The East India Company had all the trappings of a successful transnational corporation. Its operations were spread across the globe, it had a well-defined hierarchical structure of command and there was a Chinese wall between its ownership and management. It was formed in 1600 and wound up in 1874 — that should put paid to the claims that come up every now and then of an Indian having bought the company and avenged the wrongs done centuries ago! But it was far more powerful than any present-day corporation. And that power came from the royal charter that it received for trade with China and India. Without these monopoly rights, one doubts if the East India Company, also called John Company or simply Company Bahadur in India, would have achieved so much. It guarded its interests vigorously, not through lawyers and lobbyists but through territorial conquests. This is something no modern corporation would do; hence there is unlikely ever to be another East India Company. Tirthankar Roy’s book is a lucid account of the world’s most powerful corporation.
In a sense, the East India Company changed the way business was done in India. Before it, the idea of a joint stock company was not known. Of course, members of a mercantile community would often pool resources and fund a venture. But the circle of shareholders was never as wide as in the case of the East India Company. Thus, the capital available for Indian entrepreneurs and traders was always smaller in size. And, of course, the cost of capital was higher. People would lend at lower rates to members of their community or caste, but that was never a match for the inexpensive resources of the East India Company. So when it came to India, local businessmen were simply blown away.
The pinnacle of the East India Company’s power came in 1766 when it was given Diwani rights for the whole of Bengal by the Mughal emperor. When news reached London, the share price of the company shot up. But there was also growing disgust at the company’s monopoly rights. The popular angst resulted in Adam Smith’s Wealth of Nations, the first textbook of modern economics. Monopoly rights, such as the one conferred on the East India Company, Smith concluded, interfered with the “invisible hand” of free markets. Smith also worried that the servants of the company would use the company’s monopoly rights to fill their own coffers, instead of looking after the interests of the shareholders. This is a problem modern corporations grapple with — executives have huge fortunes riding on stock options, and many are not averse to dressing up the numbers to make the stock price rise. For audit and corporate governance committees, this is a serious problem.
The servants of the East India Company subverted the system in another way. The compensation paid to them was often inadequate. So when most of them indulged in private trade, the masters turned a blind eye to it. Many of the servants were able to amass huge fortunes for themselves this way. In popular literature, they were lampooned as the nabobs. The biggest example was perhaps Thomas Pitt. His private fortune included the world’s biggest diamond, which went on to adorn Marie Antoinette’s crown and Napoleon’s sword! Pitt then acquired a seat in Parliament, from where, of all things, he launched a vociferous attack on the East India Company’s monopoly. Right through the 1780s and 1790s, there were several reforms that reduced the company’s monopoly rights and effectively punctured its business model. In the 19th century, the Industrial Revolution hastened the decline of the East India Company. The production of cloth in Lancashire and Manchester increased manifold, and consumers no longer clamoured for inexpensive Indian cotton. This robbed the Company of its bread-and-butter business. It continued to do business in India till 1857, but essentially as a political administrator. After the revolt that year, India came under the British Crown and was administered directly by London.
This is when the East India Company began to rediscover itself. It made its second fortune in China. The English love affair with tea (then grown only in China) began in 1784, when the trade was liberalised and smuggling was undercut. Chinese traders, suspicious of the company, soon began to trust it. The company’s statements on cases of tea rejected in the London market, for example, were accepted at face value by the Chinese. To begin with, the company financed its tea trade entirely with bullion. But that led to a serious payments crisis. Then some company officials hit upon the idea of opium to finance the tea trade. The Qing dynasty that ruled China had made all trade in opium illegal. But East India Company officials got round the ban by smuggling it into mainland China in very large quantities. The opium was grown in the fertile plains of modern-day Uttar Pradesh and Bihar, auctioned in Kolkata and shipped to Canton. Two opium wars were fought in the 19th century; China lost both. The Chinese still remember it as a century of humiliation. The opium trade flourished. In the 1870s, a quarter of the Chinese were addicted to opium.
It was only in 1907 that the export of Indian opium to China was stopped. The last British opium factory in India shut down in 1911.
THE EAST INDIA COMPANY,
THE WORLD’S MOST POWERFUL CORPORATION
Tirthankar Roy
Penguin
237 pages; Rs 399