Network marketing is legal in IndiaNetwork marketing is legal in India. So are multi-level marketing schemes, except for certain businesses that are categorized as illegal multi-level marketing, as they are done to trap innocent consumers who invest in MLM schemes, and there is no actual trade in goods and services directly by the investors or the promoters. Rather, there is just a promise that returns will be gained by the investor. However, such promises never materialize and render huge losses to investors.
Due to this, the government of India has identified a few types of network marketing fraud strategies as illegal in India in order to protect consumers. These network marketing schemes are not legal in India under the Direct Selling Guidelines 2016 and Prize Chits & Money Circulation Schemes (Banning) Act 1978 (pdf).
Following schemes of MLM India are considered illegal:
Pyramid Schemes
A pyramid scheme in Indian law is described as the scheme where the organizer builds a structure of a pyramid which starts with one person, who represents the tip of the pyramid
- A person recruits another person who works under him/her. And this person is required to invest a certain amount which is paid to the initial recruiter
- In order to make returns on his/her investment, the new member has to recruit more investors who invest a fixed sum of money, thereby forming a chain of pyramids
- Recently, the Reserve Bank of India (RBI) released a statement cautioning investors against pyramid scheme fraud, that promises high returns and runs on hefty member subscription fees
- The RBI stated that MLM, chain marketing or pyramid structure schemes, promise easy or quick money upon enrolment of members. The RBI advised that the public should not be tempted by promises of high returns offered by multi-level marketing companies, that run network marketing, chain marketing or pyramid structure schemes in India.
Money Circulation Schemes
A money circulation scheme has been defined under Section 2(c) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978
- It states, “As any scheme which assures quick and easy earning money through money chain or if someone demands money from another in order to invest it into a ‘money circulation scheme’ means any scheme for making quick or easy money or for receiving any money or valuable thing as consideration for a promise to pay money,”
- “On any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions”
- Money Circulation Schemes or money chain business are not legal in India
Ponzi Schemes
A Ponzi Scheme is a fraudulent investment scheme and is a kind of MLM fraud which promises a high rate of return to its investors
The returns are paid to the old investors by employing the cash inflow of the new investors. Thus, the scheme relies on a constant flow of new investments and falls apart when the flow of investors stops
- It is essential to understand the difference between a Ponzi scheme and any other type of multi-level marketing scheme such as a pyramid structure
- In a Ponzi scheme, there is a single person who controls the funds and only transfers the money from one person to another, without making any real investments of the money
- Once the investor gains confidence and other investors start investing money, the person committing the fraud disappears with all the investments
- On the other hand, a pyramid scheme is structured in such a manner that the person who starts the scheme will recruit a few investors and it will be the task of those investors to recruit further investors
Chit Funds
A chit fund has been defined under the Chit Funds Act, 1982(1) as “a transaction whether called chit, chit fund, chitty, Kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period.
- Each such subscriber in chit fund shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”
- The way it works is that a group of people contribute a fixed sum of money into a pool
- After this, any member can draw a lump sum through ways such as a lucky draw or an auction (eg: If there is a group of 10 people and the contribution paid by each person is Rs. 1000 a month, then the pool is Rs. 10,000.)
- Any member-based on his needs can draw money from the chit fund.
The general features of MLM scheme which is not legal in India are that there is a promise of a very high rate of return, but in most cases there is no underlying goods or services which bears any value
- On the other hand, a legal multi-level marketing company in India like Tupperware is built through the actual sale of products
- In illegal network marketing schemes, commissions are paid to agents for merely roping in other agents or investors. Whereas, in a legal scheme, distributors are paid a commission on actual product sales of the agents who they have roped in.
- There is usually an unreasonably high rate of return, for which there is no scientific explanation in illegal MLM schemes. On the other hand, a scheme in MLM is, when there is a scientific basis established for giving compensation to its agents and distributors
- Usually, in an illegal affiliate marketing scheme, the plan works on the basis that it is an opportunity to make quick and easy money, whereas such is not the case in a legal MLM.