The rise of India's first venture capitalists

An excerpt from Omkar Goswami's Goras and Desis, which traces the rise of managing agencies, once the drivers of industrial growth, from their buccaneering beginnings in the 19th century

Goras and Desis

Managing Agencies and the Making of Corporate India 

Author: Omkar Goswami 

Publisher: Penguin Random House India

Pages: 280 

Price: Rs 299

There can be no doubt about the groaning poverty and wretchedness of India in 1900, which continued right up to Independence in 1947 and beyond. Yet, despite the sepia-tinted images of famines, beggars and skeletal cows, the fact of the matter was that by the early years of the twentieth century, British India had in place all the institutions needed for relatively rapid commercial growth*…. 

With the US Civil War, India became a source of cotton for the mills in Lancashire, and was itself soon home to spinning mills, and subsequently composite textile mills, set up by Parsi and Gujarati entrepreneurs of Bombay and later, of Ahmedabad. Similarly, after the Crimean War forced the flax mills in Dundee to switch to jute grown in east Bengal, it didn’t take long for canny Scottish businessmen to realise that gunny bag and cloth could be more profitably manufactured along the banks of the Hooghly around Calcutta, which led to the growth of India’s jute manufacturing industry. There were railway lines to be built and operated across the country; sugar to be manufactured from cane that was being grown in the Punjab, the United Provinces and the Bombay Presidency; and tea to be cultivated, processed and exported from plantations in Assam, Darjeeling and the Dooars. None of these activities required great manufacturing skills and technology. There were steady profits to be made. What was needed was an organizational form to attract risk capital and arrange the manufacturing resources. 

Goras and Desis

That form was the managing agency. Present from the latter half of the nineteenth century, a typical managing agency in India was a partnership or a closely held private limited company that leveraged its connections and entrepreneurial reputation to float different businesses across India —jute, coal, cotton, railway, banking, insurance, sugar, engineering and other companies. … The manner in which these privately held firms soon came to control most, if not all, large enterprises in colonial, and thereafter independent, India despite their limited share ownership is a story of corporate finesse. It was a story no less evident in pre- and post-World War II Japan, South Korea, Hong Kong and parts of Asia and Latin America.

As the promoter, a managing agency would announce the flotation of a publicly held company in any one of the major industries. Its entrepreneurial reputation would typically result in oversubscription of the ordinary shares and ensure that no single person or body corporate had a holding large enough to even remotely challenge the managing agency’s control over the affairs of the company. Thereafter, the agency would acquire enough proxy votes of the small shareholders to speak for the majority of those present and voting in the company’s first general meeting.** At that meeting, shareholders would ratify the company’s board of directors consisting of partners of the managing agency and other trusted people; and the company would secure approval to formally appoint the managing agency to look after its affairs. For this service, the managing agency would charge healthy commissions on sales and profits, plus fees from several other services such as sales and purchases through related companies, brokerage on inland transportation and shipping, commissions on insurance policies bought from a firm controlled by the agency, and annual charges for the supply of senior managers. It was a brilliant method which leveraged entrepreneurial reputation to ensure significant control of the managing agencies that well exceeded their cash flow rights over the listed companies, in which they had relatively small ownership. 

Author Omkar Goswami

By the early 1930s, large managing agents controlled several widely held, listed companies, with their share ownership between 6 per cent and 20 per cent in the relatively more capital-intensive jute and cotton mills, and rarely ever exceeding 50 per cent in the case of tea gardens and collieries, which needed far less investments. Besides, the managing agencies reaped benefits from the complementarities across industries. For instance, in 1911, Andrew Yule & Company, one of the largest managing agencies in Calcutta, controlled six jute mills, eleven collieries, ten plantations, a steamship company and several other, smaller firms. Similarly, the other large group in east India, Bird (along with F.W. Heilgers, which it acquired in 1917), controlled ten jute mills, eighteen collieries, an engineering works company, a fire-clay unit and other sundry companies. Jute mills and steamers created demand for the collieries; steamer companies earned revenues by shipping raw jute from riverine east Bengal to the mills on the Hooghly. All goods in transit and assets were underwritten by the agency’s insurance companies. The two largest inland steamer companies operating in Bengal were managed by Andrew Yule and Macneill—both having substantial interests in jute manufacturing. They saw to it that raw jute coming into the mills from east Bengal was shipped in tugboats attached to their steamers, and insured by their affiliated underwriting company, often at a premium that was 10 per cent higher than the going rates. 

However, it would be entirely wrong to associate managing agencies, even of the pre-Independence era, exclusively with the British. Throughout Bombay and Ahmedabad, and later, Delhi and Madras, most of colonial India’s corporate enterprises were controlled by various native Indian houses. There were Indians such as the Tatas, Birlas, Wadias, Chunilal Mehta, Shri Ram, Thackersay and Mooljee, Khatau and Makhanji, Piramal, and a couple of Bengali managing agents who controlled the cotton textile industry…. Only tea remained stubbornly British throughout the raj and even after….

Some larger mercantile agency houses eventually transformed into managing agencies in the second half of the nineteenth century. Two notable examples were Jardine Skinner & Company***, which had sizeable trade in opium with China and in indigo with Britain, and Gillanders, Arbuthnot & Company, which was started as a partnership by F M Gillanders and G C Arbuthnot. The other agency houses that soon became known as the major Calcutta-based British managing agencies entered in the late 1850s and 1860s. These had less to do with the export–import trade of their precursors, and got into India-based businesses. The best known among them were Mackinnon, Mackenzie in inland and coastal shipping, Bird & Company in coal and labour contracting for railway lines, and Andrew Yule & Company in zamindari interests and collieries. However, these firms, and some others, soon realized that there was much more to be gained by promoting new ventures and managing them for shareholders than by remaining as commission-based agency houses. That, in essence, was the fundamental distinction between agency houses and managing agencies. The former ran sundry businesses as partnerships purely based on agency commissions. The latter went far beyond that by becoming the venture capitalists of the late nineteenth and early twentieth centuries, starting a slew of relatively modern enterprises that often required sizeable fixed capital outlays, offering shares in these enterprises to a wide body of native Indian and expatriate investors, securing profitable contracts to manage these businesses and creating appropriate organizational structures to oversee a wide horizontal portfolio of both interlocking and dissimilar businesses. This book is about these business houses: the managing agencies that were the organizational core and drivers of industrial growth in India from the last quarter of the nineteenth century right up to their legislative demise in 1970.
 

Reprinted with permission

* For instance, almost all the major railway lines in India today existed during 1900–47.

**Most general meetings of the managed companies were over in a few minutes—such was the control of these managing agencies. This was an observation of H C Waters, a partner in Orr Dignam & Company, the most important firm of solicitors in Calcutta which served all the British managing agencies. 

*** William Jardine (1784–1843), who founded the business, was the largest smuggler of Bihar and Malwa opium to China via Canton, initially in partnership with Jamsetjee Jeejeebhoy (1783–1859) who became India’s First Baronet of the Realm.