Direct Selling (MLM) is an industry that has empowered millions of individuals in India to start their own business journey without the need for huge capital or infrastructure. However, due to past misuse and fraudulent practices in the name of Direct Selling (Multi-Level Marketing), the Indian Government has now strictly defined which types of business plans are legal and which are not under the Direct Selling Rules, 2021 issued under the Consumer Protection Act, 2019.
- What defines a legal direct selling MLM business plan in India
- Differences between Legal Direct Selling MLM and Illegal Pyramid Schemes
- Government guidelines and rules to comply with
- Examples of legal components in a Direct Selling MLM business plan
- Red flags to avoid in Direct Selling MLM
Understanding the Legal Framework in Direct Selling MLM Industry
To protect consumers, Direct Sellers and to ensure the ethical growth of the Direct Selling MLM industry, the Government of India issued the Consumer Protection (Direct Selling) Rules, 2021 on 28th December 2021. These rules clearly distinguish legal direct selling MLM companies from pyramid and money circulation schemes, which are banned in India.
Key Laws That Govern Direct Selling MLM in India:
- Consumer Protection Act, 2019
- Consumer Protection (Direct Selling) Rules, 2021
- E-commerce rules 2020
- Prize Chits and Money Circulation Schemes (Banning) Act, 1978
- Guidelines issued by various state governments (e.g., Andhra Pradesh, Tamil Nadu, etc.)
Characteristics of a Legal Direct Selling MLM Business Plan
A Direct Selling MLM business plan is considered legal and ethical if it meets the following key parameters:
1. Product-Centric Model
A legitimate direct selling mlm business must be based on genuine products or services. Income should primarily come from the sale of goods/services, not from recruitment of Direct Sellers.
Example: A direct selling mlm company selling health supplements, cosmetics, or garments through a network of direct sellers.
2. No Entry or Joining Fees in Direct Selling MLM Company at the time of Joining
As per Rule 10(f) of the Direct Selling Rules 2021, no direct seller should be required to pay money or purchase goods/services just to join.
3. No Income From Recruitment
A legal direct selling mlm business plan does not offer commissions, incentives, or rewards merely for recruiting new direct sellers. Commissions must come only from sales volume generated by products or services sold.
4. Transparent direct selling mlm business Plan
The business must clearly disclose its Business plan, reward structure, and payout conditions in writing. The plan must be simple, product-driven, and accessible to new participants.
5. Return & Refund Policy
A legitimate direct selling mlm company offers a reasonable return or refund policy for products, in compliance with consumer protection norms. Most companies allow 30-day returns on unused products with proper invoices.
6. Proper Grievance Redressal Mechanism
As per the law, the direct selling mlm company must have:
- A Grievance Officer
- Response time within 45 days
- Display of grievance contacts on the website
Indian Direct selling mlm Business Plans That Are Illegal
Here are some common traits of illegal or fraudulent MLM plans:
| Illegal Plan Feature | Why It’s Banned |
| Money Circulation Schemes | Earn money by circulating money, no product |
| Chain Marketing Without Product | Income from chain joining only |
| Inventory Loading | Forced bulk buying without demand |
| “Investment” in Packages | Asking for package investment for higher returns |
Note: Pyramid schemes are punishable under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
Example of a Legal Direct Selling MLM Business Plan Structure
Here’s a basic outline of how a legal and ethical Direct Selling MLM business plan might look in India:
| Level | Activity | Earnings |
| You | Sell garments worth ₹10,000 | Earn ₹2,500 commission (25%) |
| Team | 5 downlines sell ₹50,000 | You earn ₹5,000 override bonus |
All income is based on actual product sale.
No income for “adding” team members unless they sell.
Direct Selling MLM Government Regulations You Must Follow
Whether you’re a Direct Selling MLM company or a direct seller, these are mandatory compliances:
- Direct Selling MLM Company must Comply as per Direct Selling Rules 2021,
- Maintain a website with terms, products, refund policy, grievance officer, etc.
- Follow 30 specific obligations as per the Direct Selling Rules, 2021
- Display distributor agreement and Direct Selling MLM compensation plan publicly
- Avoid misleading advertisements or income claims
How to Check if a Direct Selling Business is Legal?
Before joining any company, do a quick legal check:
- Read the compensation plan – is it product-focused?
- Visit the company website – does it show refund policy, grievance details?
- Are you being promised “guaranteed” income or fast riches? (Illegal)
- Is the focus on sales or recruitment fees?
- Are invoices & GST properly provided?
Direct Selling in India has the potential to generate self-employment, entrepreneurship, and income at scale – but only if it’s practiced within the legal boundaries.
The key takeaway is:
Sell products, earn ethically, and follow the rules.
Don’t fall for recruitment-based or package investment schemes.
If you’re planning to start your own direct selling company or want to join one as a distributor, ensure that the business plan complies with Indian law and reflects the Direct Selling Rules 2021 in letter and spirit.
🛡 Need Legal Help for Your Direct Selling Business?
Gavel Law Firm offers end-to-end legal consultancy for:
- Drafting legal direct selling plans
- NCH registration Direct Selling compliance
- Compensation & return policy review
- Entity structuring and state-level guideline assistance
Reach out to us at Contact us – gavellawfirm.in