Stricter rules and centralised regulator for multi-level sales

On May 14, the government issued Decree 42/2014/ND-CP regulating multi-level sales activities. Decree 42 took effect on July 1, 2014 and replaced Decree 110/2005/ND-CP. To detail certain provisions of Decree 42/2014/ND-CP, on July 30 the Ministry of Industry and Trade issued Circular 24/2014/TT-BCT, which will come into effect from September 15.


State management of multi-level sales businesses will be massively enhanced, Photo: Le Toan

Decree 42 and Circular 24 set out stricter and more detailed regulations governing enterprises engaged in multi-level sales (MLS) activities in Vietnam, which are expected to create a sector-wide impact on how enterprises in this business will operate.

The salient details of these new provisions are highlighted in this article, which aim to give an overview of how these regulations may affect enterprises in the sector:

Capital and deposit requirements

MLS enterprises now must have a minimum charter capital of VND10 billion ($465,000). This floor amount did not exist in the former laws and adds a further restriction against entrants keen to enter the MLS field.

A deposit of five per cent (but minimum of VND5 billion) of the enterprise’s charter capital is also necessitated. This deposit is essentially locked for the general life of the enterprise as the amount cannot be utilised during its ordinary course of business. It may, however, be withdrawn with consent of the authorities or in the event of a need to pay back creditors during winding up.

Required certificates

The Certificate of Registration of MLS Activities (MLS Certificate) will now be issued by the Competition Management Agency under the MOIT (VCA) with the aim of centralising the Ministry of Industry and Trade (MOIT)’s authority over MLS enterprises. The VCA now has the broad supervisory power to issue, amend, renew, re-issue and revoke MLS Certificates.

As a business condition, enterprises that wish to apply for an MLS Certificate must have already registered their business lines to include retailing business through MLS. However, it is unclear as to how this provision will apply to existing foreign-invested MLS enterprises whose investment certificate does not include this business line.

An MLS Certificate is only valid for five years. For enterprises already in possession of an existing certificate, they must apply to the VCA for a new certificate in accordance with these new regulations.

The registration of the MLS Certificate has also now become considerably more complex and demanding, requiring a plethora of requirements. These include having to submit a large volume of documents that previously did not need to be submitted.

However, despite the complexity, the laws provide for a more streamlined system as it now takes less time, in theory, for MLS Certificate assessments to be carried out by the authorities (namely, the VCA). Upon being issued the MLS Certificate, the enterprise will need to inform the relevant Department of Industry and Trade (DOIT) in the province or city in which it conducts MLS activities.

MLS Certificates may also be revoked, and the new regulations set down stricter criteria and more grounds on which the certificate can be revoked. The MLS Certificate may also be revoked if the enterprise’s registration certificate is withdrawn or expires, if the application for the certificate contains fraudulent information, or if the enterprise is fined for a prohibited action.

Accountability of management

Under the new regulations, individuals in key or management positions of authority in an MLS enterprise (including the legal representative, members of a limited liability company, shareholders in a joint-stock company, an unlimited liability partner, or owners of a private enterprise) will be held to greater accountability.

If an MLS Certificate is revoked from the enterprise while these individuals are in office or existence, they will be restricted from holding a similar position in any MLS enterprise in the future.

Training courses and seminars

Decree 42 imposes greater obligations on MLS enterprises to notify the relevant DOIT when conducting MLS training courses and MLS seminars covering certain areas. This excludes training courses and seminars organised at the enterprise’s headquarters, local branches, representative offices and business locations. However, the notification must be accompanied by a broad set of documents previously not needed.

MLS enterprises are required to also specify a basic training programme for all participants and grant each participant a certificate. The trainers must obtain trainer certificates issued by a specific training institution.

Trading through the MLS model

The new regulations prescribe goods that are prohibited from being traded under the MLS model. These goods include, among others specifically set out under Decree 42, those set out under the list of goods already banned or restricted from being traded and goods subject to compulsory withdrawals for emergency measures.

In addition, all services or business forms other than sales and purchases of goods are prohibited from being traded under the MLS model (unless the law provides otherwise).

Commission, bonuses and other economic benefits

The new regulations now require bonus-paying programmes to be provided and registered with the MOIT. The total value of the commissions, bonuses and other economic benefits per year cannot exceed 40 per cent of the revenue of the MLS enterprise. Although, it is worth noting that the term, “MLS revenue”, is not defined under these new laws and it remains to be seen how this will apply in practice.

Suspension of operations

The new regulations now provide for a maximum period of 12 consecutive months for an MLS enterprise’s suspension of operations. The previous Decree 110 did not provide any restrictive period.

In such event of suspension, an MLS enterprise must submit the dossier of suspension notification to the VCA and publicise the relevant information at its head office and inform MLS participants.

However, in the event of suspension or termination of operations, the new regulations no longer require the MLS enterprise to liquidate its contracts with their MLS participants (as was previously required by Decree 110).

Periodic reporting obligations

Under the new regulations, MLS enterprises are subject to certain disclosure obligations to the VCA and provincial VCA.

Particularly, before July 15 each year, the MLS enterprise must submit a written and electronic report on the results of its MLS activities for the past six months. Before January 15 each year, a similar report must be submitted, but on the annual results of such activities.

These periodic reports cover the contents stipulated under Circular 24, which include business registration, operations and the financial status of the reporting MLS enterprise.

Conclusion

Decree 42 and the guiding Circular 24 are the first regulations to be issued in respect of MLS activities and enterprises since the MLS model was adopted almost 10 years ago in Vietnam. As the MLS model progressively expands in Vietnam, the management authorities have taken active steps to impose stricter regulations on enterprises engaged these activities – particularly as enforcement of these rules is centrally vested with only one ministerial authority: the MOIT through the VCA.

While costs are expected to be incurred in ensuring compliance with these rules, it is a step in the right direction towards hopefully creating more fairness and stability for MLS enterprises.

By Bui Ngoc Hong Partner at LNT & Partners