There is no separate law for setting up an MLM Company for direct selling in India now, How to start an MLM in India is a very important question for any startup looking for setting up a network marketing venture. It was proposed in the Indian Parliament in 2005 but has not become law. However, there is certain compliance that needs to be followed.
- It is not only the headcount commission modal that falls into the category of a banned Pyramid Scheme in India but also the MRTP Act alias Money Rotation Trade Practice Banning ACT 1969.
- It shouldn’t be only about the money when it comes to investment returns – there should be a viable product selling business model involved too.
An MLM company may be a good option for a company or manufacturer with unique products or services to market, who wants to tap into a global customer base without setting up expensive shops and showrooms.
What is the best practice to set up a Multi-Level Marketing Company?
We recommend setting up a Private Limited or Limited Company to set up a Multi-Level Marketing Company in India which limits the risk for directors who are setting up a Multi-Level Marketing Company Business.
Apply for membership with the Indian Direct Selling Association (IDSA). It’s a private organization set up by Amway India to govern all direct selling companies in India and to stop unethical and illegal MLM companies and Multi-Level Network Marketing Business practices from operating and destroying the MLM Business route. Apply for Vat/Service Tax/ Tan No and all necessary licenses and registration required for manufacturing and selling your product.
It is advisable to appoint a legal advisor and chartered accountant to create rules, regulations, forms, printing materials, and other company-related legal documents. Please do not cut and paste other companies’ print materials, as they may not be applicable to your product or MLM business model. It is also advisable to develop exclusive website content and information related to the company, written by the company’s legal advisor, to counter the legal laws of the land.
Government guidelines for MLM network marketing companies in India.
The following guidelines are issued with the approval of the Competent Authority to regulate the sale of goods and services outside of retail establishments, otherwise known as “Direct Selling (Multi-Level Marketing),” and to provide for the protection of consumers who purchase goods and services from direct sellers. These guidelines will come into force from the date of publication in the Official Gazette and will remain in force until appropriate legislation is enacted for the said purpose.
- Direct selling refers to marketing or selling goods directly to the end-user consumer, usually through word of mouth, display, demonstration, or distribution of pamphlets.
- Companies that engage in direct selling often open pick-up and delivery points to maintain an effective delivery system.
- Direct Selling Entity: A business entity recognized by law, including but not limited to a company incorporated under the Indian Companies Act or a registered partnership firm constituted under the Indian Partnership Act.
- A Direct Selling Entity is a business organization that is officially recognized by the government and can include companies incorporated under the Indian Companies Act or registered partnership firms under the Indian Partnership Act.
- A direct seller is someone authorized by a direct selling company to engage in the business of direct selling.
- A consumer is an individual who buys goods or services for personal use and not for manufacture or resale.
- Goods/products are defined as anything movable that is not an actionable claim or money.
- Sale incentive: refers to a percentage of the profits that a direct seller earns from selling goods or products, as stipulated in the contract between the direct seller and the direct selling entity.
2. Conditions for Permissible Direct Selling:-
I. The direct selling entity should have a sales tax/VAT, income tax, TDS, and other licenses as required by law/regulations in its principal place of business.
II. The direct selling entity should have a bank account with at least one nationalized bank.
III.The Partnership Deed or Memorandum of Association should clearly state the nature of the business. This will help to ensure that all partners are aware of the business’s purpose and goals. (If you don’t have such specific clauses in your Memorandum of Association or Partnership Deed, you should get them amended within 2 months from the date of publication of these Guidelines.)
IV. Pay sales incentive according to the agreed rate and timeframe.
V Authorized Direct Sellers’ names and identification numbers must be displayed on the company website.
VI A consumer grievance cell should be established to resolve complaints within 7 days of receipt.
VII. The website should provide a space for consumers to register complaints without any hassle.
3. Appointments/Authorisations: –
I. The Direct Selling Entity will appoint/authorize Direct Sellers after receiving and reviewing their applications in the prescribed format.
II. An agreement documenting the terms of such appointment should be executed between the Direct Selling Entity and Direct Seller.
III. No application should be considered unless the applicant is eligible to enter into a contract under the Indian Contract Act.
IV. Before a Direct Seller can be granted a license or permission to start Direct selling, they will be allotted Unique Identification Numbers.
V. Incentives for joining Direct Sellers should not be offered to any person by the Direct Selling Entity.
I. Incentives should not be based on sales volume.
II. It is wrong to knowingly sell inferior or expired goods.
III. Direct sellers must not engage in any activity prohibited by the Prize Chits and Money Circulation Scheme (Banning) Act, 1978.
5. General Conditions: –
- The MRP of goods should be displayed prominently on the packaging.
- Accounts of individual Direct Sellers should be well-kept and made available online.
- Sales incentives should be distributed to the respective Seller promptly and as agreed.
- Goods sold by the Direct Selling entity should come with a manufacturer’s guarantee/warranty. However, if the consumer finds any manufacturing defects or the product purchased is not useful for the purpose it was meant, they should be given the opportunity to exchange/return the goods within 30 days from the date of purchase, provided any seal/protection on the product is kept unbroken.
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