A physical product, free enrolment and a claim of compliance with the Consumer Protection (Direct Selling) Rules, 2021 may create an appearance of legitimacy. They do not, by themselves, establish that a direct selling multi-level marketing (MLM) model is lawful, commercially sustainable or compliant in practice.
For consumers, regulators, investors and even many participants, the first question about an MLM business is often: does it sell real products? That is an understandable question, but in over two decades of reviewing MLM models, I have found it to be consistently incomplete.
A product can be genuine, useful, properly invoiced and capable of independent sale. Yet the underlying business model may still raise legal and commercial concerns if participant rewards are driven materially by recruitment, enrolment-linked purchasing, rank qualification, internal volume or the continuing expansion of the participant network.
The decisive question is not whether a company has an attractive catalogue, a sophisticated website or carefully drafted policies and an MLM compensation plan. It is far more fundamental: What does the business actually reward, and what genuinely funds the payments promised to participants?
A credible direct-selling enterprise should be able to demonstrate genuine consumer demand, realistic commercial margins, transparent income communication and robust field discipline. Where a model instead depends on participants buying to qualify, remain "active," retain rank, or generate downline volume, the legal and economic analysis becomes substantially different, subject always to the facts of the particular case.
Products Are Relevant, but Not Conclusive
The existence of a physical product does matter. Product quality, utility, independent consumer demand, pricing and return protections are all relevant to a sustainable and legitimate direct-selling assessment. However, none of these factors, individually or collectively, operate as a conclusive compliance shield under the applicable Indian statutory framework discussed below.
The essential inquiry is whether sales occur because independent consumers value the product or because participants believe purchasing is necessary to access and advance in the earning opportunity.
This distinction becomes particularly important when assessing participant purchases. A direct seller can clearly be a genuine end-user. A small, regular purchase made for personal use, without pressure from an upline and without any effect on commission eligibility or rank, may be entirely consistent with legitimate consumption.
The position changes where a participant makes an unusually large purchase shortly after joining, towards the end of a commission period or immediately before a rank review. If the purchase follows pressure from an upline, is linked to bonus eligibility or is needed to maintain "active" status, it may be difficult to characterise the purchase as ordinary retail demand. Its significance must be assessed on the facts: quantity, timing, product suitability, participant finances, return history, communications and compensation consequences and no single factor is determinative in isolation. The key issue, consistently, is the economic purpose of the purchase.
The Indian Legal Position
Indian law expressly prohibits using direct selling as a cover for pyramid schemes and money-circulation schemes. The applicable legal framework includes the Consumer Protection Act, 2019; the Consumer Protection (Direct Selling) Rules, 2021; the Consumer Protection (Direct Selling) Amendment Rules, 2023; and the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, together with any other law that may apply on particular facts.
The Direct Selling Rules define a pyramid scheme as a multi-layered arrangement in which subscribers enrol additional subscribers to obtain benefits arising from their enrolment, actions or performance. The Rules provide an exclusion for a qualifying direct-selling arrangement only where benefits arise from participants' sale of goods or services and all prescribed conditions under the Rules are cumulatively satisfied.
Those conditions include, among other matters:
·No remuneration or incentive merely for recruitment or enrolment
·No requirement for commercially unreasonable purchases
·No participation-related entry or registration fee
·Written terms and conditions
·A reasonable cooling-off period
·Buy-back or repurchase arrangements for currently marketable goods or services
·An effective consumer-grievance redressal mechanism
The 2023 amendment adds an important point of statutory emphasis: it defines a 'network of sellers' as a network formed to sell goods or services for the purpose of receiving consideration solely from such sale.
That wording merits careful legal attention. A company may describe joining as free, but free enrolment alone does not resolve the statutory question. If a participant must, in substance, buy products to become commission-eligible, access team volume, remain active, or advance in rank, the operational reality may diverge materially from the written representation and it is the operational reality, rather than the label applied by the promoter, that is likely to be central to the legal characterisation of the arrangement.
Recruitment, Qualification and Inventory Loading
The greatest risk arises where the compensation plan or field culture makes product purchases a practical route into the earning opportunity, irrespective of how the written policy is framed.
Indicators warranting closer scrutiny include participant purchasing of stock primarily to:
·Qualify for commissions, bonuses or matching incentives
·Maintain "active" status
·Attain or retain rank
·Preserve accumulated group volume or downline-linked benefits
·Access events, recognition, training or incentive programmes
·Meet an express or informal starter-pack, activation-order or periodic-purchase expectation
A single instance of such conduct does not, by itself, establish unlawfulness. However, repeated, tolerated or incentivised pressure toward commercially unreasonable purchases may evidence a material divergence between a company's published safeguards and its actual business model, a divergence that regulators and courts internationally have historically treated as probative.
Field statements such as 'buy the larger package to qualify faster,' 'you can always sell it later,' or 'you need volume to build credibility with your team' warrant attention from compliance teams and regulators where they form part of recurring field practice, rather than isolated remarks.
Written rules are necessary but not self-executing. A prohibition on stock loading, misleading earnings claims or recruitment-based remuneration has limited legal or practical value if onboarding calls, webinars, WhatsApp groups and social-media promotions communicate a materially different message—a gap that recurs across the business model reviews I have conducted in this sector.
Chit Funds, Pyramid, Ponzi and Money-circulation Schemes Are Not Synonyms
Public and media discussion often uses the terms 'chit fund', 'Ponzi scheme', 'pyramid scheme' and 'money-circulation scheme' interchangeably. That usage is legally imprecise; each term carries a distinct meaning under Indian law and conflating them can mischaracterise both legitimate and unlawful businesses.
A chit fund, when lawfully constituted and conducted under the Chit Funds Act, 1982, is a mutual savings-and-credit mechanism among a fixed group of subscribers. It should not be confused with a ‘prize chit’ or a money-circulation scheme, which are separately addressed under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The applicable characterisation depends on the statutory definition, the consideration paid, the promised benefit and the actual operation of the arrangement.
A Ponzi-style arrangement is generally understood, as a matter of common usage rather than a defined Indian statutory term, as one in which purported returns are funded from money contributed by later participants rather than from sustainable underlying income.
A money-circulation scheme is a distinct statutory concept under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Broadly, and subject to the precise statutory language, it addresses arrangements involving a promise of quick or easy money, where consideration is paid in connection with an event or contingency related to the enrolment of members.
The Consumer Protection (Direct Selling) Rules, 2021 address pyramid schemes separately and specifically. Its assessment centres on enrolment-linked benefits and whether the arrangement satisfies the statutory conditions applicable to the direct-selling exclusion described above.
These four concepts can overlap on a given set of facts, but none should be used as a casual substitute for the others in public commentary, enforcement correspondence or media reporting. A recruitment-heavy or commercially weak business or an informal savings pool, should not be labelled a chit fund, Ponzi, pyramid or money-circulation scheme without a fact-specific analysis of the applicable statute, compensation mechanics, representations made, consideration paid and actual conduct.
Nevertheless, recruitment-linked incentives, inventory loading, participant-funded rewards and mathematical dependence on continual expansion remain significant warning signs across all these structures and warrant evidence-based scrutiny regardless of the label eventually applied.
According to Strategy India’s internal tracking*, 2025 recorded the highest number of new MLM-style Ponzi launches in a decade: 841, alongside 46 pyramid-structured launches. Many of these schemes appeared to rely on money-circulation mechanics rather than genuine retail activity.
The trend has continued into 2026. As of 15th August, Strategy India’s tracking had recorded and listed 543 new MLM-style Ponzi or money-circulation launches and 22 pyramid-structured launches in India. Of the remaining MLM operations launched and identified during the period, 13 were assessed by Strategy India as not fully aligned with the Consumer Protection (Direct Selling) Rules, 2021. Only two were assessed, on the information available at the time of review, as showing prima facie alignment with the Rules on paper.
What a Meaningful Review Requires
A rigorous assessment of a direct-selling model deploying an MLM compensation plan must examine the plan both as written and as experienced by the participant. Neither view alone is sufficient for a defensible compliance opinion.
The review should begin with revenue analysis:
·What proportion of sales comes from customers who have no right to earn under the compensation plan?
·Are customers buying repeatedly because they value the products or are participants generating most volume through their own purchases and those of their downline?
It should then examine compensation triggers:
·Do payments arise from verified retail sales, participant orders, group volume, rank conditions, recruitment events or a combination of these?
·How is "active" status obtained and maintained?
·What is the practical effect of carry-forward points, binary volume, matching bonuses and rank requirements?
Payout viability must be independently stress-tested:
·An MLM compensation plan should be modelled after product costs, tax, logistics, payment charges, refunds, returns, commissions and operating overhead.
·It should remain commercially viable even if recruitment slows materially.
·For binary and carry-forward volume plans, the review must additionally address accrued but unpaid commission exposure, payout caps and future obligations created by carried volume.
Field conduct must be treated as primary evidence, not an afterthought. Relevant material includes onboarding calls, webinars, marketing presentations, social-media content, WhatsApp communications, complaints, return data and disciplinary records. The governing question is whether earnings claims are typical, qualified and capable of substantiation and whether new participants are being encouraged to buy stock they cannot reasonably use, consume or resell.
Lessons from Comparative Case Law
Foreign judicial decisions do not determine the legal status of an Indian business and are not binding precedent in Indian courts or before Indian regulators. They are cited here solely as comparative guidance on the analytical factors courts in other jurisdictions have treated as material.
In FTC v. BurnLounge, Inc., 622 F.3d 1102 (9th Cir. 2010), the United States Court of Appeals for the Ninth Circuit held that the business operated an unlawful pyramid scheme under US law. The court found that its practical focus was recruitment and that its cash rewards were tied primarily to recruitment rather than merchandise sales. The decision is frequently cited for rejecting the argument that a business avoids pyramid-scheme concerns merely because products are present in the model.
Similarly, in Webster v. Omnitrition International, Inc., 79 F.3d 776 (9th Cir. 1996), the Ninth Circuit considered inventory loading and compensation linked to company orders rather than verified sales to ultimate users. The decision illustrates a compliance lesson of continuing relevance: written retail-sale and buy-back policies are not conclusive if they prove ineffective in actual operation.
Canadian law offers a further comparative statutory reference point. Canada's Competition Act addresses recruitment-based compensation, unreasonable inventory acquisition and reasonable buy-back protections. These provisions do not state Indian law but reflect established regulatory-policy concerns around stock loading and recruitment-driven remuneration – concerns that also arise in Indian field-agent classification disputes, where courts and regulators increasingly examine substance over contractual labels, asking who controls the work and who benefits most from that control, rather than relying solely on how a relationship is documented.
Building a Retail-led Business
No single control guarantees legal compliance. However, a responsible direct-selling company should structure its commercial model around genuine product demand and enforceable field controls, tested against the statutory conditions set out above.
A credible compliance programme should:
·Design ordinary commissions and meaningful incentives around documented product sales, not enrolment
·Ensure product pricing, quality and utility support demand independent of the income opportunity
·Avoid qualification conditions that pressure sellers into commercially unreasonable purchasing
·Regularly monitor starter packs, activation orders and recurring purchases for stock-loading patterns
·Maintain transparent, accessible buy-back and repurchase arrangements
·Prohibit misleading earnings claims and recruitment-led presentations
·Audit actual field conduct, rather than relying on policy documents alone
·Maintain dependable, auditable records of sales, returns, refunds, complaints and disciplinary action
·Take documented disciplinary action where policies are breached
Most importantly, the company should stress-test its payout commitments against realistic retail margins rather than assumptions of continuing recruitment growth.
What Regulators and the Industry Should Consider Next
Statutory text alone will not close the gap between written compliance and operational reality. Drawing on advisory engagements with industry bodies and enforcement agencies, three measures merit consideration:
A. A dedicated central monitoring and fraud-control mechanism should identify, classify and track new MLM launches at an early stage. Its priority sequence should be risk-led and should not be diluted by treating all MLM activity as equally suspect:
1. Ponzi-style and money-circulation schemes
2. Unregistered collective investment schemes
3. Pyramid structures operating under the guise of direct selling
4. Other materially non-compliant MLM operations
5. Retail-led direct-selling operations that demonstrate prima facie alignment with applicable law
This sequence reflects differing levels of consumer-loss, financial-crime and market-integrity risk. It also helps ensure that legitimate direct-selling businesses are not unnecessarily equated with suspect or unlawful arrangements.
B. Clarified regulatory guidance on the 'network of sellers' test introduced by the 2023 amendment, so that founders, auditors and enforcement officers apply a consistent evidentiary standard when assessing whether consideration flows solely from genuine sales.
C. Mandatory field-conduct audits, in addition to policy-document reviews, as part of any compliance certification process since written safeguards carry limited weight where onboarding calls, webinars and social-media promotions contradict them in practice.
Industry associations have an important role in protecting the integrity of the sector. They should distinguish genuine, retail-led direct-selling models from exploitative operations, particularly pyramid schemes operating under the guise of direct selling and avoid granting 'legitimacy' through membership or public association to models that do not meet applicable legal and compliance standards. They should also educate prospective direct sellers, existing participants and the public to recognise warning signs of Ponzi-style, money-circulation and pyramid structures before enrolment, investment or affiliation.
The Compliance Question That Matters
The product is not the compliance test. Free joining is not the compliance test. A declaration of compliance with the Consumer Protection (Direct Selling) Rules 2021 and a polished policy on paper is not the compliance test.
The determinative question, on the facts of each case, is whether the model in substance and in actual operation rewards the sale of goods or services or rewards the recruitment and purchasing activity of participants.
That question does not undermine legitimate direct selling. It protects it. The sector's long-term credibility depends on business models anchored in genuine customer demand, sustainable margins, accurate earnings communication, meaningful return protections and disciplined field practices.
Models that rely on perpetual recruitment, qualification-driven purchases or benefits principally connected to enrolment present a fundamentally different legal and commercial risk profile - one that founders, boards, investors and regulators would be well advised to test rigorously before, not after, consumer harm occurs.
(*These figures are derived from Strategy India’s proprietary monitoring of publicly observable launches and reported schemes. They are not official government statistics and may not capture every launch or MLM operation in India.)
(Pranjal R Daniel is Chief Strategist, Strategy India (Direct Selling MLM Consulting) | He has been in the direct selling MLM industry for over 26 years with a data-backed record of analysing over 15,500 MLM operations in India.)
