Sonia Bakshi (name changed), 39, completed her MCom from Mumbai University in 1998. But marriage came in the way before she could begin her professional career. She spent years as a homemaker before her brother-in-law introduced her to QNet’s direct selling business. Today, she and her husband boast of hundreds of distributors in their network, selling products worth over Rs 1 lakh a month.
Like Bakshi there are six million ‘direct sellers’ in India, selling healthcare goods, cosmetics and household products worth Rs 10,000 crore a year for different Direct Selling companies including QNet.
Direct sellers, or distributors of these companies, earn money in two ways – a margin on the product sales they do on their own, or in a structure, where they share a part of the commission made by those whom they have referred. Here the referred individuals in turn buy products. As much as around 60 per cent of these direct sellers are women.
A report by consulting firm KPMG said the Indian direct selling industry employed 3.4 million women in fiscal 2012-13. It is a $167-billion industry globally, engaging more than 90 million direct sellers. Asia-Pacific forms its largest chunk, with a 44 per cent share, followed by the Americas (20 per cent) and Europe (15 per cent).
In India, the direct selling business took off in the mid-1990s, and peaked with a growth rate of 27 per cent in 2010-11. However, that growth has diminished drastically since. The industry grew a mere 4.3 per cent in 2013-14, hit by allegations of fraud, arrests and closure of some businesses. The industry is alarmed.
The PCMC Act was formulated in 1978 to prevent fraudulent pyramid and ponzi schemes from swindling people’s money. Fraudulent schemes ape the legitimate model of direct selling firms and promise high returns, mostly through enrolment of new subscribers or investors into the system; when new recruits stop joining the pyramid, such schemes collapse.
Ponzi schemes such as SpeakAsia and Japan Life also collapsed in recent years, making authorities exercise more caution than before. But they often tend to overreact.
A major difference between a Ponzi or pyramid scheme and the direct selling business is that distributors in the direct selling business get compensated only if consumers continue to buy products, while in fraudulent schemes compensation is based on recruiting new participants. While direct selling companies’ legitimate emphasis is on bettering their product sales, in pyramid schemes the emphasis is on enrolling new subscribers. There is no entry fee involved and there are genuine business opportunities in the direct selling business.
The need for regulation globally is imminent -the World Federation of Direct Selling Associations, that represents direct sellers’ bodies in 60 countries, has established a World Selling Code of Conduct for a standard framework in the industry. Also, most countries have laws regulating the direct selling business. In the US, various states have laws regulating multi-level marketing schemes. In Europe, direct selling is regulated under various directives of the European Union. Laws in Singapore deem illegal any scheme that charges entry fee, recruitment commission or does not maintain and audit its records. China restricts the number of products sold through direct selling and disallows entry fees and payments calculated on the number of recruits.
The need for laws in India is imperative – the government, on its part, seems to have woken up to the issue.
At present, an inter-ministerial panel chaired by the consumer affairs ministry is deliberating on whether the sector needs an independent regulator. “We feel it is important to distinguish between the genuine and fraudulent players, and any proposed regulation should keep in mind the interest of consumers,” Consumer Affairs Minister Ram Vilas Paswan had said, adding that direct selling required more transparency.
The IDSA has framed a self-regulating code of conduct which expects “ethical behaviour” from its members, including refraining from misleading, deceptive or unfair sales practices, and requires its members to accurately explain products and pricing terms to customers. It also demands ensuring written order forms and receipts, and asks companies to refrain from “deceptive and misleading” promotions. It claims its members adhere to clean business practices.
KPMG’s reports indicate that the direct selling industry in India can touch $15 billion or around Rs 90,000 crore in 10 years, offering huge self-employment opportunities. But for that to happen, the industry needs to come clear on its operations. It can do that not just with help from the government in framing clear laws, but also by setting its own standards and living by them.