The East India Company: The World's Most Powerful Corporation (The Story of Indian Business) (3 page)

In addition, the adoption of joint-stock and limited liability gave the Company a specifically modern form.

The origin of the joint-stock company is attributed variously to the medieval partnerships in England, German corporatism and a Genovese institution of raising a public loan to finance a company. The Genovese institution in turn derived from an Arabic root. The significance of these forms derived from the use made of them by the guild merchants of the towns and boroughs. The guilds were a part of the town administration, which regulated the right of its members to practice a trade. In principle, the guild needed a constitution to ensure that only the lawful members had access to the profits of trade. The legal aspect demanded some form of administrative charter or license, so that law-breakers could be punished by the state. In England, the Crown had the power by common law to grant charters of incorporation to associations of merchants. The chartered rights thus awarded followed a common template; and a common set of rights and duties applied to all of the overseas trading companies as well.

In the sixteenth century, commercial bodies that had originated in the guilds were beginning to move out of the towns in their immediate vicinity to distant port cities for greater business opportunities. One of the earliest expressions of the guilds venturing out was the formation of the London firm, Company of Merchant Adventurers, in 1505 to counter growth of trade in the Flanders. In order to achieve this, such firms needed to empower the overseas chief with some law-enforcement privileges. From ‘regulated’ companies where the collectively held wealth was liable for losses, these trading companies gradually transformed themselves into joint-stock ventures with limited liability. The application of the limited liability principle enabled larger flows of savings into shareholding, as William Scott showed in a classic treatise on corporate law.

The royal charters issued between 1580 and 1610 in response to applications from merchants seeking profits overseas inherited their constitution from the guilds. And not unlike the town guild, they were all charters to create monopolies. The overseas chartered company sought and received the privilege to exclude other countrymen from overseas trade in a specific area. But this monopoly was unlike any other. Unlike the towns, the oceans did not have a government of their own, and presented logistical difficulty of enforcing any monopoly.
The overseas charter, therefore, was in practice contestable.

In the specific case of the East India Company, the moral right to a monopoly came under constant attack. The Company managed to keep shareholding restricted, so that the monopoly profits accrued to a few. The conjunction of profit and privilege made groups within the Parliament contend that its charter was in breach of basic rights of freedom. Private traders or ‘interlopers’ from the early 1600s sought the backing of these lobbies. The sentiment did see rival companies form, but a formal end to the charter did not happen until 1813. For one thing, the ideological opposition was divided. Some among those who opposed monopoly in domestic trade still favoured monopoly in overseas trade. For another, the opposition was more or less confined to merchants. A truly universal critique of monopoly had to await Adam Smith’s
Wealth of Nations
(1776).

Until then, the criticism of the Company was slow to develop, and was bred by its very success. The critics were well aware that the monopoly charter had been instrumental in the making of its fortune. The commercial-maritime enterprise entailed great financial and physical risks. In the early 1600s, possibly half of those who set out to go overseas died from scurvy, storms, pirate attacks and shipwrecks. Goods brought
from India or the Indonesian islands to England or Holland were expensive luxuries that sold in markets susceptible to economic shocks or epidemic attacks. Capital was needed to maintain an elaborate infrastructure of factory, fort, sailors, ships and soldiers. The business of overseas trade could weather these risks only if it was unusually profitable and run on a very large scale. The monopoly charter helped it earn large profits and the joint stock provided the scale.

In turn, the early Company brought to India an organizational principle that had been rare in the region’s economic and political tradition. It sought a royal charter from an Indian king. And it sent the most able diplomats to discuss the terms. In order to maintain the level of sophistication in negotiation, the chiefs of the Company’s distant outposts tended to be senior merchants. Negotiation skill became a benchmark with which individual ability in the Company’s hierarchy would be assessed, and young men could move up quickly based on this ability. Learning an Indian language helped as it could facilitate direct communication with the Indians.

In this fashion, there emerged the characteristic form of the Western European chartered companies trading in Asia.

It is sometimes suggested that the chartered companies were the precursors of the modern joint-stock company. This is true only in a narrow sense. The differences were fundamental. There were two main differences.

Firstly, the Company was formed during a time when shareholding by the public, and professional management, were still unknown. The identity of the Company was hardly distinct from the identity of the owners. Even when the shares were traded widely, the Company never acquired an identity independent of the oligarchy of the largest shareholders who controlled all policy matters. Secondly, whereas the term ‘company’ would evoke today the picture of an organization where the employees work for the interests of the shareholders and under a central command centre, the East India Company was an enterprise in which the head did not have perfect control over the limbs. This lack of control was deliberate. The very design of personnel management made the overseas branches somewhat autonomous from the head office.

The formation and functioning of the Company can be read as a partnership between the sedentary bankers and merchants of the City of London and the peripatetic sailors and soldiers. The merchants supplied the money, the sailors navigated the waters, and the soldiers ensured
security. Merchants and soldiers, the smooth and the rough sides of society, hailed from different classes, had different world views, and did not share an innate propensity to become friends. If the partnership were to work, profits of the enterprise had to be shared, or the sailors and soldiers allowed to trade on their own account. The Company paid them small salaries, but allowed them limited scope for private trade.

The scope to pursue private interest while working for a firm imparted an element of instability on the whole enterprise. The tendency to develop a split personality was intrinsic to the constitution of the Company. The individuals could trade too much and step into the Company’s preserves. They often built subsidiary partnerships with merchants, artisans and powerful individuals at the trade sites, which could overstep limits of social or political engagement set by their employers and principals. The Company directors ordinarily had a set of incentive and punishment systems in place to make the employees desist from crossing the boundaries. On some occasions, however, the Company directors were either powerless to prevent them, or preferred to wait and watch, nervously stepping in when things had gone too far.

The backing of the Crown drove the wedge between the head office and the branches even further. The
overseas branch could claim to be acting in the interest of the monarch, when some of its decisions were disputed by the head office. The royal charter was indirectly an endorsement of mercantile law or regulation. Another aspect of the charter, which gained significance over time due to European warfare in the late seventeenth and eighteenth century, was the offer of arms for the use of maritime trade. Such support was not always used or available when necessary, but its presence, even in theory, changed the character of the trading firm. A part of the sovereign authority to wage war, make laws, and police subjects, was delivered to the chartered companies to enable them to withstand attacks by competitors and predatory states. The historian Julia Adams uses the term ‘patrimonial’ state to explain this dimension of multinational firms in the early modern world.

Interestingly, the backing of the monarch empowered the overseas branches relatively more than it did the head office, for after all, it was the branch office that had to fight the wars. At times, it may have been easy to convince the head office that warfare and politics were necessary for commerce. But even when the principals thought warfare was unnecessary and unprofitable, the semi-autonomous position in which the agents found themselves, coupled with their own private interests
and ambitions, could still spur them on to military engagements.

The bigger problem with sovereign interference was that the Indians also followed a similar political paradigm. With numerous mini-kings, fiefs and vassals, disagreements escalated quickly into battles, especially since there was neither a law book, nor a supreme authority to settle such quarrels.

Adam Smith rightly observed that the big difference between the Spanish conquest of the Americas and the English conquest of India was that, in the latter territories, the Europeans encountered powerful states reliant on the support of merchants and landlords. The local officers and tax collectors functioned as law-makers, especially near the coasts. A trade license taken from the imperial court in Agra did not necessarily provide immunity from meddlesome local lords in Surat, Patna or Kasimbazar. If the foreign traders saw themselves as mini-sovereigns, so did the local kings, as did even some of their merchant allies. More fundamentally, the monopoly charter may have been of advantage to the Company, but it was an embarrassment for an Indian king, who received requests of accommodation, and
money, from competing merchant bodies all the time and often did not know who to please. In such a situation, disputes over trade licenses, taxation, territorial control and profit-sharing could go out of control, unless settled by means of bribes. In the course of dealing with the local situation, which the London employers did not fully understand, the employees stationed overseas realized that it was too dangerous to behave like obedient servants of London. But if they were not servants of London, they were not subjects of the Indian kings either. Who were their masters, then? It was partly in this ambiguity that the prospect of an empire lay hidden.

Responding to the ambiguity, the overseas branches tried to secure their own military identity in defiance of London, and with this goal in mind founded three mini-kingdoms of their own—Bombay, Madras and Calcutta—by the end of the seventeenth century. In the beginning of their history, these settlements were no more than well-defended villages. They lacked good harbours (Madras had none), were poorer in resources relative to some of the older European settlements such as Surat or Masulipatnam, and constantly in fear of attacks by enemies. But in the eighteenth century, as wars broke out in the interior, these port towns grew by attracting migrant merchants and artisans. By the mid-eighteenth century, the Company’s estate was to grow
beyond these towns, and include large Mughal provinces. And by 1803, an empire was within sight. Neither the Crown nor the Company’s London office had actually planned an empire. And yet an empire happened. Why did it happen? The ambiguous position of the overseas branches provides one part of an answer.

A fuller answer to the question, however, requires us to understand also the unfolding conditions of business in mid-eighteenth century India.

The business world that evolved as a result of European presence in Indian markets was essentially a hybrid. It could not be otherwise, given that the Europeans operated in a world that was already adept at long-distance trade and had well-developed institutional conventions. Which elements in the conventions of Indo-European trade were distinctively European and which ones distinctively Indian, is not an easy question to answer. It was of course the case that the joint stock form was previously unknown in India. But this fact did not seem to make an impression upon the leading Indian businesses, who continued to function within family firms with community support. Two other ingredients
of European commercial success did, however, make a deep impression on the Indian merchants who collaborated with the Europeans. These were the efficient use of naval power and fortification as a bulwark for trade, and the availability of a framework of formal commercial contracts, enforceable by the state. Neither of these elements was indigenous. The coasts and the ports were not a major military priority for most Indian states before, and commercial contracts had existed at best as unwritten social conventions before. The fullest play of these elements can be seen in the three port cities that the English owned, which made them especially attractive for entrepreneurial Indians. As states grew weaker around them, the merchants and bankers migrated to the Company territories, and increasingly made use of the English commercial law in force in these territories.

On the other hand, in recruiting the Indian partners and agents, the Company and the private traders needed to be mindful of social conventions of castes and communities, and needed to integrate indigenous skills, commercial acumen, capital and leadership structure into the businesses that they ran. The middleman or the agent was a crucial actor, and enjoyed much freedom and power as a result of the extent to which the Europeans had to depend on the agent. In turn, the
position of these actors in their own societies was enhanced by association with such a large firm.

In the last twenty years, historians have suggested that the prospect of an empire lay hidden in the deep mutual dependence that had developed between the English Company, private traders, and Indian merchants. The argument is offered as an alternative to an older view advanced by historians sympathetic to the British rule in India that the Company became an empire because the Indian kingdoms were in a state of collapse, and anarchy ruled all round. The Company needed peace and brought about peace by the force of its own arms. This is valid, if at all, for certain regions of India, especially those which were poor in economic resources. It is not valid for the richest regions of India, where the empire began. Bengal on the eve of the Battle of Plassey in 1757 was not a lawless anarchic state.