The East India Company: The World's Most Powerful Corporation (The Story of Indian Business)
Authors: Tirthankar Roy
The East India Company
The World’s Most Powerful Corporation
THE STORY OF INDIAN BUSINESS
Foreword by
Gurcharan Das
THE EAST INDIA Company is a bridge which connects the pre-modern with the modern period in history, and Tirthankar Roy’s book is a slim, elegant and authoritative guide for someone who wishes to make the crossing. His volume is part of a multi-volume history series by Penguin on the great business and economic ideas that have shaped commerce on the Indian subcontinent. Leading contemporary scholars will interpret these ideas in a lively, sharp and authoritative manner for the intelligent reader with no prior background in the field. Each slender volume recounts the romance and adventure of business enterprise in the bazaar or on the high seas along a 5000-mile coastline.
Based generally on a close examination of one or more classical texts, each author offers an enduring perspective on business and economic enterprise in the
past, avoiding the pitfall of simplistically cataloguing a set of lessons for today. The value of the exercise, I believe, is to promote in the reader a longer term sensibility which can help one to understand the material bases for our present human condition and to think sensibly about the future. Taken together, the series as a whole celebrates the ideal captured in the Sanskrit word artha, ‘material well being’, which was one of the aims of the classical Indian life.
The books in this series range over a vast territory, beginning with a commentary on the two-thousand-year-old art of wealth, the
Arthashastra
, by the renowned Tom Trauttman, and ending with the
Bombay Plan
, drawn up by eminent industrialists in 1944–45, who wrestled with the proper roles of the public and private sectors, recounted for us vividly by Medha Kudaisiya. In between is a veritable feast. Four sparkling volumes cover the ancient and early medieval periods—Gregory Schopen presents the
Business Model of Early Buddhist Monasticism
based on the
Mulasarvastivada-vinaya
; Kanakalatha Mukund takes us into the world of the Tamil merchant drawn from the epics,
Silappadikaram
and
Manimekalai
, to the end of the Chola empire; Himanshu Prabha Ray transfers us to the maritime trading world of the western Indian ocean, along the Kanara and Gujarat coasts, using the Sanskrit
Lekhapaddhati
written in Gujarati; and Arshia Sattar recounts the brilliant adventures of
The Mouse Merchant
and other tales based on
Kathasaritsagara
and other sources.
Scott Levi takes off into the early modern period with the saga of Multani traders in caravans through central Asia, rooted in the work of Zia al-Din Barani’s
Tarikh-i Firuz Shahi
and Jean-Baptiste Tavernier. The celebrated Sanjay Subrahmanyam and Muzaffar Alam take us into the world of sultans, shopkeepers and portfolio capitalists in Mughal India. Ishan Chakrabarti traces the ethically individualistic world of Banarsidas, a Jain merchant in Mughal times, via his diary,
Ardhakathanak
. This present volume on the East India Company is, of course, our passage into the modern world. In another volume the distinguished Lakshmi Subramanian recounts the ups and downs in the adventurous lives of three great merchants of Bombay—Tarwady Arjunjee Nathjee, Jamsetjee Jeejeebhoy and Premchand Raychand.
Anuradha Kumar creates a narrative on the building of railways in nineteenth-century India through the eyes of those who built them. Chhaya Goswami dives deep into the Indian Ocean to recount the tale of Kachchhi enterprise in the triangle between Zanzibar, Muscat and Mandvi. Tom Timberg revisits the bold, risk-taking world of the Marwaris and Raman Mahadevan describes Nattukottai Chettiars’ search for
fortune. Vikramjit Banerjee rounds up the series with competing visions of prosperity among men who fought for India’s freedom in the early twentieth century via the works of Gandhi, Vivekananda, Nehru, Ambedkar and others. The privilege of reading most of the rich and diverse volumes in this series has left me—one reader—with a sense of wonder at the vivid, dynamic and illustrious role played by trade and economic enterprise in advancing Indian civilization.
Since there is no point in going over the same territory as Tirthankar Roy’s excellent book, I shall focus in this foreword on a few themes which highlight the enduring legacy of the East India Company (henceforth ‘the Company’): the corporate model of doing business; the noble sentiment of trust and its relationship to contracts in the business life; the damaging effects of the Company’s monopoly and its influence on Adam Smith’s foundational text on capitalism; how the Company made its second fortune in China through opium; and, finally, what is the enduring significance of the Company?
The modern corporation is, indeed, a child of the East
India Company and there is much to learn from the mother’s failures and successes. In its extraordinary history lie answers to the great questions faced by business people throughout history—how to mitigate risk, raise capital, build trust with customers and suppliers, motivate employees, keep shareholders happy and achieve a harmonious relationship with society.
The Company was one of the pioneers of the shareholder or joint-stock model of corporate enterprise. As an early joint-stock company it derived huge competitive advantage—it could mobilize vast amounts of capital and operate on a much bigger scale than before. By separating investors from the professional managers who ran the business, it achieved a division of labour that made it more efficient. Unlike the ‘owner’ or ‘partner’ model of business, it was able to distribute risk widely—it shielded shareholders from losses as they were only responsible up to the value of their paid-up capital. Since it was a ‘legal person’, it could act independently beyond the interests of its investors. Indeed, the corporate form of doing business is one of the reasons for the rise of the West in the transition from the pre-modern to the modern periods in history (and possibly the backwardness of other societies such as the Islamic Middle East, as argued by some scholars).
The English got the concept of a corporation from
Roman law—in particular, the ideas of a legal personality, limited liability and variable shareholdings. The Italians in the fifteenth century experimented with the corporate form during the flowering of their great multinational business houses, such as the Medicis of Florence (although it was in the city of Genoa that public loans were first used to finance companies). In sixteenth-century England, chartered companies brought together a group of merchants, seamen, adventurers and politicians in order to buy and sell goods on a common platform. The idea of pooling resources, however, went back to the medieval guild—a commercial body of merchants who made rules for trade and formed part of town administration. The chartered companies took great risks to finance sea voyages over vast distances which sometimes took years; their capital costs were high and the ships carried high-value luxuries, as well as gold and silver to pay for them. Everything could be lost in a storm. Hence, spreading the shareholding and the backing of the state helped to mitigate risk.
As one of the earliest corporations, the Company evolved a hierarchical model of management that is still followed by today’s multinational companies. Its commercial success also lay in its information management system, not unlike today. Whereas it matched supply and demand through an army of ‘writers’
and clerks, today’s marketing professionals achieve the same thing through highly sophisticated software. But even the best of information depends, in the end, on a ‘feel for the market’. The Company’s directors debated the same sort of issues—for example, how do you balance headquarters control with autonomy of the local subsidiary—that multinational companies wrestle with today. These are some of its enduring legacies for business enterprises today.
The major difference between the Company and the modern corporation is that it was a monopoly created by the state, privileged by a charter granted by the Crown (later by Parliament) because it was thought to have a public purpose as well as private interest. Such chartered companies have largely disappeared—the BBC is one of the few that remain—as the modern age has rebelled against the notion of monopoly. Today in our democratic times anyone literally can start a company and raise capital by listing it on the stock exchange. And its share price is dependent far more on vigorous competitive forces, unlike chartered companies, whose monopoly powers were able to maintain high share prices.
Gradually, in the eighteenth century, public sentiment in Britain turned against the idea of a monopoly chartered by the government that furthered private interest. This
was partly due to the misdeeds of the Company, but in fact, the coming of the Industrial Revolution with its vigorously competitive and innovative companies made the idea obsolete. In today’s jargon, the Company had acquired the unacceptable odour of ‘crony capitalism’. Soon it became an anachronism and when it died in 1874, the era of the chartered corporation died with it.
Public monopolies did not die, however. They were popular around the world during ‘socialist periods’ of the twentieth century. The post-Independence government of India between 1956 and 1981, in a period popularly called ‘License Raj’, was as biased in favour of public monopoly and against private enterprise as the mercantile state in Europe. These state monopolies were beset with some of the problems that Adam Smith had forecast: poor customer service, high costs, weak profits, poor work ethic among employees, poor capital output ratios and low accountability.
Underlying Tirthankar Roy’s persuasive narrative is the moral idea of trust. Although Indian and the Company merchants did not often like each other, they ultimately built a relationship based on self interest, and this usually
entailed sticking to one’s word. As the scale of operations expanded, the Company’s buying system in India evolved from ‘spot purchases’ in the bazaar to ‘long term contracts’. Since there were no courts to enforce contracts, both sides depended on the other’s integrity. Sometimes the trust was breached. And power also mattered—the merchants of Surat were able to better protect their interests when Mughal authority over Surat was stronger. But the best officers of the Company recognized that long-term success depended on the confidence that its word and its name generated—much as a ‘brand name’ does in the contemporary world.
In the same way, Indian agents or ‘banias’ built a reputation for which they were rewarded with repeat business and some went on to become large houses that carried on for generations. Trust allowed a financier to take vast risks with large amounts of cash through instruments such as the hundi, a promissory note payable on demand in a far-flung city. Trust usually began in a joint family, or the sub-caste, but it had to inevitably extend to strangers as business grew. Trade entails transactions with outsiders, often foreigners. Over time repeated actions of a certain kind build confidence and are an invitation for partnerships.
The Company’s corporate form also helped to create trust. Customers and suppliers found they were dealing
with an institution which would outlive the whims of an individual. Potential employees thought they were joining an institution of professionals rather than an individual or a family. The joint-stock structure created trust among shareholders as their liability would be limited in a disaster. Military and political power was obviously important to the Company’s long-term success, but it was its ability to generate trust with customers, suppliers and shareholders that allowed it to endure commercially for more than two centuries.
Tirthankar Roy reminds us that Indian and European merchants did not usually become friends, which suggests that business relationships depend far more on mutual trust rather than friendship. However, the ability to become friends does give one a competitive advantage—the decline of old British firms in the 1920s and 1930s and the rise of multinationals is connected to the latter’s superior ability to relate to Indians, as Maria Misra has argued. As the Company’s political power expanded, the English went on to establish modern courts in the territories under their control for enforcing commercial contracts. Formal courts brought greater predictability to business life as business actors felt reassured that contracts were backed by the power of the judiciary and the police. This is one of the reasons for the amazing success of the port cities of Bombay,
Calcutta and Madras. Merchants and bankers migrated to these cities for many reasons (mostly commercial) but one of them was the increasing rule of commercial law.
Since there are almost no records of Indian business firms before the Company made its appearance, it is difficult to know how traditional contracts were enforced in pre-modern India. Roy suggests that traditional contracts were more useful for collecting debt than to enforce conditions of sales. The dharmashastra has an entire section called vyavahara, ‘transactions’, or vivada, ‘disputes’, which suggests the presence of some kind of court for civil disputes, that included matters of payment for goods, disagreement of partners, disputes about wages and the like. There are indeed records of various sorts of merchant courts and chief merchants—the Nagar Seth, for example, which had parallels in other parts of India.
The larger point I am making, however, is that despite contracts and courts, business transactions, both then and now, are based on good faith between human beings. Edward Banfield illustrated this in his classic,
The Moral Basis of a Backward Society.
He attributed the relative failure of South Italy to the absence of trust outside the family versus higher levels of trust towards non-family members in the more prosperous North Italy. The legal
contract is thus only a last resort. This has always been true and continues to be so in the vigorous global economy of the twenty-first century when daily transactions in the billions of dollars depend on trust.
Adam Smith’s disgust at the monopoly of the East India Company partly drove the famous Scottish philosopher to write his great work,
An Enquiry into the Nature and Causes of the Wealth
of
Nations,
the foundational text of capitalism. Smith published it in 1776 at the height of the attack on the Company by Edmund Burke, Sheridan, Lord North and many Members of Parliament.