
i s bei ng prohi bi ted. Thi s wi l l protect di rect sel l i ng
compani es, protect consumers and al so make the task
of enforcement easi er.
In addi tion to amending the Pri ze, Chi ts and Money
Ci rcul ati on Schemes (Banni ng) Act, i t i s al so necessary
to amend the Consumer Protection Act. For i nstance,
Secti on 2 of the Consumer Protection Act i s agai nst
unfair practices and unfair trade practice means a trade
practice whi ch, for the purpose of promoti ng the sale, use
or supply of any goods or for the provisi on of any servi ce,
adopts any unfair method or unfair or deceptive practice
i ncl udi ng any of the fol l owi ng practi ces Al though
thi s l i sti ng i s meant to be i ndi cative and not exhausti ve,
it is sometimes interpreted as bei ng exhaustive, the point
bei ng that a pyrami d scheme i s not expl i ci tly menti oned
as an unfair trade practi ce.
These two amendments are the bare mi ni mum that is
necessary. However, there i s a reason why these have
been descri bed as a second-best sol uti on. Laws are
enacted at various points in time, to cater to a speci c
need. Ti nkeri ng wi th secti ons and amending them here
22 Indicus White Paper Series
and there, to cater to a new need, i s often a bad i dea.
Such amendments fail to take a holi sti c vi ew. Given the
i mportance of the direct sell i ng i ndustry, an i mportance
that i s onl y likely to increase in the future, a fresh piece of
l egi slati on is needed.
23 Indicus White Paper Series
Src1ioN 5: Tur rins1-nrs1 sotu1ioN
Many countri es i n the worl d (Si ngapore, Mal aysi a,
Uni ted Ki ngdom, Uni ted States, Thai l and, Mal aysi a,
Korea, I ndonesi a, Chi na, Vi etnam, Japan, Tai wan,
Si ngapore) have speci c pi eces of l egi sl ati on on di rect
sel l i ng and there are reasons for thi s. They address
i ssues beyond the ones menti oned i n Secti on 4 and
l egal l y formal i ze some of the pri ncipl es I DSA has i n
the Code of Ethi cs. For exampl e, these cover conduct
towards consumers, conduct towards di rect sel l ers and
conduct towards compani es. One must al so remember
that di rect sel l i ng need not al ways be B2C. I t can al so
be B2B. I f one scans the l egi sl ati on i n these di erent
countri es, they general l y tend to i nvol ve a l i censi ng
cum regi strati on system for di rect sell ers, prohi bi ti ons
on certai n categori es of products, restri cti ons on
col l ecti ng money, a cool i ng-o peri od (duri ng whi ch
consumers can cancel the contract), restri cti ons on
mul ti -l evel marketi ng modes and prohi bi ti ons on
pyrami d schemes. I n some form, they are al so part of
gui del i nes that have been i ssued i n the State of Keral a.
Other than deni ng and al l owi ng di rect sel l i ng and
deni ng and prohi bi ti ng pyrami d schemes, these coul d
24 Indicus White Paper Series
i nvol ve a regi strati on system for the di rect sel l i ng
company (regardl ess of the speci c statute under whi ch
the company i s regi stered), wri en contracts between
the di rect sel l er and the di rect sel l i ng company and
i mpose condi ti ons on both the di rect sel l i ng company
and the di rect sel l er.
But gi ven what was sai d about the i mportance of the
unorgani zed/i nformal segment, one cannot dri ve the
regi strati on/l i censi ng requi rement too hard, especi al l y
because thi s i snt a requi rement that can be readi l y
enforced. Though not a gure for di rect sel l i ng, i n 2004-
05, 84.9% of own account enterpri ses i n I ndi a were
not regi stered and thi s needs to be agged, because
regi strati on al so bri ngsaendant benets, such as
access to credi t or government subsi di es on marketi ng
and technol ogy.
14
Why arent own account enterpri ses
regi stered? The answer i snt enti rel y l ack of i nformati on.
Opti ng out of regi strati on i s probabl y a consci ous
deci si on, because the benets from regi strati onare not
commensurate wi th the costs. Not onl y are procedures
connected wi th regi strati oncompl i cated and ti resome,
regi strati on bri ngs wi th i t the aendant probl em
of bri bery and rent-seeki ngfrom the government
14 Report on Conditions of Work and Promotion of Livelihoods in the Unorganized
Sector, NCEUS, 2007, http://nceuis.nic.in/Condition_of_workers_sep_2007.
pdf
25 Indicus White Paper Series
machi nery . The non-regi strati on i ssue spi l l s over
i nto the exi stence of the unorgani zed sector i n
general . I t i s often presumed that ri gi d l abour l aws
i n the organi zed sector encourage i nformal i ty. But
thi s i s a parti al expl anati on. There are other reasons
behi nd i nformal i ty avoi dance of taxes, compl i cated
transacti on costs associ ated wi th regi strati on, rent-
seeki ng and few percei ved benets from formal i zati on.
The 3
rd
SSI (smal l -scal e i ndustry ) Census was hel d
i n 2000-01. When asked about the reasons for non-
regi strati on, 53.13% sai d that they werent aware of the
provi si ons, whi l e another 39.8% sai d that they were
not i nterested .
15
After the MSMED (Mi cro, Smal l
and Medi um Enterpri ses) Act of 2006, the SSI census
became a MSME Census, conducted i n 2006-07.
16
Thi s
conti nued to show very hi gh l evel s of non-regi strati on.
Therefore, whi l e regi strati on/l i censi ng i s a good i dea
and ensures the transi ti on from unorgani zed/i nformal
to organi zed/formal , wi th i ts aendant benets, thi s
needs to be i ncenti vi zed.
As has been menti oned earl ier, the Seventh Schedule
doesnt come in the way of the Uni on piloti ng such a fresh
piece of l egi slation, pi loted by the Mi nistry of Consumer
ai rs, Food and Publ i c Distri bution. Al l that i s requi red
15 hp://dcmsme.gov.in/ssii ndia/census/highlights.htm
16 hp://www.dcmsme.gov.in/publications/Fi nalReport010711.pdf
26 Indicus White Paper Series
is for two-thirds of States to opt for such legislation.
Failing that, it is always possible to formulate a model
piece of legislati on, which can be adopted by whichever
State wishes to.
27 Indicus White Paper Series
Src1ioN 6: CoNctuoiNc No1r - Wnv
Fonwnno
Policy and legislation that do not adequately understand
the nuances of any industry have the potential of not only
adversely impacting that industry, but other complementary
upstream and downstream industries as well. Recent
movements in the policy domai n [REFERENCE] pertaining
to pyramid schemes are being framed such that a large
number of important sales and marketi ng activiti es may
become illegal. Direct sales and multi-level-marketing
are all being inadvertently bracketed with pyramid
and Ponzy schemes; consequently consumer protection
considerations are being imposed on perfectly legitimate
and benecial economic activities with signicant positive
externalities. The adverse outcomes of such awed
policy could be many - increase in cost of sales, reduced
competition, greater ine ciencies and increased cost of
entry for new rms being some. Not only developed, even
fast growing developing countries have recognized this
and have drafted a facilitative structure for Direct Sales
and Multi-level Marketing that clearly distinguishes them
from Pyramid schemes.
However recent draft guidelines issued to the states show
no such vision; they could be construed to be describing
28 Indicus White Paper Series
direct productsales as disguised form of a pyramid / money
circulation schemes. This only reects that policy-makers
need to beer understand the nuances of the DS and MLM
industry, and also appreciate its current and potential
importance. It is critical for the government to understand that
any economic activity that is based on regular consumption
of real consumable goods or services, irrespective of the cost
of the goods, cannot be simplistically classi ed as a disguised
form of money circulation.
The current draft guidelines envisage eliminating all direct
selling activity where the entity higher in the hierarchy is able
to earn commissions basis the sales e orts of those down the
line, without having to work equally hard. This is of course a
rather nave form of identifying an undesirable or undesirable
economic activity by this route insurance agents, almost
all of trade, and most forms of economic activity could be
considered to be undesirable. The guidelines also allude to
pricing and premiums being inordinately high, pricing of
course,is a function of market forces, and never can a product
of regular consumption in a non-monopolistic seing be
bought and sold consistently at high premiums over years.
It i s obvi ous that di rect sel l i ng and MLM are forms
of economi c acti vi ty that coul d pl ay a very i mportant
rol e i n a country l i ke I ndi a. These are l ow transacti on
cost mechani sms for sal es that have a very hi gh val ue
added component, and are not very resource i ntensi ve
29 Indicus White Paper Series
unl i ke other forms of sal es and marketi ng. DS and MLM
therefore al l ow rms, smal l and l arge to use busi ness
model s that precl ude the need for bui l di ng l arge
physi cal retai l i nfrastructure. It i s al so obvi ous, that a
competi ti ve economy needs to all ow vari ous opti ons of
sl aes and marketi ng, as i t needs to al l ow vari ous opti ons
for i nvestment and producti on.
Unl i ke busi ness model s however, the economi c pol i cy
framework needs to be evenl y spread across the
country, and therefore the central government needs to
pl ay a l eadershi p rol e i n many areas. DS and MLM i s
one such domai n, si nce sal es and maketi ng i n the new
economy wi l l necessari l y be many ti mes across borders,
a common framework woul d hel p i n creati ng a fracture-
l ess marketpl ace.
Ensuri ng the correct del i neati on by speci c deni ti ons
i n poli cy and tort woul d be the rst step. Removi ng such
fuzzi ness from some l aws woul d be another i mportant
step. A regi strati on and regul atory regi me woul d need to
be bui l t up over a peri od of ti me. Al l of thi s woul d need
to be done, whi l e not sti i ng smal l scal e or unorgani zed
enterpri se, rather they shoul d be abl e to see the benets
of bei ng the regi stered and regul ated domai n and
benets from l arger scal es and l ower transacti on costs.
That needs to be the objecti ve of economi c pol i cy.
30 Indicus White Paper Series
Anou1 FICCI
Establi shed i n 1927, FICCI i s the l argest and ol dest apex
business organi sati on i n Indi a. Its hi story i s cl osel y
i nterwoven wi th Indi as struggle for independence, i ts
i ndustri ali zati on, and its emergence as one of the most
rapidly growing global economi es. FI CCI has contri buted
to this hi stori cal process by encouraging debate,
arti cul ati ng the pri vate sectors vi ews and i nuencing
policy.
A non-government, not-for-prot organi sati on, FICCI is
the voi ce of Indi as business and i ndustry.
FICCI draws i ts membershi p from the corporate sector,
both pri vate and publ ic, i ncl udi ng SMEs and MNCs; FICCI
enjoys an i ndirect membership of over 2,50,000 companies
from vari ous regi onal chambers of commerce.
31 Indicus White Paper Series
Anou1 INoicus
Indi cus Anal yti cs i s an economi cs research and data
analysis rm. Indi cus follows the progress of the many
facets of the Indi an economy at a sub-national and sub-
state l evel on real time basi s. It conducts moni tori ng and
eval uati on studies, i ndexati on and rati ngs, as wel l as
policy analysis.
Our multidisciplinary team draws from the analytical
inputs developed in several elds economics, statisti cs,
demography, management, engineeri ng, soci ol ogy, etc.
We have been worki ng with range of Internati onal l y
renowned organi zati ons such as Worl d Bank and vari ous
UN organizations, academia such as Harvard, Stanford
and Cambridge Uni versi ti es, government organi zations
such as Finance Commission, Competition Commission
of Indi a and Reserve Bank of India, top medi a houses such
as India Today group, Outl ook group, Indi an Express
group, and the topmost national and multinational
companies.
32 Indicus White Paper Series
DisctniMrn
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the current vi ews of the author (s) as of the date of
publi cation. This White Paper is for informational purpose
onl y. The author (s) and Indi cus makes no warranties,
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