Myopia on limited liability will kill risk-taking–04.12.2017

In India, limited liability has become endangered. The principle that an investor’s liability is limited to the capital he or she has put into a company, if the company goes belly up, is vital to entrepreneurship. Limited liability companies were invented because unlimited liability on investors would constrain the size of companies: only habitual punters would contribute to a company’s capital, other than the monomaniac convinced of his own infallibility and puts in enough money to take control of the company and run it.

The joint stock company with limited liability has been the engine of capitalist growth and the enabler of the miracles it has wrought, slashing poverty, laying waste to disease, making commoners live better than the kings of yore, advancing knowledge and revolutionising technology and the production of new technology. Yet, in India, the attitude to limited liability has been cavalier.

Banks routinely seek the personal guarantee of promoters and directors to sanction a loan to acompany. This did not used to matter, because of the ingenuity of Indian businessmen and the matching generosity of their creditors when the credit under default spelt serious money.

Things have changed with the Insolvency and Bankruptcy Code. Now, personal guarantors of corporate loans stand to lose their shirt, literally. Banks are not alone. The government was trigger-happy in its decision to make shareholders of Financial Technologies Ltd cough up the dues owed to punters who lost their money on FTL’s subsidiary, National Spot Exchange Ltd, when the commodities regulator took the strange decision to ban, rather than wind down, certain forward contracts on that exchange: the right thing to do was to extract the money from those who had defaulted on their contracts and forged warehouse receipts.

The highest court of the land, too, is more than ready to lift the corporate veil of the bankrupt Jaypee Infratech’s holding company, going to the extent of barring the promoter from alienating assets. Ficci is right to demand that limited liability stay limited.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Myopia on limited liability will kill risk-taking

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