Daniel R Pranjal, chief strategist at Strategy India, says, "Since these companies do not require a huge investment they keep on copying other fraudulent companies and keep popping. Most of these companies though are registered and head in big cities but still operate more in rural areas and once these companies shut down, the investors go to local police stations."
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So how do these companies operate? Founders usually rope in initial investors to start the company. They then announce big compensation plans to rope in more and more investors. With the new investment, initial investors are compensated to build credibility. But the company finally reaches a point where its payout promises are greater than the money coming in. Usually the business goes bankrupt, and investors lose their money.
Financial experts say it's a big challenge to monitor such companies. Pranjal says, "The need of the hour is to have guideline from the central government which is applicable for the entire country to all states and union territories which will clearly help people distinguish between genuine companies and fraudulent companies."
The guidelines, which are now being considered by the Finance Ministry, to keep a check on multi-marketing schemes may well be the answer to the growing menace of companies collecting money from the public through ponzi schemes.
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