New rules to help fight ills of pyramid schemes

The subscribers who enrol the new people occupy a higher position and the newly joined ones are ranked lower, resulting in a multi-layered network with successive additions.

Published: 15th January 2022 01:34 AM  |   Last Updated: 15th January 2022 01:34 AM   |  A+A-

Consumer Protection

For representational purposes

In an effort to revamp the consumer protection laws in the country, the Central government had introduced the new Consumer Protection Act, 2019, that contained additional and enhanced obligations on the seller(s)/provider(s) of goods and services.

The old Act that was introduced in 1986 could not keep up with the constantly innovating market and hence it was thought necessary to introduce a new one altogether that would take into account the changing needs of society and also address the problems that were created because of the loopholes present in the earlier law. Naturally, after the Act came into force, rules were needed to address specific offences and procedural matters and have constantly been notified since then.

Much needed and awaited were the rules on direct selling, which have just been introduced in late December 2021. Initially, there was only the guidance that had been provided to the states in 2016. The most striking feature of the Rules is the prohibition of pyramid and money circulation schemes.

The rules define a pyramid scheme as a multi-layered network of subscribers formed by the existing ones who enrol one or more new people to receive any benefit, directly or indirectly, as a result of enrolment, action or their performance. The subscribers who enrol the new people occupy a higher position and the newly joined ones are ranked lower, resulting in a multi-layered network with successive additions.

The rules state that the entities involved in pyramid or money circulation schemes do not form a part of the direct selling outfit. Also, Rule 10 expressly prohibits, in strict terms, the engagement by the direct selling entities in activities that promote pyramid or money circulation schemes. Agents of financial institutions are also excluded from the definition. In order to maintain the consistency between the different rules, it also specifies that the direct selling entities are bound to follow the Consumer Protection (eCommerce) Rules, 2020.

At a general level, the rules have now been made very prescriptive, in the sense that various obligations are imposed on both the direct sellers and direct selling entities. For instance, incorporation under any of the laws depending on the form of entity, having a registered office at someplace in India and providing self-declarations of compliance with the Rules. All the direct selling entities are supposed to act in accordance with these Rules within a period of 90 days.

The state governments have been entrusted with the task of monitoring and supervising the activities of such direct selling entities. It also makes the direct selling entity responsible for the grievances arising out of the conduct of any of the direct sellers.

At the outset, the pyramid scheme models are not sustainable as they depend on the continuous recruitment of new people. It is also not good for an economy, especially one like India that is characterised by huge unemployment and illiteracy.

The pyramid schemes have often led to misleading and deception of the end customers and those involved in the multi-layered scheme. It also takes the legitimacy out of the direct selling business because the focus shifts from selling the actual products or services for its benefits to just recruitment of new people.

On a very general level, it leads to the wastage of resources and talent. This is because the people first have to invest some money themselves to become a part of the scheme that is not actually a legitimate addition to the economy or their own worth.

Problems also stem from the non-tracing of the start of such pyramid schemes and creating accountability for any grievance that anyone may have. This is now sufficiently addressed by the rules that state the direct selling entity is required to have a registered office. In addition, it also makes the direct selling entity liable for the actions of the direct sellers.

The problem of pyramid schemes was deep-rooted in Indian society and had not been addressed till date despite several efforts to regulate the same through non-statutory methods. It is only under the new Consumer Protection Act read with the rules that there has been at least an attempt to seriously address this problem.

Kavya Lalchandani

A legal scholar based out of UK


India Matters


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