Direct Selling Vs Pyramid Schemes
In India, many people confuse direct selling with pyramid schemes, but legally, they are very different. Understanding this difference is important for consumers, sellers, and companies to stay on the right side of the law.
What is Direct Selling?
Direct selling is a legal business model where products or services are sold directly to consumers, without retail stores. It includes single-level or multi-level marketing (MLM) — but only if the income comes mainly from real product sales, not from adding people.
As per the Consumer Protection (Direct Selling) Rules, 2021, a valid direct selling company must:
- Sell genuine products or services
- Pay commissions only on actual sales
- Offer a clear return and refund policy
- Sign written agreements with sellers
- Provide a proper grievance redressal system
What is a Pyramid Scheme?
A pyramid scheme is illegal in India. It focuses on recruiting people, not selling products. Income is earned by bringing others into the system, who also pay to join. There’s usually no real product value, and the system eventually collapses.
Pyramid schemes are banned under:
- Prize Chits and Money Circulation Schemes (Banning) Act, 1978
- Consumer Protection Act, 2019
- Direct Selling Rules, 2021
Key Legal Difference (Easy Table)
| Feature | Direct Selling (Legal) | Pyramid Scheme (Illegal) |
| Main income from | Selling real products | Recruiting new members |
| Product involvement | Yes, genuine sale | Often fake or overpriced products |
| Joining fee required? | No | Usually yes |
| Legal status in India | Allowed if compliant | Completely banned |
Final Thoughts
If you’re earning money by selling real products, you’re in direct selling.
If you’re earning just by adding people into the system, it’s likely a pyramid scheme — and that’s illegal in India.
Always check if a company follows the Direct Selling Rules 2021 before joining!
Need legal guidance on whether your company is compliant? Contact Gavel Direct Selling Law Firm — India’s trusted experts in Direct Selling Law.