Economic liberalisation is often viewed as a new beginning for the Indian economy, but in some ways it marks a circular path to the past. Indian middle class consumers of a certain age will recognise it in the return of a range of brands and services — Coca Cola, IBM, Hershey’s, Shell, Ford, General Motors, private (and foreign) insurance companies, airlines and commodity producers and in the attempted re-privatisation of nationalised firms like Hindustan Copper.
Few, however, would recognise signs of the past in an activity that has “jus’ growed” – to pinch a quote from Uncle Tom’s Cabin – over the past decade: venture capital (VC) and private equity (PE) funding. Given that the short-lived dotcom boom was driven by this mode of finance, and because it is associated with successful technology conglomerates like Dell, Intel and Apple, PE and VC funding is widely considered a trendy new-age form of finance for corporate India (the difference between the two is one of degree, so the terms are often used interchangeably). But long before India opened for business in 1991, today’s VC/PE fund firms had a predecessor of sorts in the managing agency system.
The similarities arise because PE/VC firms have not limited themselves to small firms and start-ups — large Indian corporations also attract their money. Before they were banned in the 1969-70 tsunami of nationalisation, the managing agencies were considered useful and troublesome. They were certainly powerful. Firms like Jardine, Gillanders, Mackintosh Burn, Bird & Company, Williamson Magor were blue chips on the local stock exchange and the remnants of their former majesty can be seen in the architecture of Kolkata’s central business district, BBD Bag, nee Dalhousie Square. If they have a slightly negative reputation in India today it is because they grew into predatory conglomerates associated with the country’s colonial past and are viewed as vehicles for the drain of wealth by repatriating profits to British owners.
This notion was not misplaced. Managing agencies have their origins in eighteenth century British India, when investing in joint stock companies overseas was risky and finance from European banks wasn’t forthcoming. So just like VC/PE funds today, the managing agencies were a useful mode of capital — but, uniquely, also of outsourced managerial talent. Given the limits on information and financial flows two centuries ago they must have taken far more risk on their books than today’s PE/VC firms do and, indeed, some managing agencies did fail rather spectacularly. To balance the risks many diversified into manufacturing or trading activities of their own — the high-margin shipping, plantation and commodity businesses were particularly popular.
Still, the system was enough of a success to remain the dominant form of corporate governance in post-Independence India when financial markets were relatively undeveloped and global managerial talent all but absent.
Ultimately, the managing agencies came to be regarded as self-serving monopolies. Their senior management cadres were a semi-oligopolistic grouping, as a hugely useful online research paper* shows. In 1871, it pointed out, 31 managing agencies in Calcutta, “the hometown of the managing agency system”, managed and controlled 90 corporations. This, in turn, resulted in interlocking directorships. An analysis of 77 corporations in the same year showed that 241 directorships were held by 148 people. J H Williamson, the partner of Williamson Magor (then a plantation and commodity conglomerate, now owned by the Khaitan family), held seven directorships.
Some scholars have spotted similarities between current governance systems and the managing agencies. Of course, the fundamental difference is that managing agencies acted as promoters and managers. Modern-day PE/VC fund managers do not run their own independent businesses or, indeed, the businesses in which they invest (they usually hold board positions and act as consultants). Their profits flow from capital gains. This, too, may change soon since many firms are now emerging to offer purely managerial services and the opportunities in the merger of finance and managerial talent can hardly have escaped such businessmen.
If no one has questioned this, it is because PE/VC funding and participation is welcomed in a country in which corporate activity still has enormous growth potential. It is no surprise that India is now among the biggest recipients of such funding. But as the economy matures, it would not be unreasonable to expect hostile leveraged buyouts and other boardroom battles that will make corporate India an exciting prospect in quite another way.
*http://prr.hec.gov.pk/Chapters/923-7.pdf
