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
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.
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 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.
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.