Typically, in multi-level marketing (also known as direct selling using network marketing) a person gets rewarded not only for referring/selling the goods and services by himself but also by his referred members. Innumerable companies offering multi-level marketing schemes that present lucrative opportunities to their participants to make quick money have come up time and again and many a time questions have been raised on the legality –- at times on the business model per se and at other times on the scheme being promoted. A Division Bench of Madras High Court opined that MLM schemes cannot be declared outright illegal, unless the scheme in question has elements that render it illegal.
As regards the elements that render a particular scheme illegal, the Supreme Court in the case of State of West Bengal v. Swapan Kumar evolved a two-pronged test that finds basis in Section 2(c) of the Act. To hold a particular scheme illegal in law, (a) it must be proved that the scheme is for making quick and easy money and (b) the chance or opportunity of making quick and easy money depends upon the enrolment of members into the scheme.
As any popular scheme involves large number of individuals who earn their livelihood from such schemes and a subsequent finding of the scheme being illegal may adversely impact them, it is important that we move from the present reactive to a pro-active determination mechanism. In order to achieve this and also to overcome a situation of multiple prosecutions being launched against the same scheme by different States, the following is suggested:
1. RBI shall be frame general rules under the Act on multi-level marketing schemes which may be notified by the States at their option;
2. The rules shall require all multi-level marketing companies operating in the States that has notified the rules to get their scheme evaluated by the RBI before commencement of the business;
3. For the already existing schemes, the rules shall provide for a two year window to get the scheme evaluated by the RBI
These steps will go a long way in ending the uncertainty that multi-level marketing business model currently faces and will reassure many who earn their livelihood by being part of such business. This will also ensure that no money circulation scheme camouflaged as genuine business will be able to dupe lay investors or members. Further, this will bring succour to the promoters of multi-level marketing schemes from any Police action that may be initiated at the behest of disgruntled members of the scheme.
