In April 1970, the managing agency system was finally abolished by the Indira Gandhi government. But much before that, by the middle of the 1960s, many of the managing agencies in India were selling off their stakes and exiting the country. The history of modern India's entrepreneurship and industrialisation would be incomplete without the story of the managing agencies that flourished between the middle of the nineteenth century.
The managing agency was a peculiar corporate structure that allowed the few partners who set it up to control a number of public limited and joint stock companies, despite a very small shareholding in the latter. It allowed men with great entrepreneurial drive and organisational abilities to get involved in a number of businesses and promote others, but it was also a system prone to abuse. The managing agency essentially managed these firms through long-term management contracts that gave them total control, and big returns while the investors of the firm got the short shrift.
Typically, the partner (or at least the dominant partner) of the managing agency was also the promoter of the corporation being managed, though the amount of capital he would risk would be limited. His reputation (and that of the managing agency) allowed for the raising of enough capital from rich, but passive, investors who were comfortable with limited returns.
There are very few, if any, references in modern business manuals about the managing agency system, which is why Omkar Goswami's slim study - Goras and Desis: Managing Agencies and the Making of Corporate India - is such an important contribution. It is an exceedingly interesting book for laymen as well as serious students of corporate history.
Goswami makes the book easy to read without over simplifying things or skimping on detail. He starts off with a brief look at the agency system, which was a completely different organisation entity and preceded the managing agency system. The agency system was a partnership firm of traders who banded together to exploit certain trade routes and destinations. The English East India Company started as an agency and ended up becoming the ruler of most of India before its decline started in the 19th century. Initially, some of its former employees left to form trading agencies with names such as Jardine Skinner and Gillander Arbuthnot. These, apart from trading activities, also invested some capital in plantations and other businesses.
However, when the British Empire took direct control of the governance of India after 1857, the big managing agencies were born. By the end of World War I, they practically controlled three-fourths of all industry in India. The managing agencies were true conglomerates, controlling tea, coffee, rubber and jute plantations, textile and jute mills, coal mines, shipping companies, and many others. The English, Scottish and Indian agencies jostled to dominate entire industries. Probably, the first Indian entrepreneur to set up his own managing agency was Dwarkanath Tagore who promoted Carr, Tagore & Company in Calcutta with his English partner. Tagore even started a bank. He had amassed great wealth through his estates and money lending by the time he set up his managing agency, and at its peak, it was one of the biggest in India.
The Tatas, the Birlas, the Walchand Hirachands, and many others set up their own agencies. The agencies, in turn, controlled companies these entrepreneurs had set up as well as businesses they managed to take over. Andrew Yule, Macneill and Barry, Mackenzie & Co, were some of the British managing agencies of that era. They often looked down on their Indian peers.
But the agencies promoted by Parsi and Marwari entrepreneurs more than held their own. Initially, the British agencies had a complete lock on the jute mills, for example. But by the early 20th century, even before World War II, the Marwaris, led by the Birlas, had taken charge of the business. It was a pattern to be repeated in other industries.
Over time, problems of the agency system came to the fore. The companies they managed often did not do well, and passed on most of the profits they made to the agency first. Also, managing agencies did not put in much capital, but had a disproportionate control over public companies. Many entrepreneurs at the head of the agencies siphoned off profits from the companies they managed.
By the time India attained Independence, the managing agency system was already straining at its seams. The government of Nehru, too, did not like the structure, and controls began being put on them. Many English and Scottish promoters sold off their interests, and headed home. The Indians continued, initially even buying out the gora agencies from their departing partners. But by the time Indira Gandhi came to power, the end of the managing agency system was in sight. And in 1970, it was formally abolished by the government.
The book looks at both the historical events of corporate India, as well as the colourful Indian and British entrepreneurs who stamped their imprint on Indian businesses. It provides a good insight into the origins of many of India's big business families.
@ProsaicView