A wake-up call for promoters

The Insolvency and Bankruptcy Code will strengthen lenders' rights and transform corporate behaviour by discouraging profligate borrowing and cavalier attitude towards debt servicing

Nobel laureate Ronald Coase, a pioneer in the discipline of law and economics, posited corporate governance as an attempt to address a classic principal-agent problem. In large companies, the principals (i.e. shareholders) tend to be widespread and diversified, whereas the agents they appoint (i.e. managers or directors) to run the company are a handful. Given her miniscule share, each rational shareholder estimates that the cost of personally monitoring the behaviour of agents is prohibitively expensive. Consequently, agents are able to indulge in self-serving behaviour such as short-termism, deriving excessive perquisites and empire-building through overleveraging. Laws try to reduce agency costs