Pyramid Schemes : RBI warns against The Scheme

Highlights: 

  • The Reserve Bank of India (RBI) recently cautioned investors against multi-level marketing firms that promise high returns and run on hefty member susbscription fees, warning such offers could result in direct financial losses.
  • There has been a spurt in the number of such schemes in recent past even as various regulators are taking actions such entities.
  • Advising caution, the RBI said investors should not fall prey to such unscrupulous entities as the pyramid structure mandates all members to enroll more members.
  • Any break in the chain leads to the collapse of the pyramid, and the members lower down in the pyramid are the ones that are affected the most.
  • Further acceptance of money under money circulation/multi-level marketing/pyramid structures is a cognizable offence under the Prize Chit and Money Circulation (Banning) Act 1978.
  • Members of public coming across such offers should immediately lodge a complaint with the state police.

What is pyramid scheme ?

  • A pyramid scheme is an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public
  • Various forms of pyramid schemes are illegal in many countries all over the World.
  • In a pyramid scheme, an organization compels individuals to make a payment and join. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. 
  • The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative-whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.
  • Pyramid schemes-also referred to as franchise fraud or chain referral schemes-are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. 
  • The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.