The Wolf of Dalal Street: Re-Thinking Liability Frameworks for Shadow Banks

– Sayantan Chanda

Shadow Banking via NBFCs has steadily increased in popularity in India over the past decade. Multiple entities offer an array of financial services which provide credit lines for vital projects in infrastructure, housing and other fields. For many start-ups and small businesses across the country, shadow banks are a source of funding. While the growth of the sector is to be appreciated, the potential dangers of this form of capitalism were apparent in 2018 with the collapse of IL&FS. To this end, taking from the lessons learned the hard way from 2018 and the Great Recession of 2007-2009 caused by the meltdown of Wall Street’s shadow banks, certain fundamental concepts of company law must be re-examined. It will be argued that further RBI and SEBI Regulations fail to address the issue of banking failures. Rather, the concept of limited liability, long believed as fundamental to the company form, is unsuitable for the NBFC/shadow banking sector and must be diluted to reintroduce a form of multiple liability. This is essential for dissuading the irresponsible and risky strategies employed by management and directors in shadow banks. Such a dilution may also apply to other company forms in the future. Additionally, civil liability, long believed to be the most appropriate way of holding errant bankers liable for their greed and outrageous risk-taking, has turned out to be a disappointment in the United States. The approach of impugning individual directors and managers in civil law will have to be reformed in order to ensure that it is more effective in penalizing their collective negligence.