Appropriate Regulation Is the Key Author:Bibek Debroy FICCI Indicus Analytics April, 2013 CONTENTS Executi ve Summary ................................................................. 3 Section 1: Deni ng direct sel li ng ........................................... 6 Section 2: The Numbers ........................................................ 11 Section 3: Si ngle l evel , Mul ti Level and Pyrami d .............. 15 Section 4: Second Best Sol uti on ............................................ 20 Section 5: First Best Sol uti on ................................................. 23 Section 6: Concl udi ng Note Way Forward ...................... 27 3 Indicus White Paper Series Exrcu1ivr SuMMnnv This paper sets the base for a good understanding of the di rect sel l i ng model , i ts advantages, and i ts l i mi tati ons, and how government pol i cy needs to deal wi th this growi ng empl oyment opportunity for the masses. It argues that good and sustai nabl e growth ori ented government pol i cy needs to protect the i nterests of the consumers and al so promote cost reduci ng, and e ci ency enhanci ng activi ti es of employment generati on. It shows that this i s possibl e si mpl y by appropri atel y di erentiating between the desirable and the undesirable. The paper rst makes clear that the way data are col lected by the Government of Indi a itsel f provides a good indi cati on of what Di rect Sel l i ng (DS) i s, and what it i s not. All sales of goods that are not through a physi cal l ocati on such as stores, stal l s and marts, and also not through mail order, internet, etc. In other words, Di rect Sell ing i s the residual and involves selli ng usual ly through expl anation and demonstrati ons by a di rect sel l er and not through any other means. Wi thi n the DS model there may be a multi-level marketing (MLM) model however that is very dierent from the pyrami d schemes that the Government needs to protect consumers agai nst. (These pyrami d or Ponzy 4 Indicus White Paper Series schemes involve promises of abnormal returns/benets) To contrast, the DS model even i f i t is in the MLM mode i s about sal es of goods and sometimes services. These deni ti onal i ssues are i mportant to be coded in al l current and future pol i cy and l egi sl ation i f Indi a i s to ful ly benet from the e ci ency enhanci ng and empl oyment generati ng advantages of DS and of MLM. And international evi dence shows that there are benets. DS through MLM i s a form of di si ntermediati on and has the obvi ous advantage of reducti on in transaction costs and bri dgi ng the gap between consumer prices and manufacturer prices, faci li tated by the use of technology. It is because of thi s that as countri es move up the devel opment l adder (as reected by per capi ta income) direct selli ng i ncreases in importance. The benets are further enhanced when we consider the i mpact as an addi tional source of employment, often to untrained and otherwi se unempl oyabl e persons and also often to women. I ndi a needs to operate at the central l ev el . I t needs to amend the Pri ze, Chi ts and Money Ci rcul ati on Schemes (Banni ng) Act, maki ng the di sti ncti on cl ear. Fi rst, di rect sel l i ng, i ncl udi ng mul ti -l ev el marketi ng, has to be defi ned. Second, there has to be an expl i ci t qual i fi cati on expl ai ni ng that di r ect sel l i ng i s not to 5 Indicus White Paper Series be i nterpreted as a money ci rcul ati on scheme. Thi rd, a pyr ami d scheme has to be defi ned, so that one knows what i s bei ng prohi bi ted. Thi s wi l l protect di rect sel l i ng compani es, pr otect consumers and al so make the task of enfor cement easi er. Other than deni ng and al l owing di rect sel l ing and deni ng and prohi bi ti ng pyrami d schemes, a formal regi stration system should be put i n place, there need to be wrien contracts between the di rect sel l er and the di rect sel l i ng company that make the rel ati onshi p transparent and speci fy sal es practi ces i n the ethical domai n. Overall , India needs a more systematic pol i cy on DS that is based on i ts own consti tutional structure and al so the real i ties and idi osyncracies of the Indi an economy. Fast growing countries such as Thail and, Malaysia, Korea, Indonesi a, Chi na, Vi etnam, Japan, Tai wan and Si ngapore al l have a speci c statute that regul ates, and more important, facilitates direct selling. 6 Indicus White Paper Series Src1ioN 1: DrriNiNc oinrc1 srttiNc There i s no unambi guous deni tion of di rect sel l i ng. Deni tions can be of three types and they dont necessari ly overlap. First, there is a statistical ki nd of denition. For example, consi der the Uni ted Nati ons Central Product Cl assi cati on (UNCPC). In the current versi on 2 of thi s 1 , the 2-di git code 62 stands for retai l trade services and the further classications 621 and 622 are retail trade servi ces through speciali zed and non-speciali zed stores. Everything else (623, 624, 625) is a residual category and can be i nterpreted as di rect sel l ing. 2 623 is explained as, This group incl udes:- mail, catalogue or Internet sal es servi ces by stores that accept orders of new goods by mail ,telephone, e-mail, etc., and shi p or del iver products to the customers door. 624 i s expl ained as, Thi s group i ncl udes:- retai l trade sal es through vending machines; - retail trade services of market stalls- retail trade servi ces of door-to-door sales or direct sales, dened as 1 hp://unstats.un.org/unsd/cr/regi stry/docs/CPCv2_explanatory_notes.pdf 2 However, Socio-Economic Impact of Direct Selling: Need for a Policy Stimulus, Arpi ta Mukherjee, Tanu M. Goyal, DivyaSatija and NirupamaSoundarajan, ICRIER, undated, equates direct sel ling with code 624. 7 Indicus White Paper Series a method of consumerproduct and servi ces di stri bution via sales i n a person-to-person manner/way from a xed retail l ocati on pri mari ly through i ndependent sal espeopl e and di stri butors who are compensated forthei r sal es and for thei r marketi ng and promoti onal servi ces, based on the actual use orconsumpti on of such products or services. Fi nally, 625 is explained as, This group i ncludes:- retai l servi ces of commi ssi on agents who negoti ate retail commercial transactions for a fee or acommission; - services of electronic retail auctions. The Indian statistical counterpart is the 2008 version of the National Industrial Classi cation (NIC). 3 At the 2-digi t l evel , 47 covers retai l trade, wi th the excepti on of motor vehicl es and motor-cycl es. Sub-di vi ded further, 471 through 478 are sal es through stores, stal ls and marts. Everythi ng el se (479) i s a residual category and comes under direct selling. The code 479 is dened as, retail trade not in stores, stal ls or marts . One can sub-di vi de a bit further, but that is at best articial. For example, 4791 is dened as retail sale via mail order houses or via Internet and explained as, In retail sale activities in this cl ass, the buyer makes his choice on the basi sof adverti sements, catalogues, i nformati on provi ded on a websi te, modelsor any other means of advertising. The customer pl aces his order by mai l, phone or over the 3 hp://mospi.nic.in/mospi_new/upload/nic_2008_17apr09.pdf 8 Indicus White Paper Series Internet (usual l y through speci al means provi ded by awebsi te). The products purchased can be ei ther di rectly downl oaded fromthe Internet or physi cal l y del i vered to the customer. This leaves 4799 as a residual category of other retai l sal es not through stores, stall s or marts and interpreted as, This cl ass i ncludes retail sal e of any kind of product i n any way that i s noti ncl uded i n previ ous classes (by di rect sal es or door-to-door sal es persons, through vending machi nes etc.), direct sel l i ng of fuel (heating oil, re woodetc.), delivered directly to the customers premises, acti viti es of non-storeauctions (retai l ), retai l sal e by (non-store) commi ssion agents. Subject to that point about unnecessary silos i n a seamless word, 4799 rather than 479 then becomes a denition of di rect sel l i ng i n the Indi an context, at l east from the statistical point of vi ew. The second ki nd of deni ti on i s one formul ated by di rect sel li ng associ ati ons. Regi onal and country- speci c associ ations or federati ons often have their own deni tions. Si nce this is paper i s about India, lets sti ck to the Indi an Di rect Sel l i ng Associ ati ons (IDSA) deni tion. 4 Di rect Sel li ng means the marketi ng of consumer products/services di rectl y to the consumers general ly i n thei r homes or the homes of others, at thei r workpl ace 4 hp://www.idsa.co.in/WhatIsDi rectSelling.html 9 Indicus White Paper Series and other pl aces away from permanent retai l locati ons, usual ly through explanation or demonstrati on of the products by a direct sell er. But for the qualication usual ly through , this corresponds to 4799. Stati sti cal deni ti ons, or those arti cul ated by federati ons and associati ons, dont amount to l aw and pol i cy. For that purpose, one has to look at speci c legislati on and the probl em i n Indi a i s that none exists. Thi s i s partl y because of the Seventh Schedul e. Entry 33 i n the Concurrent List talks about trade and commerce and specically mentions the products of any i ndustry where the control of such i ndustry by the Uni on i s decl ared by Parl i ament by law to be expedient i n the publi c i nterest, and i mported goods of the same kind as such products. However, subject to thi s, trade and commerce withi n the State i s i n the State l i st. Thi s has l ed to arti ci al compartments between FDI i n wholesal e and FDI i n retai l and FDI in multi -brand and FDI i n si ngle-brand. Such compartmentali zati on is impossible to enforce and i s certain to be vi olated, del iberatel y, or inadvertentl y. It is not just devel oped countries like the United States and the United Kingdom that have specic statutes on di rect sel l i ng. So do developing countries like Thailand, Malaysia, Korea, Indonesi a, Chi na, Vi etnam, Japan, Tai wan and Si ngapore. Uni on-State relati ons do not come i n the way of a specic statute on di rect sel li ng ei ther. There are i nstances (l and, 10 Indicus White Paper Series l abour, contract farmi ng, educati on) where the Uni on has formul ated model l egi slati on as a templ ate for States to adopt, or alternativel y, enacted such l egi slation. Nor is the Seventh Schedul e cast i n stone. Down the years, i t has been amended several ti mes. We wil l return to this point later. 11 Indicus White Paper Series Src1ioN 2: Tur NuMnrns The ori gi ns of I ndi as di rect sel l i ng i ndustry are dated to 1995 or 1996, 1996 bei ng the year when I DSA was formal l y establ i shed. I DSA membershi p i s not the best i ndi cator to determi ne the i mportance of di rect sel l i ng. For i nstance, I DSA di rectl y has 18 members and i ndi rectl y, more than 1 mi l l i on i ndependent sal espeopl e. However, the number of di rect sel l ers i s esti mated to be al most 4 mi l l i on i n 2010-11. 5 For that same year, sal es revenue was esti mated at 1149 mi l l i on US dol l ars, accounti ng for 35.8% of non-store retai l sal es, 4.41% of organi zed retai l sal es and 0.07% of GDP. These numbers are subject to a caveat. The I ndi an economy has an organi zed/formal segment and an unorgani zed/i nformal segment. The Nati onal Commi ssi on for Enterpri ses i n the Unorgani zed Sector (NCEUS) was set up i n 2004 and one of i ts reports had a very good di scussi on of deni ti onal and stati sti cal i ssues i n anal yzi ng I ndi as i nformal economy. 6 For purposes of thi s paper, l et us use the terms 5 The Indian Direct Selling Industry, Annual Survey 2010-11, PHD Chamber of Commerce and Industry and IDSA, 2012. 6 Report on Conditions of Work and Promotion of Livelihoods in the Unorganized Sector, NCEUS, 2007, hp://nceuis.nic.i n/Condition_of_workers_sep_2007.pdf 12 Indicus White Paper Series organi zed and formal synonymousl y, just as the terms unorgani zed and i nformal are used synonymousl y. Outsi de of agri cul ture, i nformal i ty can be dened i n one of three di erent ways. Fi rst, there i s a deni ti on i n terms ofexempti ons from payi ng i ndi rect taxes. Second, there i s a deni ti on i n terms of smal l -scal e i ndustry(SSI ) or MSME (mi cro, smal l and medi um enterpri ses). Thi rd,there i s a deni ti on i n terms of l abour l aws. That i s, an enterpri se i s unorgani zed i f i t uses power and empl oys fewer than 10 peopl e or does not use power and empl oys fewer than 20 peopl e. 7 Wi thout gei ng i nto the ni y-gri y of those deni ti ons, there are an esti mated 407 di rect sel l i ng compani es i n I ndi a, of whi ch, 157 (38.6%) are i n the organi zed sector. 8 Thi s has i mpl icati ons for enforceabi l i ty of l aw and regul ati ons, though i n any process of economi c devel opment, there i s a natural transi ti on from the unorgani zed/i nformal to the organi zed/formal . Wi th that caveat, for the organi zed sector, most revenue i s from segments l i ke wel l ness, cosmeti cs and personal care, home i mprovements, home care and househol d goods. 9 And most revenues occur i n the South, fol l owed by the West, the East and the North, i n that order. 7 Strictly speaking, this is a Factories Act denition. 8 Ibid. 9 Ibid. 13 Indicus White Paper Series There are reasons for the increase in the importance of di rect sel l ing. As an addi ti onal channel , it can l ead to di sintermedi ati on, reducti on i n transacti on costs and bridgi ng the gap between consumer prices and manufacturer prices, faci li tated by the use of technology. Urbanization, i ncome and consumption growth, higher female work participation rates and dual i ncome families increase the importance of transaction costs and their decl ine. Fi gures are often ci ted about the importance of direct selli ng i n providi ng employment, especial ly to women, and i ts contri buti on to tax revenue. 10 Whil e true i n principle, this is a counter-factual. The contribution to tax revenue i s based on a premi se that growth occurs i n the organized sector, not the unorganized. Thi s i s a plausible asserti on, but not axi omati c. Si mi l arly, the empl oyment creati on argument i s also based on the assumpti on that there is a net creation of sales, not a di version of sales from conventi onal channel s to di rect modes. However, we do know that as countries move up the per capita i ncome l adder, di rect sel li ng i ncreases i n i mportance. Thi s has not onl y happened i n devel oped country markets l i ke the Uni ted States, Japan, Germany, Uni ted Ki ngdom, France, Australia and Singapore, but also in emerging markets like Brazil, Korea, Russia, Malaysia, Argentina, South Afri ca, Indonesi a and Hong Kong. Therefore, l ogi cal l y, 10 See both the ICRI ER and PHD reports mentioned earli er. 14 Indicus White Paper Series three propositions do fol low. First, direct selling is going to i ncrease i n importance i n Indi a. Second, i t wi l l provi de an additional source of employment, often part-time and often to women. Third, i ts contributi on to tax revenue wil l also increase. As has been said earlier, these are empirical propositi ons, not theoreti cal. Whi l e these observations are based on cross-country numbers, a l imi ted survey i n the PHD study also i ndi cates a positive correlation between use of di rect sell i ng and monthly househol d income. 11 Often, law and regulation do not keep pace with economic devel opment, but follow it. That seems to be happening i n Indias direct sel l i ng i ndustry too. 11 Ibid. 15 Indicus White Paper Series Src1ioN 3: SiNctr-trvrt, Mut1i-trvrt nNo rvnnMio We begin this section wi th three answers from Parl i amentary questi ons, since they hi ghli ght the nature of the problem. The questions do not maer, since they are obvi ous enough. The rst was LokSabhaUnstarred Question No. 4875, dated 20/12/2002. Proposals were received from the Indi an Di rect Sel l i ng Associ ati on as well as M/S Fronti er Trading etc. requesti ng to enact a separate legislation to cover di rect selli ng/multi-level marketi ng/network marketi ng. The mai n contenti on of the representati on was that members of Di rect Sel ling Associ ati on are bei ng targeted due to vagueness of the Pri ze Chi ts and Money Ci rcul ati on Scheme (Banning) Act, 1978 i n di stingui shi ng between Pri ze Chi t Funds and genui ne agenci es i nvol ved i n di rect marketi ng. This maer was examined in detail i n consultation with concerned Ministri es. The need for a separate l egi sl ation was not felt in view of the fact that there were adequate provisions in the Sale of Goods Act, 1930 (for regulating the sal e of goods); the Indi an Contract Act, 1872 (for the sale of services) and the Consumer Protection Act, 1986 (to promote and protect the rights of the consumers). The provi si ons of the Pri ze Chits and Money Circul ation 16 Indicus White Paper Series Scheme (Banni ng) Act, 1978 seek to ban the promoti on or conduct of Pri ze Chi ts and Money Ci rculati on Schemes. The provisions of this Act had come up for scrutiny before the Honourable Supreme Court of Indi a who have ruled that the Network Marketing Plan and direct sale of goods and servi ces by the di rect sel l i ng compani es do not fal l wi thi n the mi schi ef of the aforesaid Act. The Sal e of Goods Act and the Indi an Contract Act dont real l y constitute the problem. But in so far as the Consumer Protection Act and the Prize Chits and Money Circul ation Scheme (Banning) Act are concerned, especi al l y the laer, this answer in 2002 clearly fai led to anticipate the problems due to court i nterventi ons. Second, there was LokSabhaUnstarred Question No. 4062, dated 23/08/2005. As per Indi an Di rect Sel l i ng Associ ati on (IDSA) there are more than 200 direct sel l i ng rms openi ng 12 i n Indi a and most of them are small and regional players. The rms account for over 50% of all goods sold through direct selli ng route i n India. The direct sell ing rms are predomi nantly unorgani zed and the i nformati on on the approvals taken by such rms i s not avai lable. The IDSA i s a sel f regul ati ng i ndustry associati on that mandates i ts members to operate wi thin the stri ct provi si ons of a Code of ethics prescribed by the World Federation of Di rect Sel li ng Association. The Code of ethics sets out 12 Sic, probably meant to be operating . 17 Indicus White Paper Series fai r and ethi cal pri ncipl es that i nduce a congeni al and heal thy envi ronment for the di rect sel l i ng i ndustry. Consumers are protected against i llegal or unethi cal practices through the enforcement of the Code. So far, so good and i ndeed IDSA does have a Code of Ethics. 13 But that code i s onl y bi nding on members and membership cannot be mandatory. That apart, as the answer itself acknowl edges, el ements of direct sell ing do take place vi a the unorgani zed channel mode, even i f its share i n revenue is not proportionate, and enforcement of any law or regulation for the unorganized sector is di cul t. Thi rd, there was LokSabhaUnstarred Questi on No. 4683, dated 7/8/2009. During 2003, Department of Consumer airs had recei ved requests from Indi an Di rect Sel l ing Association and other persons for enacting a separate legislati on to cover Direct Sell ing/Di rect/Network/Multi - Level Marketi ng. In consultati on wi th the Mi ni stry of Law, Department of Consumer Aai rs has issued a leer to al l the Chief Secretaries of States and Union Terri tori es clarifying that if the Direct/Network/Mul ti-Level Marketi ng Companies do their activities l awfull y, then thei r acti vi ti es would not aract any of the provi si ons of the Prize, Chits and Money Ci rcul ati on Schemes (Banning) Act, 1978. The Central Economi c Intel ligence Bureau, the i nvestigating agency deal ing wi th economi c oences, had 13 hp://www.idsa.co.i n/images/pdf/CodeOfEthics.pdf 18 Indicus White Paper Series drawn aenti on of the Department of Consumer Aai rs to the fact that companies usi ng pyrami d schemes to sel l thei r products were taki ng shel ter under thi s l eer to protect themsel ves from possibl e legal action. I n further response, Department of Consumer Aai rs cl ari ed to al l the States and Uni on Territori es that the i nstructi ons issued earlier di d not cover pyramid structure marketing scheme. Reserve Bank of India has also separatel y clari ed that i t is for the State Governments to seek advi ce of their Law O cers/Publi c Prosecutor to deci de whether any given scheme aracts the provi si ons of the Prize, Chits and Money Ci rcul ati on Schemes (Banning) Act, 1978. There is thus recognition that there is a doubl e ki nd of problem. First, stated explici tly, compani es indulging i n pyramid structure marketi ng schemes were cl aimi ng exemption from the Prize, Chi ts and Money Circul ation Schemes (Banni ng) Act. Second, left i mpl ici t and not expli citly stated, si nce direct selli ng can al so be multi - level, companies indulgi ng i n mul ti-level marketing were bei ng equated wi th those that dabbl ed i n pyrami d structures. In pyramid structures, peopl e are persuaded to joi n and pay money, because they gai n from the payments made by people who joi n later. In practice, it shouldnt be di cul t to di stingui sh between the two. For i nstance, there i s often no cl ear product in a pyrami d structure and commi ssions are pai d on regi strati on and entry fees, not 19 Indicus White Paper Series on sal es of products. Even if there i s a product, i t may be of dubi ous val ue. Havi ng sai d this, does the Pri ze, Chi ts and Money Circul ation Schemes (Banni ng) Act cl early di sti nguish between the two, wi thout having to go in for judi cial i nterpretati on? 20 Indicus White Paper Series Src1ioN 4: Tur srcoNo-nrs1 sotu1ioN I n the present context, the rel evant part of the Pri ze, Chi ts and Money Ci rcul ati on Schemes (Banni ng) Act i s the bi t that concerns money ci rcul ati on schemes . The rel evant part i s Secti on 2C of the deni ti ons. Thi s states, Money ci rcul ati on scheme means any scheme, by whatever name cal l ed, for the maki ng of qui ck or easy money, or for the recei pt of any money or val uable thi ng as the consi derati on for a promi se to pay money, on any event or conti ngency rel ati ve or appl i cabl e to the enrol ment of members i nto the scheme, whether or not such money or thi ng i s deri ved from the entrance money of the members of such scheme or peri odi cal subscri pti ons. The questi on to ask i s the fol l owi ng. Gi ven the cl ause on any event or conti ngency rel ati ve or appl i cabl e to the enrol ment of members etc , i s i t i mmedi atel y obvi ous that thi s statute does not appl y to mul ti -l evel marketi ng schemes? The answer has to be i n the negati ve. Therefore, an amendment i s needed to the Pri ze, Chi ts and Money Ci rcul ati on Schemes (Banni ng) Act, maki ng the di sti ncti on cl ear. Fi rst, di rect sel l i ng, i ncl udi ng mul ti -l evel marketi ng, has to be dened. Second, there has to be a qual i cati on 21 Indicus White Paper Series expl ai ni ng that di rect sel l i ng i s not to be i nterpreted as a money ci rcul ati on scheme, as l ong as there i s no pyrami d structure i nvol ved. Thi rd, a pyrami d scheme has to be dened, so that one knows what i s bei ng prohi bi ted. Thi s wi l l protect di rect sel l i ng compani es, protect consumers and al so make the task of enforcement easi er. In addi tion to amending the Pri ze, Chi ts and Money Ci rcul ati on Schemes (Banni ng) Act, i t i s al so necessary to amend the Consumer Protection Act. For i nstance, Secti on 2 of the Consumer Protection Act i s agai nst unfair practices and unfair trade practice means a trade practice whi ch, for the purpose of promoti ng the sale, use or supply of any goods or for the provisi on of any servi ce, adopts any unfair method or unfair or deceptive practice i ncl udi ng any of the fol l owi ng practi ces Al though thi s l i sti ng i s meant to be i ndi cative and not exhausti ve, it is sometimes interpreted as bei ng exhaustive, the point bei ng that a pyrami d scheme i s not expl i ci tly menti oned as an unfair trade practi ce. These two amendments are the bare mi ni mum that is necessary. However, there i s a reason why these have been descri bed as a second-best sol uti on. Laws are enacted at various points in time, to cater to a speci c need. Ti nkeri ng wi th secti ons and amending them here 22 Indicus White Paper Series and there, to cater to a new need, i s often a bad i dea. Such amendments fail to take a holi sti c vi ew. Given the i mportance of the direct sell i ng i ndustry, an i mportance that i s onl y likely to increase in the future, a fresh piece of l egi slati on is needed. 23 Indicus White Paper Series Src1ioN 5: Tur rins1-nrs1 sotu1ioN Many countri es i n the worl d (Si ngapore, Mal aysi a, Uni ted Ki ngdom, Uni ted States, Thai l and, Mal aysi a, Korea, I ndonesi a, Chi na, Vi etnam, Japan, Tai wan, Si ngapore) have speci c pi eces of l egi sl ati on on di rect sel l i ng and there are reasons for thi s. They address i ssues beyond the ones menti oned i n Secti on 4 and l egal l y formal i ze some of the pri ncipl es I DSA has i n the Code of Ethi cs. For exampl e, these cover conduct towards consumers, conduct towards di rect sel l ers and conduct towards compani es. One must al so remember that di rect sel l i ng need not al ways be B2C. I t can al so be B2B. I f one scans the l egi sl ati on i n these di erent countri es, they general l y tend to i nvol ve a l i censi ng cum regi strati on system for di rect sell ers, prohi bi ti ons on certai n categori es of products, restri cti ons on col l ecti ng money, a cool i ng-o peri od (duri ng whi ch consumers can cancel the contract), restri cti ons on mul ti -l evel marketi ng modes and prohi bi ti ons on pyrami d schemes. I n some form, they are al so part of gui del i nes that have been i ssued i n the State of Keral a. Other than deni ng and al l owi ng di rect sel l i ng and deni ng and prohi bi ti ng pyrami d schemes, these coul d 24 Indicus White Paper Series i nvol ve a regi strati on system for the di rect sel l i ng company (regardl ess of the speci c statute under whi ch the company i s regi stered), wri en contracts between the di rect sel l er and the di rect sel l i ng company and i mpose condi ti ons on both the di rect sel l i ng company and the di rect sel l er. But gi ven what was sai d about the i mportance of the unorgani zed/i nformal segment, one cannot dri ve the regi strati on/l i censi ng requi rement too hard, especi al l y because thi s i snt a requi rement that can be readi l y enforced. Though not a gure for di rect sel l i ng, i n 2004- 05, 84.9% of own account enterpri ses i n I ndi a were not regi stered and thi s needs to be agged, because regi strati on al so bri ngsaendant benets, such as access to credi t or government subsi di es on marketi ng and technol ogy. 14 Why arent own account enterpri ses regi stered? The answer i snt enti rel y l ack of i nformati on. Opti ng out of regi strati on i s probabl y a consci ous deci si on, because the benets from regi strati onare not commensurate wi th the costs. Not onl y are procedures connected wi th regi strati oncompl i cated and ti resome, regi strati on bri ngs wi th i t the aendant probl em of bri bery and rent-seeki ngfrom the government 14 Report on Conditions of Work and Promotion of Livelihoods in the Unorganized Sector, NCEUS, 2007, http://nceuis.nic.in/Condition_of_workers_sep_2007. pdf 25 Indicus White Paper Series machi nery . The non-regi strati on i ssue spi l l s over i nto the exi stence of the unorgani zed sector i n general . I t i s often presumed that ri gi d l abour l aws i n the organi zed sector encourage i nformal i ty. But thi s i s a parti al expl anati on. There are other reasons behi nd i nformal i ty avoi dance of taxes, compl i cated transacti on costs associ ated wi th regi strati on, rent- seeki ng and few percei ved benets from formal i zati on. The 3 rd SSI (smal l -scal e i ndustry ) Census was hel d i n 2000-01. When asked about the reasons for non- regi strati on, 53.13% sai d that they werent aware of the provi si ons, whi l e another 39.8% sai d that they were not i nterested . 15 After the MSMED (Mi cro, Smal l and Medi um Enterpri ses) Act of 2006, the SSI census became a MSME Census, conducted i n 2006-07. 16 Thi s conti nued to show very hi gh l evel s of non-regi strati on. Therefore, whi l e regi strati on/l i censi ng i s a good i dea and ensures the transi ti on from unorgani zed/i nformal to organi zed/formal , wi th i ts aendant benets, thi s needs to be i ncenti vi zed. As has been menti oned earl ier, the Seventh Schedule doesnt come in the way of the Uni on piloti ng such a fresh piece of l egi slation, pi loted by the Mi nistry of Consumer ai rs, Food and Publ i c Distri bution. Al l that i s requi red 15 hp://dcmsme.gov.in/ssii ndia/census/highlights.htm 16 hp://www.dcmsme.gov.in/publications/Fi nalReport010711.pdf 26 Indicus White Paper Series is for two-thirds of States to opt for such legislation. Failing that, it is always possible to formulate a model piece of legislati on, which can be adopted by whichever State wishes to. 27 Indicus White Paper Series Src1ioN 6: CoNctuoiNc No1r - Wnv Fonwnno Policy and legislation that do not adequately understand the nuances of any industry have the potential of not only adversely impacting that industry, but other complementary upstream and downstream industries as well. Recent movements in the policy domai n [REFERENCE] pertaining to pyramid schemes are being framed such that a large number of important sales and marketi ng activiti es may become illegal. Direct sales and multi-level-marketing are all being inadvertently bracketed with pyramid and Ponzy schemes; consequently consumer protection considerations are being imposed on perfectly legitimate and benecial economic activities with signicant positive externalities. The adverse outcomes of such awed policy could be many - increase in cost of sales, reduced competition, greater ine ciencies and increased cost of entry for new rms being some. Not only developed, even fast growing developing countries have recognized this and have drafted a facilitative structure for Direct Sales and Multi-level Marketing that clearly distinguishes them from Pyramid schemes. However recent draft guidelines issued to the states show no such vision; they could be construed to be describing 28 Indicus White Paper Series direct productsales as disguised form of a pyramid / money circulation schemes. This only reects that policy-makers need to beer understand the nuances of the DS and MLM industry, and also appreciate its current and potential importance. It is critical for the government to understand that any economic activity that is based on regular consumption of real consumable goods or services, irrespective of the cost of the goods, cannot be simplistically classi ed as a disguised form of money circulation. The current draft guidelines envisage eliminating all direct selling activity where the entity higher in the hierarchy is able to earn commissions basis the sales e orts of those down the line, without having to work equally hard. This is of course a rather nave form of identifying an undesirable or undesirable economic activity by this route insurance agents, almost all of trade, and most forms of economic activity could be considered to be undesirable. The guidelines also allude to pricing and premiums being inordinately high, pricing of course,is a function of market forces, and never can a product of regular consumption in a non-monopolistic seing be bought and sold consistently at high premiums over years. It i s obvi ous that di rect sel l i ng and MLM are forms of economi c acti vi ty that coul d pl ay a very i mportant rol e i n a country l i ke I ndi a. These are l ow transacti on cost mechani sms for sal es that have a very hi gh val ue added component, and are not very resource i ntensi ve 29 Indicus White Paper Series unl i ke other forms of sal es and marketi ng. DS and MLM therefore al l ow rms, smal l and l arge to use busi ness model s that precl ude the need for bui l di ng l arge physi cal retai l i nfrastructure. It i s al so obvi ous, that a competi ti ve economy needs to all ow vari ous opti ons of sl aes and marketi ng, as i t needs to al l ow vari ous opti ons for i nvestment and producti on. Unl i ke busi ness model s however, the economi c pol i cy framework needs to be evenl y spread across the country, and therefore the central government needs to pl ay a l eadershi p rol e i n many areas. DS and MLM i s one such domai n, si nce sal es and maketi ng i n the new economy wi l l necessari l y be many ti mes across borders, a common framework woul d hel p i n creati ng a fracture- l ess marketpl ace. Ensuri ng the correct del i neati on by speci c deni ti ons i n poli cy and tort woul d be the rst step. Removi ng such fuzzi ness from some l aws woul d be another i mportant step. A regi strati on and regul atory regi me woul d need to be bui l t up over a peri od of ti me. Al l of thi s woul d need to be done, whi l e not sti i ng smal l scal e or unorgani zed enterpri se, rather they shoul d be abl e to see the benets of bei ng the regi stered and regul ated domai n and benets from l arger scal es and l ower transacti on costs. That needs to be the objecti ve of economi c pol i cy. 30 Indicus White Paper Series Anou1 FICCI Establi shed i n 1927, FICCI i s the l argest and ol dest apex business organi sati on i n Indi a. Its hi story i s cl osel y i nterwoven wi th Indi as struggle for independence, i ts i ndustri ali zati on, and its emergence as one of the most rapidly growing global economi es. FI CCI has contri buted to this hi stori cal process by encouraging debate, arti cul ati ng the pri vate sectors vi ews and i nuencing policy. A non-government, not-for-prot organi sati on, FICCI is the voi ce of Indi as business and i ndustry. FICCI draws i ts membershi p from the corporate sector, both pri vate and publ ic, i ncl udi ng SMEs and MNCs; FICCI enjoys an i ndirect membership of over 2,50,000 companies from vari ous regi onal chambers of commerce. 31 Indicus White Paper Series Anou1 INoicus Indi cus Anal yti cs i s an economi cs research and data analysis rm. Indi cus follows the progress of the many facets of the Indi an economy at a sub-national and sub- state l evel on real time basi s. It conducts moni tori ng and eval uati on studies, i ndexati on and rati ngs, as wel l as policy analysis. Our multidisciplinary team draws from the analytical inputs developed in several elds economics, statisti cs, demography, management, engineeri ng, soci ol ogy, etc. We have been worki ng with range of Internati onal l y renowned organi zati ons such as Worl d Bank and vari ous UN organizations, academia such as Harvard, Stanford and Cambridge Uni versi ti es, government organi zations such as Finance Commission, Competition Commission of Indi a and Reserve Bank of India, top medi a houses such as India Today group, Outl ook group, Indi an Express group, and the topmost national and multinational companies. 32 Indicus White Paper Series DisctniMrn The i nformation contained i n thi s document represents the current vi ews of the author (s) as of the date of publi cation. This White Paper is for informational purpose onl y. The author (s) and Indi cus makes no warranties, express, i mpli ed or statutory, as to the i nformation i n thi s document. 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