Union Government issues model guidelines for states to curb Ponzi schemes

Sep 13, 2016 13:07 IST

The Union Government on 12 September 2016 issued model guidelines for states to regulate direct selling and multi-level marketing businesses while prohibiting pyramid structures as well as money circulation schemes. The guidelines were issued to protect consumers from Ponzi frauds.

The Direct Selling Guidelines 2016 framework was released by the Food and Consumer Affairs Minister Ram Vilas Paswan. They have been sent to the states and Union Territories for adoption.

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Key highlights of the guidelines

In the guidelines, the Union Government has clearly defined legitimate direct selling and differentiates it from pyramid and money circulation schemes to help investigating agencies identify fraudulent players.

Direct selling means marketing, distribution and sale of goods or providing of services as a part of network of direct selling other than under a pyramid scheme.

Pyramid Scheme has also be defined in the framework. Money Circulation Scheme has the same meaning as defined under Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

To conduct direct selling business, the guidelines have prescribed many conditions that need to be complied within 90 days.

The guidelines bar direct selling companies from charging any entry fee from agents or compelling them to buy back unsold stocks. These entities will have to enter into an agreement with direct sellers or agents, and give full refund or buy-back guarantee for goods and services sold to them.

The guidelines also mandate direct sellers to constitute a grievance redressal committee to protect consumers’ right.

The guidelines have also made provision for appointment of monitoring authority at both Central and state level to deal with the issues related to direct selling.

They also prohibit direct selling entities from using misleading and deceptive or unfair recruitment practices.

The guidelines have also put conditions for contract between direct sellers and direct selling entity, saying that all such agreements should be in writing describing the material impact of the participation.

The agreement should not compel or induce the direct seller to purchase goods or services in an amount that exceeds an amount that can be expected to be sold to consumers within a reasonable period of time.

The contract should provide direct sellers a reasonable cooling-off period in which they can cancel it and receive a refund for goods and services purchased.

The guidelines have also specified certain obligations of direct sellers such as carrying identity card, and full disclosure of the good and services offered by the entity represented by them.

The new guidelines mandate a seller to provide information about the name of the purchaser and seller, delivery date of goods, procedure of its return and its warranty.

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