Venture Capitalists of a Different Era

Debashis Basu 16 February 2017

In India of the late-1800s, there was backbreaking poverty, occasional famines, and age-old cultural practices. But, by the early-1900s, major railway lines linked the ports to the interior as well as to the main cities and towns; steamship moved cargo and people along the coasts; and three Presidency Banks offered business loans. There were two stock exchanges—the Bombay Stock Exchange established in 1875, the second in Asia after Tokyo, and the Ahmedabad bourse that came up in 1894. The Calcutta Stock Exchange came up in 1908.

The US Civil War had turned India into a major source of cotton for the mills in Lancashire which created a small group of extremely wealthy Parsi and Gujarati merchants in Bombay. They had ambitions to set up spinning mills and composite textile mills in Bombay and Ahmedabad. The Crimean War (1853-56) forced the flax mills in Dundee to switch to jute grown in east Bengal and the Scottish businessmen soon realised that gunny bag and cloth could be more profitably manufactured along the banks of the Hooghly around Calcutta. This is how India’s textiles industry took birth in the west and jute industry in the east. There were many other business opportunities. In the words of Omkar Goswami’s Goras and Desis: “Railway lines had 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.”

By this time, Calcutta, Bombay and Ahmedabad had enough wealthy urban Indians who were willing to risk a part of their wealth to a welter of new businesses that were sprouting, given the then rapid technological change. India also had a contractual and legal system and courts for adjudicating on commercial matters. Time was ripe for entrepreneurs to dream big. But they still needed something more: an organisation that could “attract risk capital and arrange the manufacturing resources.” The managing agency came into being.

A typical managing agency was a “partnership or a closely held private limited company that leveraged its connections and entrepreneurial reputation to float different businesses across India.” Managing agents controlled the businesses in textiles, sugar, transportation, jute and so on. Gillanders, Arbuthnot & Company, which started as a partnership of FM Gillanders and GC Arbuthnot, was in construction. Mackinnon & Company, Mackenzie was in inland and coastal shipping; Bird & Company was in coal and labour contracting for railway lines; and Andrew Yule & Company controlled six jute mills, 11 collieries, 10 tea plantations, a steamship company and several smaller firms.

The managing agencies spotted new opportunities and raised the initial capital. Then, they floated a public issue. Their reputation attracted public money. Riding on growth opportunities and light regulation, over the next few decades, managing agencies came to control vast sections of Indian businesses and continued well into independent India until Indira Gandhi decided to axe them in 1970. The raison d’être of managing agencies was obvious. More than 100 years ago, when there were no developed markets for accessing finance and spreading the risk, what could have connected risk-takers or financiers to business opportunities? It had to be a form of organisation that could take the risk of assessing new business opportunities, fund business enterprises and maintain control by holding legal and financial strings. In some form or the other they have existed “in the US up to the Great Depression; in the UK till the end of World War II; in France, Italy and Spain till much later; in Japan and South Korea till the 1980s; and in much of emerging Asia right up to recent times.”

Omkar Goswami, an economist and raconteur par excellence, brings the story of managing agencies alive by narrating their rise through a cast of highly colourful characters. He starts with prince Dwarakanath Tagore, the creator of the managing agency idea, grandfather of Rabindranath Tagore, a risk-taker, a fabulously wealthy man who went bankrupt and died in London in 1846. And ends with the scamsters Haridas Mundhra and Ramkrishna Dalmia; Tata, Birla, Wadia, Sarabhai, Lalbhai, Walchand Hirachand and others appear in between. It’s a fascinating slice of India’s business history.

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