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India Direct selling industry Analysis from Regulatory perspective

India Direct selling industry Analysis from Regulatory perspective



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Published by The entrepreneur
$110 billion Direct selling Industry Worldwide is growing at a decent pace in India. However there are many regulatory lope holes which prevents the legitimate businesses to grow.
Check out the in-depth analysis done by ET Bureau.
$110 billion Direct selling Industry Worldwide is growing at a decent pace in India. However there are many regulatory lope holes which prevents the legitimate businesses to grow.
Check out the in-depth analysis done by ET Bureau.

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Published by: The entrepreneur on Jun 17, 2009
Copyright:Attribution Non-commercial


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Printed fromRemove policy ambiguity on direct selling industry15 Sep 2008, 0408 hrs IST, K G Narendranath, ET BureauNEW DELHI: India lacks a clear policy on direct selling(DS), which under a proper regulatory framework couldhave given millions with limited means a legitimate toolto earn a decent living and develop marketing andmanagement skills. The caution on display to forbidpyramid/money circulation companies and chaincompanies — whose incidence is only growing despitegovernment crack-downs — limits the growth if not birth of DS units.The situation in India is in sharp contrast to that in the US,most of Europe and Singapore especially as thesecountries have legalised (and thriving) DS industries —the global size of the industry was around $110 billion in2007— under meticulous, yet non-intrusive regulatoryframeworks. Even China now permits DS by calling it“sales away from a fixed location” although subject toseveral conditions such as minimum paid-up capital ($6.5million) for each DS firm; specified experience outsideChina; and ban on multi-level marketing (MLM) unless thedistributor is ‘authorised agent’ of the DS company.In Singapore’s case, it is a clear case of realisation of thelegitimacy and lawfulness of DS industry considering thatthat country had enacted the restrictive Pyramid Schemesand Multi-level Marketing (Banning) Act in 1978,immediately following the worldwide scam “Dare to BeGreat.” (This scheme was also operational in India as amoney circulation scheme. It was operated by a felon bythe name Glenn Turner).Even when the ban existed, Singapore was wont to permitdirect selling provided that no payment was made by acompany to a distributor for any services other thanpersonal sales. Singapore rethought its position in mid-1990s, owing to legitimate pressure from the businesscommunity to add MLM component to their operations inorder to cut outsourcing to Malaysia. The DS distributorscould convince the Singapore government of the potentialbenefits of MLM as “a compensation system throughwhich companies pay distributors for marketing and salessupport services in addition to sales,” in which manysafety mechanisms are in-built.For starters, direct selling is the distribution systememployed by certain companies in which they engageprivate citizens on a contractual basis to sell their products/services to the consumers. The distributor, beingnot an employee of the company, will, in most cases, beable to set his schedule, retail price and level of effort
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(mostly with the comfort of the company’s promise that itwon’t undercut his sales efforts). The distributor’scompensation comprises the margin between thewholesale and retail prices of the product and also theextra bonus paid by the company to him when salesvolumes hit certain levels. The main problem with thispractice from the point of view of policymakers andregulators arises when the DS company encourages itsdistributors to recruit customers to become distributorsthemselves (this is what is called MLM). This is beingdone by offering the primary distributor a compensation if his recruit is able to generate additional sales. The systemof linking commission to new distributor recruits (rather than sales) is considered to be inherently flawed andunsustainable and so, requiring regulatory crack-down.But this problem, it is now reasonably established by theUS, EU and Singapore regulators, can be resolved byestablishing a system that recognises the economicbenefit of MLM operations. Linking compensation to saleswould ensure that properly regulated MLM is not akin to apyramid scheme, Indian Direct Selling Association (IDSA)said in a recent presentation to the central government.The legitimate direct selling industry in India is clamouringfor differentiation between them and (fraudulent)pyramid/money circulation schemes. IDSA demandslegalisation of the DS industry. According to it, thecorrectness of the behaviour of the DS units can beensured through a few a steps: link commissions toproduct sales (not to more recruits as done by ‘chaincompanies’); give direct seller the option to exit after areasonable period with refund; ensure quality of products;obviate inventory loading.In India, currently, provisions of Sales of Goods Act,Consumer Protection Act, and those relating to restrictiveand unfair trade practices, packaging regulations etc.mutatis mutandis apply to direct selling. It is not otherwiseclear which law — whether framed by the Uniongovernment or the states— will apply to the DS industry.If you compare the size and magnitude of the global DSindustry with that of India’s, it is very clear that the industryneeds policy support, in the form of removal of theregulatory ambiguity. There are over 3,500 companiesglobally that use only DS for sales, with 61 milliondistributors aggregating sales of $110 billion. Incomparison, Indian DS industry’s turnover is just about Rs2,500 crore (excluding insurance product sales) with 15lakh distributors. Obviously, there is a lot of potential for employment in the sector provided the most importantsafeguard— no payment unless product is sold— is inplace.Powered by IndiatimesAbout Us|Advertise with Us|Terms of Use|Privacy Policy|Feedback|Sitemap
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