Basics of Direct Selling: Definitions and Distinctions
This write up sets out foundational definitions and interpretive clauses intended to support a clear distinction between legitimate direct selling operations, including direct and multi-level marketing compensation structures, and illegitimate arrangements such as pyramid schemes, money circulation/Ponzi schemes, unregistered collective investment schemes, and similar deceptive or unsustainable models.
These clauses are intended for educational, policy, compliance, and interpretive use on the Strategy India website and should be read subject to the prevailing laws in force, including the Consumer Protection Act, 2019, the Information Technology Act, 2000, the Indian Contract Act, the SEBI Act, 1992, and all other applicable rules, regulations, notifications, circulars, advisories, and clarifications.
1. Customer
“Customer” refers to any person/s whether an individual or an organisation (a group of individuals), who:
1.1 Buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment, and who may be a user/consumer, and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid and partly promised, or under any system of deferred payment, when such use is made with the approval of such person, but does not include a person who obtains such goods for resale.
1.2 Hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment, and includes any beneficiary of such services other than the person who hires or avails of such services for consideration paid or promised or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first-mentioned person, but does not include a person who avails of such services for providing it to another person/s.
1.3 Explanation:
- “Commercial purpose” does not include use by a person who purchases the goods or services to use/consume them, where such goods or services are purchased exclusively to earn his/her livelihood by means of self-employment.
- The expressions “buys any goods” and “hires or avails any services” include offline and/or online transactions through electronic means or by teleshopping or direct selling, deploying a direct, single-level or multi-level marketing compensation plan.
- A Customer may or may not be a Direct Seller.
- A Customer may or may not be a consumer/user.
1.4 In a legitimate direct selling model, a Customer purchases saleable goods or services for use, consumption, or bona fide retail demand; in an illegitimate pyramid or money circulation model, so-called “customers” are often participants making qualifying payments or purchases primarily to gain eligibility for income or rewards.
2. Direct Selling
“Direct Selling” means the marketing, distribution, and sale of goods or provision of services through an individual or a network of persons engaged with the company through a legally valid contract/agreement as independent contractors, other than through a permanent retail location/s.
2.1 It is primarily a B2C (Business-to-Customer) model, with limited exceptions where the agreement is entered into between the Direct Selling entity and an Entity/Organisation, including a Proprietary concern, Partnership, Limited Liability Partnership, One Person Company, Private Limited Company, Trust, or Public Limited Company.
2.2 Direct Selling may also be described as Direct Sales, Network Marketing, Referral Marketing, Affiliate Marketing, or by any other similar description.
2.3 For the purposes of this document, a business shall not be treated as legitimate Direct Selling merely because it uses a direct, single-level, or multi-level compensation structure; the determining factor is whether the business is primarily and sustainably driven by the sale of genuine goods or services to customers.
2.4 A business shall not be treated as legitimate Direct Selling if, in substance, it operates as a Pyramid Scheme, Money Circulation Scheme, Ponzi Scheme, or Collective Investment Scheme, irrespective of the terminology used by its promoters.
3. Company Literature
“Company Literature” refers to any document in physical or electronic form, including business opportunity materials, product catalogues, brochures, newsletters, emails, presentations, or similar materials, issued or published by the Company on its official platforms to share information, spread awareness, or promote its goods, services, or business opportunity.
3.1 Company Literature shall be accurate, lawful, and not misleading, and shall not contain representations of income, returns, appreciation, or rewards that are arithmetically unsustainable or predominantly dependent on recruitment, new investments, or qualifying purchases disconnected from genuine customer demand.
4. Direct Selling Entity
“Direct Selling Entity” means a body corporate that may be a One Person Company, a Limited Liability Partnership, or a Private Limited Company engaged in the business of Direct Selling and fully compliant with the relevant laws in force.
4.1 The organisation may be a manufacturer or a trader of products and/or services.
4.2 It utilises the services of independent contractors, also known as Direct Sellers, to recommend and retail products and/or services.
4.3 The company may commit, calculate, and pay incentives/commissions to Direct Sellers by deploying direct, single-level, or multi-level marketing compensation plans.
4.4 An entity that primarily collects money, subscriptions, investments, package amounts, or qualifying purchases in order to pay returns from fresh inflows rather than from the sustainable sale of goods/services to customers shall not be regarded as a legitimate Direct Selling Entity merely because it uses direct selling terminology.
5. Independent Contractor
An “Independent Contractor” is a person who enters into a service contract with the entity.
5.1 A “contract for service” implies an agreement wherein one party undertakes to provide services to or for another, in the performance of which he/she is not subject to detailed direction and control but exercises professional or technical skill and uses knowledge and discretion.
5.2 A Direct Seller/participant/member is an Independent Contractor, unless otherwise specifically provided by law or contract.
6. Direct Seller
“Direct Seller” is a person above the age of 18 years on the date of enrolment, having eligibility to enter into a business contract, who enrols/registers/signs up with the Direct Selling Entity through a legally enforceable agreement as an Independent Contractor to undertake direct selling business on a principal-to-principal basis for purchasing goods at a discount for self-consumption and/or for the opportunity to earn income by retailing goods and/or by helping others enrol and retail the goods.
6.1 A Direct Seller may be a consumer/user, a customer/purchaser/buyer, a reseller, or all three.
6.2 Direct Sellers may also be known as Distributors, Associates, Independent Business Owners, Consultants, Networkers, Members, Advisors, Independent Business Associates, Affiliates, Independent Representatives, Agents, or by similar designations.
6.3 Explanation: A “contract” includes e-contracts or digital contracts and shall be governed by the Information Technology Act, 2000 and the Indian Contract Act, as amended from time to time.
6.4 A Direct Seller in a legitimate model earns primarily from lawful retailing, customer acquisition, and support activities connected with the sale of goods/services; where the commercial emphasis shifts to recruitment-led purchasing, inventory loading, or entry payments, the arrangement may take on the character of a pyramid or money circulation scheme.
7. Active Direct Seller
“Active Direct Seller” is a Direct Seller whose monthly purchase, whether for consumption or retail, from the company, exceeds INR 50/-.
7.1 The concept of activity shall not be used to compel unnecessary purchases, inventory loading, or financially irrational behaviour for the sole purpose of maintaining rank, title, eligibility, or payout status.
8. Prospect
“Prospect” means a person to whom an offer or a proposal is made by the Direct Seller to join a Direct Selling business opportunity or to purchase a product/service.
8.1 A Prospect must be provided fair, truthful, and complete disclosure relating to the product/service, the business opportunity, realistic income expectations, refund or buy-back rights, and the nature of any conditions for earning commissions or incentives.
9. Goods
“Goods” refers to movable property and includes anything, products or services, tangible or intangible, that constitutes the subject of a proposed transaction.
9.1 In legitimate Direct Selling, goods should not be used as a mere disguise or pretext for collecting money under a recruitment-driven model.
10. Saleable
“Saleable”, concerning goods or services, means unopened, unused, marketable and of merchantable quality, which has not expired and which is not discontinued, excluding goods or services under special promotions or those offered free or at a token price.
10.1 Saleability is a material indicator of whether a product is capable of genuine customer movement and usable retail demand.
11. Product
“Product” means any article, goods or substance or raw material or any extended cycle of such product, which may be in gaseous, liquid, or solid state, possessing intrinsic value and capable of delivery either as wholly assembled or as a part and produced for introduction into trade or commerce, but does not include human tissues, blood, blood products and organs.
12. Service
“Service” means service of any description made available to potential users and includes, but is not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement, or the purveying of news or additional information, but does not include rendering of any service free of charge or under a contract of personal service.
13. Price
“Price” is the money consideration for the sale/purchase of goods or services.
14. Purchase
“Purchase” means the acquisition of goods or services at a Price.
14.1 Artificially inflated prices, compulsory package purchases, or recurring qualification purchases unrelated to market demand may indicate that the real object of the arrangement is fund collection and not lawful retail trade.
15. Person
“Person”, unless otherwise provided, shall have the meaning assigned under the Consumer Protection Act, 2019.
16. Quality
“Quality” is the ability of goods/services to perform satisfactorily and to be suitable for their intended purpose as indicated in the official literature/application/website, including brochures, labels, and presentations developed/distributed/retailed by the company; the quality of goods/services includes their condition.
17. Satisfaction Guarantee
“Satisfaction Guarantee” is a promise to the Customer, who may or may not be a Direct Seller, empowering him/her to return goods under specified conditions if he/she does not receive the results as expected or as promised/claimed by the company.
17.1 This policy addresses quality issues with goods.
18. Money Back Guarantee
“Money Back Guarantee” is a promise to Direct Sellers and Customers, empowering them to return goods if they are unable to resell the purchased products to customers or use them for self-consumption.
18.1 This policy addresses concerns relating to product overstocking by Direct Sellers and is an important safeguard distinguishing lawful direct selling from inventory-loading schemes.
19. Negative Product List
“Negative Product List” means a list of goods that Direct Selling companies should not promote.
20. Special Product List
“Special Product List” means a list of products/services that may be promoted, subject to various conditions.
21. Official Communication
“Official Communication” refers to any communication made by the entity or its authorised personnel in written form, whether printed or electronic, on the domains/applications owned and/or operated by the entity.
21.1 The entity is expected to ensure that Official Communication does not contain deceptive claims relating to product efficacy, earnings, token appreciation, or certainty of returns.
22. Delivery
“Delivery” is a voluntary transfer of possession from one party to another.
22.1 Real and timely delivery of the promised goods/services is an important indicator of genuine trade.
23. Office
“Office” means a room, set of rooms, or building used exclusively for conducting business activities, as stated in the entity’s official literature/website/application.
24. Enrol
“Enrol” means to introduce/register/sign up formally through a legally enforceable contract, as per the latest version of the Indian Contract Act and the Information Technology Act, for undertaking the business on a principal-to-principal basis as a participant or person or any entity, including any role mentioned under the definition of Direct Seller.
24.1 Enrolment by itself is not unlawful; however, where compensation is primarily attached to the act of enrolment or to payments made upon enrolment rather than to retail sale of goods/services, the arrangement may amount to a pyramid or money circulation scheme.
25. Organisation Structure
“Organisation Structure” is a way of representing the tiered nature of people in graphical form to help them recognise their relative positions within the company, as well as those above or below them.
25.1 This arrangement is also known as the Tree Structure or Network Structure.
25A. Types of Frontline (or Leg) Structures
Participants mapped directly to a Participant in their Organisation Structure are known as the frontline or first generation.
- Single – Maximum of one participant in the frontline.
- Binary – Maximum of two participants in the frontline.
- Trinary – Maximum of three participants in the frontline.
- Fixed – Maximum of four or five or x participants in the frontline, where “x” is the number of participants as per the constraint/logic of the compensation plan published by the company.
- Infinity – An unlimited number of participants positioned in the frontline.
25B. Types of Generation (or Level) Structures
A Direct Selling company may arrange participants in different ways depending on its compensation plan.
- “Generation” is commonly referred to as a “level”.
- Direct – In a direct structure, the participant is directly connected with the company, and there are no downline levels beneath the participant.
- Multi-level – In a multi-level structure, participants are connected to the company through other participants who have already joined and have valid contractual relationships with the company, and are arranged in multiple generations/levels.
- The mere existence of multiple levels does not make a model illegal; legality depends on whether compensation is funded by the verifiable sale of goods/services.
26. Compensation Plan
“Compensation Plan” is a method adopted/published by the entity to calculate and/or pay the returns/commissions/incentives and/or rewards assured/promised to be given to/among participants from the money invested/turnover from the sales of goods/provision of services directly/indirectly provided by them personally or by other participants in their Organisation Structure.
26.1 Compensation Plans are developed to encourage and reward personal purchases for self-consumption or retail, and/or support participants in the Organisation Structure for retailing and guidance to retail.
26.2 Offering compensation for the mere conscription of persons, or for payments unrelated to retail demand, is an unethical practice and may render the model a pyramid scheme and/or money circulation scheme.
26A. Paid on Generations
- Direct – Participants who use, consume, or sell goods are compensated for their personal purchases/retail.
- Single – Participants may be paid for their purchases/retail and also for the participants in the first generation.
- Multiple – Participants may be compensated on their purchases/retail and the purchases/retail by persons in more than the first generation.
26B. Rank / Title Achievement
- Non-cumulative – Participants, regardless of previous ranks/titles, start a new calendar day/week/month with the counter set to zero.
- Cumulative – On achievement of rank/title, participants continue to enjoy the privileges meant for the highest rank attained, although earnings are calculated on the sales for the specific period.
26C. Frequency of Compensation Pay-outs
- As and when the criterion is achieved / on a real-time basis.
- Daily.
- Weekly.
- Fortnightly.
- Monthly.
27. Virtual Currency
“Virtual Currency”, also known as e-currency, e-money, electronic cash, electronic currency, e-vouchers, digital money, digital cash, virtual cash, digital currency, cyber currency or by any other name, is a token created by the company and not backed by any collateral or any government.
27.1 Virtual Currency is an internally created token or unit that may be used within the company’s system, but it is not legal tender and does not by itself establish the legitimacy of the business model.
28. Cryptocurrency
“Cryptocurrency” means a form of virtual currency consisting of electronically created and stored digital tokens generated or issued using cryptographic techniques, which: (i) are intangible in nature and exist only as electronic records; (ii) in India and in most jurisdictions, are not legal tender and are not issued, guaranteed, or backed by the Government of India, the Reserve Bank of India, or by any collateral or underlying tangible asset; and (iii) may or may not be capable of acceptance or exchange in the real economy, and whose perceived value, if any, depends solely on the willingness of other persons to acquire or accept such tokens.
28.1 The expressions “cryptocurrency” and “crypto asset” shall not be construed as implying that such tokens are currency, legal tender, securities, or have any guaranteed or statutory value in the real world.
28.2 For the purposes of this document, Cryptocurrency may be “mined” or “minted” as more particularly defined below.
29. Cryptocurrency – Mined
“Cryptocurrency – Mined” means a form of cryptocurrency in which digital tokens are created or generated through a computer-based process of solving cryptographic or mathematical puzzles, typically for validating or recording transactions on a distributed ledger or similar electronic system, and which are intangible electronic records, are not legal tender, are not issued, guaranteed, or backed by the Government of India, the Reserve Bank of India, or by any collateral or underlying tangible asset, and have no intrinsic or guaranteed value apart from any perceived value assigned by willing acquirers or acceptors.
30. Cryptocurrency – Minted
“Cryptocurrency – Minted” means a form of cryptocurrency in which digital tokens are created, issued, or brought into existence by a person, entity, protocol, or platform through any pre-programmed, centralised, or discretionary mechanism other than cryptographic mining, and which are intangible electronic records, are not legal tender, are not issued, guaranteed, or backed by the Government of India, the Reserve Bank of India, or by any collateral or underlying tangible asset, and have no intrinsic or guaranteed value apart from any perceived value assigned by willing acquirers or acceptors.
30.1 Use of Virtual Currency or Cryptocurrency in a direct selling or MLM plan where returns are primarily promised from token appreciation, trading, accumulation, recruitment, or fresh inflows, rather than from sale of genuine goods/services to customers, may amount to a money circulation scheme, Ponzi-type arrangement, Collective Investment Scheme, and/or other unlawful arrangement, depending on the facts and the applicable law.
30.2 Certain pooling or “staking”, “packages”, “nodes”, “mining pools”, “auto-trading bots”, “profit-sharing”, or similar crypto/token arrangements, where funds or tokens are pooled and managed centrally with a promise of profits to passive participants, may also fall within the definition of a Collective Investment Scheme under section 11AA of the SEBI Act.
31. Pyramid Scheme
“Pyramid Scheme” refers to a model in which participants are required to pay a hefty amount for a one-time purchase or make periodic purchases by paying considerable amounts, primarily to earn income from the performance of participants in the downline Organisation Structure.
31.1 In a pyramid model, participants who joined earlier tend to make more money than new participants because of position and continuing recruitment rather than sustainable retail sale of goods/services.
32. Money Circulation Scheme
“Money Circulation Scheme” means any scheme in which the verbal or written commitments are not arithmetically sustainable and/or may not be related to the sale of goods/services by the participants engaged or the participants below them in their Organisation Structure.
32.1 This type of scheme is partly or entirely dependent on new investments for the earnings committed and is also commonly known as a Ponzi Scheme.
32.2 Any arrangement that funds returns substantially from new participant inflows, token purchases, subscriptions, package fees, or entry-linked transactions rather than genuine external customer sales is indicative of a Money Circulation Scheme.
33. Collective Investment Scheme (CIS)
“Collective Investment Scheme” or “CIS” shall have the meaning assigned to it under section 11AA of the Securities and Exchange Board of India Act, 1992 and, for the purposes of this document, refers to any scheme or arrangement made or offered by any person under which:
33.1 the contributions or payments made by investors, by whatever name called, are pooled and utilised for the purposes of the scheme or arrangement;
33.2 the contributions or payments are made to such scheme or arrangement by the investors with a view to receiving, directly or indirectly, any profits, income, produce or property;
33.3 the property, contributions or investments forming part of such scheme or arrangement are managed on behalf of the investors; and
33.4 the investors do not have day-to-day control over the management and operation of the scheme or arrangement.
33.5 Any scheme or arrangement that qualifies as a Collective Investment Scheme under section 11AA of the SEBI Act is required to be registered with the Securities and Exchange Board of India (SEBI) and operated in compliance with the SEBI (Collective Investment Schemes) Regulations, 1999, failing which it may be treated as an unregistered or illegal CIS with attendant regulatory, civil, and criminal consequences.
33.6 Labelling an arrangement as “direct selling”, “MLM”, “network marketing”, “affiliate programme”, “staking”, “crypto-based plan”, or by any other similar term shall not prevent such arrangement from being characterised as a Collective Investment Scheme where the factual ingredients of section 11AA are satisfied.
34. Easy Money
“Easy Money” means monies, whether fixed or variable, committed without the sale of goods or services.
34.1 No Direct Selling Entity, Direct Seller, or participant shall promote, imply, or rely upon Easy Money as the basis of a lawful direct selling opportunity.
35. Direct Marketing
“Direct Marketing” is a method in which companies communicate directly with prospects through formats such as online advertising, direct mail (postal and email), text messaging, and voice calls.
36. E-commerce
“E-commerce” is the display and/or the sale and/or purchase of goods and services conducted using a digital or electronic network, including but not limited to the World Wide Web.
37. Electronic Service Provider
“Electronic Service Provider” means a person/entity who provides technologies or processes to enable a product seller to engage in advertising or selling goods or services to a consumer and includes any online marketplace or online auction site.
38. Prevailing Laws
“Prevailing Laws” means all provisions of the applicable Acts, Rules, Regulations, Notifications, Guidelines, Circulars, Ordinances, Orders, Advisories, Clarifications, etc., including any amendments therein or enactment thereof, for the time being in force.
38.1 All Direct Selling, Direct Marketing, E-commerce, Virtual Currency, and Cryptocurrency-linked activities must comply with Prevailing Laws.
38.2 The use of terminology such as “direct selling”, “MLM”, “network marketing”, “virtual currency”, “crypto asset”, or similar expressions shall not by itself protect any entity or participant from regulatory, civil, or criminal scrutiny where the underlying structure is, in substance, a Pyramid Scheme, Money Circulation/Ponzi Scheme, Collective Investment Scheme, or other unlawful arrangement.
