17/06/2009

Printed from

Remove policy ambiguity on direc…

Remove policy ambiguity on direct selling industry 15 Sep 2008, 0408 hrs IST, K G Narendranath, ET Bureau NEW DELHI: India lacks a clear policy on direct selling (DS), which under a proper regulatory framework could have given millions with limited means a legitimate tool to earn a decent living and develop marketing and management skills. The caution on display to forbid pyramid/money circulation companies and chain companies — whose incidence is only growing despite government 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 these countries have legalised (and thriving) DS industries — the global size of the industry was around $110 billion in 2007— under meticulous, yet non-intrusive regulatory frameworks. Even China now permits DS by calling it “sales away from a fixed location” although subject to several conditions such as minimum paid-up capital ($6.5 million) for each DS firm; specified experience outside China; and ban on multi-level marketing (MLM) unless the distributor is ‘authorised agent’ of the DS company. In Singapore’s case, it is a clear case of realisation of the legitimacy and lawfulness of DS industry considering that that country had enacted the restrictive Pyramid Schemes and Multi-level Marketing (Banning) Act in 1978, immediately following the worldwide scam “Dare to Be Great.” (This scheme was also operational in India as a money circulation scheme. It was operated by a felon by the name Glenn Turner). Even when the ban existed, Singapore was wont to permit direct selling provided that no payment was made by a company to a distributor for any services other than personal sales. Singapore rethought its position in mid1990s, owing to legitimate pressure from the business community to add MLM component to their operations in order to cut outsourcing to Malaysia. The DS distributors could convince the Singapore government of the potential benefits of MLM as “a compensation system through which companies pay distributors for marketing and sales support services in addition to sales,” in which many safety mechanisms are in-built. For starters, direct selling is the distribution system employed by certain companies in which they engage private citizens on a contractual basis to sell their products/services to the consumers. The distributor, being not an employee of the company, will, in most cases, be able to set his schedule, retail price and level of effort

…indiatimes.com/…/3483601.cms…

1/3

17/06/2009 Remove policy ambiguity on direc… (mostly with the comfort of the company’s promise that it won’t undercut his sales efforts). The distributor’s compensation comprises the margin between the wholesale and retail prices of the product and also the extra bonus paid by the company to him when sales volumes hit certain levels. The main problem with this practice from the point of view of policymakers and regulators arises when the DS company encourages its distributors to recruit customers to become distributors themselves (this is what is called MLM). This is being done by offering the primary distributor a compensation if his recruit is able to generate additional sales. The system of linking commission to new distributor recruits (rather than sales) is considered to be inherently flawed and unsustainable and so, requiring regulatory crack-down.
But this problem, it is now reasonably established by the US, EU and Singapore regulators, can be resolved by establishing a system that recognises the economic benefit of MLM operations. Linking compensation to sales would ensure that properly regulated MLM is not akin to a pyramid scheme, Indian Direct Selling Association (IDSA) said in a recent presentation to the central government. The legitimate direct selling industry in India is clamouring for differentiation between them and (fraudulent) pyramid/money circulation schemes. IDSA demands legalisation of the DS industry. According to it, the correctness of the behaviour of the DS units can be ensured through a few a steps: link commissions to product sales (not to more recruits as done by ‘chain companies’); give direct seller the option to exit after a reasonable 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 restrictive and unfair trade practices, packaging regulations etc. mutatis mutandis apply to direct selling. It is not otherwise clear which law — whether framed by the Union government or the states— will apply to the DS industry. If you compare the size and magnitude of the global DS industry with that of India’s, it is very clear that the industry needs policy support, in the form of removal of the regulatory ambiguity. There are over 3,500 companies globally that use only DS for sales, with 61 million distributors aggregating sales of $110 billion. In comparison, Indian DS industry’s turnover is just about Rs 2,500 crore (excluding insurance product sales) with 15 lakh distributors. Obviously, there is a lot of potential for employment in the sector provided the most important safeguard— no payment unless product is sold— is in place.

Powered by Indiatimes About Us | Advertise with Us | Terms of Use | Privacy Policy | Feedback | Sitemap

…indiatimes.com/…/3483601.cms…

2/3

17/06/2009

Remove policy ambiguity on direc…

Copyright © 2009 Bennett Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication

Service This site is best viewed with Internet Explorer 6.0 or higher; Firefox 2.0 or higher at a minimum screen resolution of 1024x768

…indiatimes.com/…/3483601.cms…

3/3

Sign up to vote on this title
UsefulNot useful