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Direct Selling In India – A New Approach

Direct selling can be undertaken by anyone regardless of age, gender, educational qualification, or experience level and is largely dependent on the communication and interpersonal skill of the direct seller (also known as direct selling agent)

Direct selling, also known as multi level marketing (MLM), network marketing, or referral marketing, has become an extremely popular sales model across India in the last few decades. Unlike its retail counterparts, in direct selling, products are sold to consumers through demonstration, usually at the consumer’s home or office, and not at a retail outlet. Direct selling can be undertaken by anyone regardless of age, gender, educational qualification, or experience level and is largely dependent on the communication and interpersonal skill of the direct seller (also known as direct selling agent). The success of direct selling lies on the direct seller’s ability to create a personal connect with the consumer. Moreover, direct selling provides the option of working flexible hours (besides working regular jobs) enabling housewives, students, and small time job workers to pursue an additional career without much of a hassle. It can be said that the direct selling has been encouraging self-employment among people for years now, something the current Government is pushing to achieve through Stand-Up India programme. No wonder, the direct selling industry in India has seen such rapid growth in the last two decades. While global players such as Amway, Oriflame, Tupperware, Q-Net, and Herbalife have become household names, homegrown companies such as AMC Cookware, Vestige, and Modicare are not too far behind. The 2016-17 Annual Survey Report of the Indian Direct Sellers Association (IDSA) states, “…the direct selling industry in India has grown at a CAGR of 8.42% over the period 2013-14 to 2016-17 when it has grown to INR 1,03,242 million (INR 10,324.2 crores) in 2016-17 from INR 74,722 million (INR 7,472.2 crores in 2013-14). This can be accounted to the growth in the number of Direct Sellers involved which has risen to around 5.1 million in 2016-17 from 3.9 million in 2015-16 showing a robust growth of 30.1%.”

Regardless of the incremental growth in size and employment figures, the direct selling industry is not exactly a preferred sector for policymakers in India. In fact, the industry has often been criticised for exploiting customers’ naiveté and disregarding business ethics. While all allegations cannot be baseless, a majority of them are believed to be mere hearsay. The general nescience towards direct selling can be attributed to four basic reasons.

First, the direct selling industry lacked any regulatory directives in the past. Add to this the poor level of understanding of the direct selling model among law enforcement agencies, judiciary, and the media. Although, there has been a gradual change in the outlook of policymakers and judiciary towards the industry over the years, the understanding among junior level officers of law enforcement and the media is inadequate.

Second, there is a common misconception amongst the general public that all direct selling operations are pyramid schemes and/or Ponzi schemes. This notion is in fact in tandem with another age-old business in India, which is chit funds. It is to be understood that both direct selling and chit funds are perfectly legitimate business models which operate under stipulated guidelines laid down by their concerned regulators. However, in the last few years, the unfurling of few scams has led to both these businesses blaming the other. Few of these include the SpeakAsia scam, Pearl Agrotech Corporation scam, Saradha Group scam, and more recently the Social Trade scam in Noida. Although, further investigations revealed that these frauds were actually carried out by fly-by-night operators disguising themselves as direct selling businesses, the direct selling industry bore the brunt of these incidents. The public mistrust on direct selling further accentuated by various media reports that were published without probing the veracity of the nature of these scams.

The third reason could be the fact that the direct selling industry doesn’t meet India’s traditional norms of conducting business. Even though, the concept of street selling and door-to-door sales has existed in India for a long time, the pay and compensation structure of direct selling is an entirely new concept for Indian consumers. The direct selling industry doesn’t really follow the traditional concept of monthly salary and wages, and pays through an incentive structure depending on volumes of sales by a direct seller added to a percentage from the sales of direct sellers introduced below him or her. This anomaly in the pay system is uncommon to the average Indian psyche, and has often turned into a point of contention on non-receipt of the expected compensation and bonus. Moreover, on joining a direct selling business, most direct sellers set unrealistic targets for themselves, both in terms of sales and introducing new participants. On most occasions, these targets prove hard to achieve. This leads to severe disappointment among direct sellers, prompting them to label the company’s operation as a sham and register complaints with the local law enforcement agencies. The lack of understanding of the direct selling business model among law enforcement agencies often leads to booking direct selling businesses under haphazard laws and arbitrary clauses. Moreover, since personal incompetency is not a befitting ground for claiming compensation, most complaints are linked to organisational pay policy and is further coupled with the infamous Prize Chit Money Laundering (Banning) Act of 1978, (commonly known as PCMCS) to fortify the case.

The final and most challenging aspect for direct selling operations is the industry itself. Regulatory and policy reforms aside, it would be unfair to say that this industry has always been clean in its operation. The direct selling industry has its own set of operational flaws, many of which still persist. A series of problems ranging from a feeble customer grievance redressal mechanism, inconsistent compensation, and refund policy, and mis-selling continue to hound the sector. Since direct selling is largely dependent on word-of-mouth, chances of even an odd instance being escalated is enough to give the entire industry a bad name.

The regulatory challenges to direct selling have been resolved to some extent, with the Department of Consumer Affairs, GoI releasing the direct selling guidelines in September 2016. In the last few months, many states have adopted these guidelines and issues their own guidelines while others are in the process of doing the same. However, merely adopting guidelines will have a very limited impact on this sector which needs some serious policy reform. 

To start with, the Union Government should consider including direct selling as a channel of sales under retail rather than terming it as a business. It is to be understood that with evolving times retail doesn’t encompass just “market and fair”, as defined in the State List of Seventh Schedule of the Indian Constitution. Instead, it should include various formats including direct selling. Since a consumer doesn’t differentiate between channels of sale, it is only common sense for the Government to follow the same principle. The Government of Telangana, which is currently drafting a uniform ‘Retail Policy’ for the State, is considering bringing all channels of sales under one umbrella and create a level playing field for all segments. Perhaps the Union Government should consider replicating this model to create a Central Retail Policy.

Second, to control the problems of fly-by-night operators, the Government should ensure registration of all direct selling companies with a single authority. A closer to home example would be of the chit fund industry, where fraudulent operations were drastically reduced once all legitimate chit fund businesses started registering with the chit fund registrar of the operating State.

Third, the PCMCS Act must be amended to clearly define the nature of cases that can be filed under its ambit. These cannot include regular customer grievances. In fact, a separate customised grievance redressal cell should be created at a central level for customer complaints with a stipulated turnaround time.

Fourth, the industry and the Government should jointly discuss the proposal to create a self-regulatory organisation (SRO), something along the lines of Association of Mutual Fund Companies (AMFI) for mutual funds or M-Fin for microfinance. With the creation of an SRO, the industry can be better managed by creating standard regulations and best practices.

Fifth, it is high time that industry comes together and starts addressing its internal problem. The industry must understand that due to past instances it inherently runs a reputation risk and needs immediate corrective actions to avoid further damage. The industry must collectively work to turn around the general psyche around direct selling by spreading awareness about its business model among public, media, and law enforcement. The industry needs to take further corrective measures to put an end to fraud in the business. To begin with, there could be a common database to track fraudulent direct sellers. Further, the industry should also look to address the issues of customer grievance by putting in place better grievance redressal mechanism.

The direct selling sector had been at the receiving end for many years, but has gradually evolved over the years. It has the potential to be a major driver in pushing growth and generating employment in the economy. In fact, not just employment but direct selling can also address the issue of improving the female labour participation, which is currently a little above 30 per cent as per World Bank’s report on female labour force participation in India. What remains to be seen is, if the policymakers are willing to give the industry a chance.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Arindam Goswami

Arindam Goswami is a Research Fellow with Pahle India Foundation (www.pahleindia.org), New Delhi. His interests are in the domain of financial sector, gold and precious metal commodities, and domestic trade.

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