An insane interlude in history

An account of India's first stock market boom and the crash that followed

When the American Civil War broke out in 1861, Great Britain found itself squeezed into an impossible position.

The Confederate States refused to supply cotton which the Lancashire mills depended on, unless Britain granted them recognition. Britain held fast and turned to India for the desperately needed cotton.

The result was that prices shot through the roof and every available acre was turned to cotton cultivation. Fortunes were made overnight and in Bombay a bout of frenzied speculation got under way

The cotton trade in the beginning was conducted on sound, prudent lines, but as the war progressed and there seemed to be no end to the British famine, many began to indulge in forward trading that set off a speculative trend which seemed to gain strength with every passing day.

All this brought enormous wealth into the city (Bombay). Statistics would bear this out. Whereas in 1860, India imported bullion worth Rs 113,569,630 only, the aggregate value brought into the country in the next four years amounted to Rs 689,915,900 "" an average of Rs 172,678,975 per annum. Of this, Bombay Presidency claimed the lion's share.

A part of this amount undoubtedly went to the cultivators and cotton dealers in the interior, where it was hoarded or converted into ornaments never again to be available for investment. But a substantial part remained fluid in Bombay.

According to a rough estimate, the wealth retained in the city from this source was Rs 51 crore "" a stupendous sum by the prevailing value of the rupee.

A small part of the new wealth seems to have been utilised sensibly for honest trade and laudable schemes directed to improving the city.

Bombay had little claim to eminence in 1860. It was a dark and dirty assemblage of islands surrounded by a foul and hideous foreshore.

Governor Bartle Frere was keen to leave a beautiful Bombay behind. He, therefore, launched a scheme to improve the defence of the harbour in cooperation with the Bombay Chamber of Commerce.

The government also destroyed obsolete fortifications which made room for wider roads and streets. The merchants donated parts of their new wealth for the construction of public buildings "" libraries, hospitals, training institutes, etc.

Most of the private buildings that surround the magnificent Elphinstone Circle today were built with the profits earned during those years. A few merchants instituted fellowships for higher education.

A company established in 1862 would for the first time illuminate a part of the city with gas light in 1866. Within fifteen years, the city wore a new look, thanks to the wealth that poured into Bombay during the years of cotton famine in Britain.

Senseless speculation
It is nothing but an irony of history that with one of the schemes of beautification and development of the city started a process that eventually led the Bombay business into an unprecedented chaos.

The scheme aimed at reclaiming land from the foreshore. The population of the city as well as its trade and commerce had been expanding for the last few decades, rendering grossly insufficient the available space in the islands.

Reclaiming land from the sea was the only solution to the problem of growing congestion. This was the rationale, eminently sound on the face of it, behind the formation of a company in 1864 with the aim of reclaiming a section of the sea, known as Back Bay.

The principal promoter of Back Bay Reclamation Company, Premchand Roychand, was almost unknown to the Bombay business world until the onset of the cotton crisis in Britain.

With a meagre formal education, as was usually the case with children of small traders, and a working knowledge of English, he started his career as a broker in bank shares, and showed a great deal of promise in this sphere.

Premchand's real opportunity for amassing wealth, however, came with the cotton crisis. With agencies established in the cotton-growing regions of Gujarat, he emerged as a big cotton trader and made huge profits.

So firmly did he establish himself in the Bombay business world that the government officials considered it worth their while to befriend him, and Governor Frere appointed him a director of the Bank of Bombay.

Because of his concern for beautifying the city, Frere also encouraged Premchand to launch Back Bay Reclamation Company, and even proposed to buy 400 shares to make sure that his government had a voice in the management of the new enterprise.

However, the Government of India rejected Frere's proposal, as this ran counter to the free trade principles. These shares were, therefore, put up for public auction.

Against the face value of Rs 5,000 per share, they fetched a colossal sum of Rs 10,600,000 "" a premium of Rs 21,500 per share.

The proceeds were deposited with Asiatic Banking Corporation, appointed as the bankers to Back Bay Company. The Corporation was a bank holding concern founded by Premchand, who had a tight control over its management.

The trade in cotton by this time had brought in an enormous amount in the city, waiting for investment. The reaction to the Back Bay shares showed an easy way to fortune and triggered off the worst kind of speculation.

Premchand himself, in association with others, floated a number of companies, the shares of which were sold at a high premium.

In many cases, the prospective investors received advances, on Premchand's recommendation, from Bank of Bombay and Asiatic Banking Corporation in order to acquire shares in the companies promoted by him.

Like the proverbial Midas touch, his association with a firm was sufficient to turn a scrip into instant wealth....

As the share market remained overheated all through the duration of the cotton crisis in Britain, the investors had no doubt that they would gain many times over the funds borrowed from the bank against the shares, and banks had no doubt that the money advanced on high rates of interest was perfectly safe.

Most banks in the city "" as many as fourteen banks were formed during the period of speculation, reflecting the signs of the times "" followed the lead given by the premier banking institution in the Presidency which functioned under the close supervision of the government.

A large number of joint stock financial companies, formed during the same period and subject to lesser constraints than a bank, too fanned the fire of specualation.

The modus operandi ran somewhat like this. A bank would help float a financial company by advancing against its share, the promoters of the financial company would launch a reclamation company, against the shares of which both the bank and the financial company would advance funds....

Ridiculously high premium for the shares of formidable as well as of more modest concerns was only one distinguishing feature of the speculation of the 1860s. 'Time bargain' was another.

Convinced that the share prices would continue to escalate, many, 'for the most part hitherto nameless' persons entered into agreements to effect the sale or purchase of shares, at prices fixed far above their current value, after an agreed upon interval of three or even six months.

Even though the price of cotton in the Bombay market fell whenever prospects of peace in America appeared bright, the spectators refused to heed the implicit warning, and merrily went on with their share gambling mania as if the good times would last for ever.

The crash and its aftermath
The end of the Civil War changed all this. The news of the Confederate defeat reached India on 1 May 1865. The message was clear: Britain would once again turn to America for raw cotton, ending the short-lived glory of the Indian staple.

Gripped by an unprecedented panic, the city went entirely mad. Investors rushed to dispose of their shares in the bubble companies, for which there were no buyers.

The banks and financial institutions that had advanced them funds found themselves in an utterly hopeless situation. The greatly enlarged business community, which until then was hoping to reach out to the stars, was now waiting helplessly for doomsday to arrive.

And it did arrive on 18 May when the formidable house of Behramji Hormusji Cama, unable to meet its liabilities, fell for Rs 330 lakh.

Then followed a succession of failures including such illustrious names as Rustomji Jamsetji Jejeebhoy, Kharshedji Furdunji Parekh, K J Readymoney and K N Cama.

The wreck of the Bombay ephemeral prosperity was complete on 1 July, on which day innumerable 'time bargain' shares matured up, but there was no money available to honour the commitments.

This caused another wave of failures sweeping away many more of the neo-rich, the most prominent being Premchand Roychand himself, the lynchpin of the share mania.

The rise of Jamsetji Tata

The hero of the period, however, was Jamsetji Nusserwanji Tata. Like many Parsees of his times, his father had moved from Navsari to Bombay in the early years of the nineteenth century and established a trading firm.

After completing his education at the prestigious Elphinstone College, Jamsetji joined the family firm, and spent a few years learning the intricacies of business before being despatched to China.

He stayed there for four years, during which period he laid the foundation of the China House in Hong Kong on behalf of his Bombay firm and also opened a branch in Shanghai in 1863, Jamsetji returned to India just before the speculation fever gripped the city.

With Premchand Roychand being a partner in his business, Nusserwanji could not have controlled the temptation to speculate. How much money the Tatas made during this period is not known, but it must have been sufficient to justify the decision to send Jamsetji to London to supervise the arrival of consignments of cotton shipped by their firm.

Hew as also entrusted with the task of opening a branch of Asiatic Trading Corporation, a banking holding company promoted by Premchand during the height of the share mania. Jamsetji left for London with a bunch of securities, including a large number of bills on the China market.

However, hardly had he set foot on the British soil when the cotton market crashed, rendering worthless all those seemingly precious financial instruments he had brought with him.

Without losing his cool in this hour of crisis, Jamsetji convinced his creditors that his problems were entirely due to an abnormal situation and was in no way a reflection of the intrinsic strength of his firm.

So impressed were his creditors that they appointed him his own liquidator. The experience must have boosted the self-confidence of the young Tata, just about 26 years of age then.

After spending a few more months in Britain to study the working of the textile industry in that country, Jamsetji returned home.

Like Dinshaw Petit, the Tatas also recovered their position rather quickly, and were back to their normal operations by 1867 when the profits from a contract for commissariat for the British army fighting in Abyssinia bolstered up their financial position.

The Tatas, however, were still a backbencher in the Bombay business world when Jamsetji decided to enter the still small tribe of industrialists.

In 1869, he purchased an old and crumbling oil pressing factory in Bombay, converted it into a textile unit and called it Alexandra Mills.

After only two years, he sold off the renovated mill for a handsome profit and left for England to gain first-hand knowledge of textile manufacturing in the world's most developed country.

He must have now been fully equipped to re-enter the cotton industry in a big way, for soon after returning home, he launched in 1874 what would remain the flagship company of the Tatas during Jamsetji's lifetime "" Central India Spinning, weaving, and Manufacturing Company.

His choice of the location for the factories anticipated the kind of originality and perceptiveness would characterize his business decisions throughout his life.

Instead of Bombay, his home since childhood and the preferred site of cotton producers in general, he selected Nagpur for this purpose, in what was then known as the Central Provinces.

The city was close to the cotton growing areas of Berar and coal deposits in eastern India; it was a handloom centre promising a ready market for the products of the proposed mill; and being a terminus of the Great Indian Peninsula railway, it was well connected with the rest of the country.

However, the only land available near the station was marshy, uneven, and full of wild weed and vegetation. Many in the Bombay business circles were sceptical about the future of the enterprise.

A prominent Marwari trader, when offered shares in the proposed company, refused to do anything with a venture that was like 'taking out earth and putting gold into the ground'.

The critics, however, were proved wrong, and the mill with 14,400 spindles and 450 looms started functioning on 1 January 1877, the date on which Queen Victoria was proclaimed the Empress of India. To celebrate the event, the factory was named Empress Mills.

Empress Mills had teething troubles and performance initially was far from satisfactory.

But Jamsetji, assisted by a group of trusted and competent managers, enabled the mill to turn the corner. An emboldened Jamsetji decided to expand his textile operations and for that purpose purchased, at a throwaway price, a derelict, tottering mill in a Bombay suburb, founded originally by a fellow Parsee, which had few buyers.

Reorganized and renamed, the company was registered as Swadeshi Mills in 1886 which would specialise in the production of finer varieties of yarn and cloth "" an almost novel phenomenon in Bombay, where most mills produced only coarse material.

Tata's textile expansion was rounded up in 1903, when he acquired another mill in distress, this time in Ahmedabad, and relaunched it as Advance Mills.

Tata and his men, some of whom had been trained in Empress Mills, converted these hopeless acquisitions into profitable and progressive concerns within a short time.

Some features of the management of these companies manifested Jamsetji's propensity for innovation.

In Empress Mills, he introduced the ring spindle when the device was yet to come into general use in the United States where it was invented, and to which Manchester was still indifferent.

Simpler to use, and requiring less exacting labour standards, the ring spindles were better suited to the conditions in India.

He also introduced in his companies several labour welfare measures and incentive schemes that were yet to become common. He even experimented with a new form of management in Empress Mills.

For two years, this company was managed under the pattern prevailing in Britain: Tata, as a salaried managing director, reporting to a functional board of directors.

This innovation, however, proved to be too revolutionary for Indian conditions and Jamsetji eventually had to fall back upon the managing agency structure, placing the mill under the care of his family firm, Tata and Co., that would be reconstituted as Tata and Sons in 1887.

But he refused to follow the common practice of calculating the managing agents' remuneration on the basis of sales or production.

Instead, in the companies under his management, the commission the managing agents claimed was based on the profits, a system that became general in Indian industry much later Jamsetji's innovative mind conceived some other schemes which met with varying success These included an attempt to export mangoes to Europe in cold storage steamers.

He also tried to promote a business in frozen food "" fish, fruit, etc. "" and built an ice house for that purpose. He also toyed with developing sericulture in Mysore.

Poor consumer response killed the first two projects, and the apathy of the princely state proved fatal to the sericulture plans.

His initiative to launch a shipping line between Bombay had to be abandoned because the European shipping companies, which never countenanced any threat whatsoever to their monopoly position in these waters, reduced the freight to ridiculously low levels, diverting the shippers, including textile manufacturers of Bombay, away from the Tata line.

The most successful among the minor ventures of Jamsetji was Taj Mahal Hotel established in Bombay to provide for a world-class shelter to discerning tourists to the city.

All said and done, if Jamsetji had accomplished only this much before his death in 1904, his place in the business history of India would have been alongside a large number of entrepreneurs of his times.

What, however, has won for him a towering, almost unique, position, are the gigantic industrial projects that were conceived and launched during his lifetime but were completed by his successors.

These related to an initiative to promote steel production in India, and another to generate hydroelectric power from the waterfalls in the Western Ghats.

How they were planned, what trials and tribulations were encountered in the course of execution, and how they actually became a reality belongs to the next chapter.

It sufffices to say here that these initiatives, revolutionary for his times, place Jamsetji into a class of remarkably gifted businessmen who are born and not easily duplicated', to quote a competent authority.

Extracts from The Oxford History of Indian Business by Prof. Dwijendra Tripathi

"My hero is still J N Tata"

The Oxford History of Indian Business is a magnum opus that has been almost 40 years in the making.

Prof Dwijendra Tripathi first conceived it when he began teaching business history at IIM-Ahmedabad and immediately found that there were few studies he could depend on. He has researched the field ever since and this volume is the result. Excerpts from an interview:

How long have you been working on this book?
This was a book I have been thinking about ever since I started working on business history. In 1964 I joined IIM-A and I soon found there was nothing I could depend on. I had to collect tidbits. The idea of a comprehensive volume took shape at that time.

About 13 years ago I had an outline ready of what it would be like. Writing the book has taken about four years. I have been collecting material for a long time but I really started writing in 1998.

What studies existed in the field?
The Europeans always looked at India from a certain angle to explain the backwardness through the socio-cultural formations of Indian society. Cultural determinism is not so strong now. But it was very strong till the end of the '80s.

What were the most difficult parts to write?
The first few chapters were very difficult. I had to figure out how to map out the territory of the 1700s and imaginatively reconstruct it.

I had to create a framework within which I could look at business in that period. That chapter took the longest.

Who were the characters you admire most in history?
I still think my hero remains J N Tata. The imagination, the will to compete with the West, to look at himself and take on the high and mighty. I do not see any other person who comes close. He is followed by G D Birla.

What about the post-Independence period?
Despite all the criticism I think Dhirubhai Ambani is the most amazing person. This man with nothing in his hands created things we could not have imagined.

Also, there is Narayanamoorthy. These are people who can be role models for imaginative businessmen. I think these two people would get the highest marks.