December 4, 2021

Legal tips for entrepreneurs on online direct selling business

Introduction

Direct selling is a type of selling in which intermediaries are eliminated from the supply chain. The sale of the product is made directly to the ultimate consumer. Direct selling is generally used by Network Marketing Companies and even many businesses which sell business to business use Direct Selling to reach the end consumer. We are surrounded by direct selling, and sometimes we don’t even know about it. 

Few Examples of Direct Selling Company

Amway, Modi care, Avon, Forever Living

Online Direct Selling 

Online Direct Selling is similar to Direct Selling but is entirely online. Online Direct Selling is successful because many tools help the Direct Seller to measure the success of the business. It also helps the direct seller to reach the smaller segments of the economy. Online Direct Selling Business is legal in India.

There are various methods of Online Direct Selling. Following are the methods

  1. Social media – While using social sites we see many ads of products with clear specifications of the product. The intermediaries in the process of the supply chain are removed. Direct Sellers can reach direct customers. Examples of social sites- Facebook, Twitter, Instagram, etc.
  2. E-MAIL – The other method of Online Direct Selling is E-MAIL. E-MAIL is the most inexpensive method of online Direct Selling. In E-MAIL the company shares details of the promotion and various invitations.
  3. Direct Selling Software – In this method, the company makes its software and sells the products through that software and the company can also keep track of sales, orders, and other relevant details.

Benefits of Online Direct Selling

  • The Middle chain between consumers and the company will be removed.
  • It will save the time of the consumer.
  • The products will be available at reasonable prices.
  • The cost of setting up an Online Direct Selling Business is less as compared to other business
  • Detailed information on the product is available
  •  The product is delivered at customer’s door.

Legal tips to Start Online Direct Selling Business

In India, there is no separate law for setting up Online Direct Selling businesses. But there are various Government agencies and Departments involved in regulating Online Direct Selling Companies and there are certain acts in the Indian Constitution which an entrepreneur needs to comply with for setting up Online Direct Selling Business.

Incorporation/ Registration 

 Entrepreneurs, who want to start Online Direct Selling Business, must set up an Online Direct Selling Company or Private Company, or Public Company in India. And the company should be registered with the Registrar of Companies and Ministry of Corporate Affairs Government of India.

The entrepreneurs have to apply for Indian Direct Selling Association membership (IDSA). It is a Private Body set up by Amway India who is governing all Direct Selling Companies in India and taking necessary steps to stop unethical and illegal Online Direct Selling Companies.

  •  Contracts/ Agreements

 To start Online Direct Selling Business, Entrepreneurs are required to have certain agreements such as 

  • Co-founder Agreement- It is an official agreement that is executed between Co-founders of the company. The agreement contains information related to the capital contribution, Investments, roles and responsibilities, dispute resolution mechanism, etc.
  • Logistics Agreement – This agreement is done between courier services and the Company. This agreement includes terms and conditions related to timely delivery of goods, charges for delivery, the safety of products, etc.
  • Payment Gateway Service Provider Agreement – While purchasing goods online, customers sometimes have to make payments online through a different payment gateway such as Google Pay, Net Banking, etc., and for this, the company makes a contract with the Payment Gateway Service Provider Agreement.
  • Compliance of Income Tax Act,1961 and Goods, and Services Tax Act,2017

The company must be registered under Income Tax Act, 1961 and Goods and Services Tax Act, 2017.

The Company should have a Goods and Services Taxpayer Identification Number (GSTIN), Corporate Identification Number. The company has to file GST Returns, Income Tax returns as prescribed under the Act.

In case of non-compliance, there is a penal provision. The company has to pay interest for default in filing returns.

  • Compliance of Companies Act,2013

The company must be registered with the Registrar of Companies. The company should have its Memorandum of Association and Articles of Association and have to file its details in the format as prescribed in the Act.

The minimum paid-up of the company should be INR 500000/- and the net worth of Promoters of the company should be INR 50,00,000/-

In case of non-compliance, Directors or Promoters of the company will be punishable under the act. Directors Identification Number can be taken by Registrar of Companies. There is a certain penal provision for it.

  • Compliance of Information Technology Act,2000, Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules,2011 

The company has to maintain Privacy Policy. It should not share information about its customers with any third person. According to the provisions of section 72(A) of Information Technology Act,2000, sharing of customer’s personal information without informing them and breach of contract is punishable with imprisonment up to three years and a fine up to INR 500000/-

Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules,2011 deals with the protection of personal information such as Passwords, Bank Account Number, Credit Card numbers, etc. The rules state that the Company or any person on collects, receives, possess, store, deals, or handle information is required to follow guidelines of “Personal sensitive data or information”. In case of any breach, the company or any other person acting on behalf of the company will be liable to pay damages to the customer.

  • Compliance of Legal Metrology Act,2009 and Legal Metrology (Packaged Commodities) Rules,2011

Rule 27 of Legal Metrology (Packaged Commodities) Rules,2011 states that every Online Direct Selling company has to submit Registration Certificate issued.

As per provisions of Chapter – II, certain important declarations have to be made on the packaging of every good such as 

  • There must be the name and address of the manufacturer on the goods.
  • Weight, Standard Quantity, Expiry Date, Manufacturing date must be mentioned on the product.

In case of no compliance, the goods can be banned under the said act.

And all the directors or promoters of the company will be punishable under the act.

  • Compliances of Consumer Protection Act

 The company has to maintain a proper website with consumer compliant portal where the consumer can file their complaints and any complaints on that portal must be solved within 7 days of registration of compliant.

There is a penal provision in case of non-compliance of the provisions of the said Act.  Company has to refund or replace the goods purchase by the consumers

  • Compliance of Foreign Exchange Management Act,1999

Any company selling its product online has to comply with the guidelines of the said  Act. If the company is not complying with the guidelines then, the Directors, Promoters, or other members of the company will be punishable under the said Act

  • Compliances under guidelines of Ministry of Consumer Affairs and Ministry of Corporate Affairs

Ministry Of Consumer Affairs – The entrepreneur who wants to start an Online Direct Selling Business have to take approval from the Ministry of Consumer Affairs Any company engaged in the business of Online Direct Selling have to submit an undertaking to the Ministry of Consumer Affairs stating that they have followed the guidelines issued with the details of incorporation and supporting documents. In case of non-compliance, the directors of the company or promoters of the company will be punishable under Consumer Protection Act,2019

Ministry of Corporate Affairs- The Company should be registered under Indian Laws such as Companies Act, 2013, etc. and the Director or Promoter of the company should not be convicted of any offense.

Compliance Of Government Guidelines

Every Online Direct Selling Company should maintain Know Your Customer Guidelines as a mandatory procedure. The company should have a bank account in Nationalized Bank. All the Online Direct Selling Companies are required to submit the Buy-Back policy for the consumers.

Conclusion

Online Direct Selling Business is one of the fastest-growing businesses in India. It is contributing to the Gross Domestic Product (GDP) of India. The Laws of India are not against Online Direct Selling businesses. But to safeguard the interest of customers Government has made certain laws for Online Direct Selling Companies and Entrepreneurs should comply with all the applicable Laws so that they can run their business smoothly without any complications.

Author details

Daminee Jain

3rd Year, Vidhyasthali law college, Jaipur

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