The Future of Managing Agency System

Summary

This Forum of Free Enterprise booklet collects three talks delivered at an FFE symposium in Bombay on 3 September 1966 on the future of India’s managing agency system, the dominant form of corporate control in colonial and early-independence India. Written against the backdrop of the I. G. Patel Committee report (received March 1966) and the Union Cabinet’s apparent decision to discontinue managing agencies across all five industries it examined, the three contributors mount a broadly common defence: that the managing agency system, though historically marred by abuses, has been effectively disciplined by the Companies Act of 1956 and remains a useful instrument for industrial finance and entrepreneurship. C. C. Chokshi (a chartered accountant) argues the Government’s outlook needs re-orientation; Dhirajlal Maganlal (Bombay Shareholders’ Association) argues shareholders desire the system’s continuation; and R. L. N. Vijayanagar (Secretary, Bombay Millowners’ Association) argues the inquiry committee ignored the textile industry’s capital needs and that abuse is not peculiar to managing agencies. The volume’s argumentative center is that regulation, not abolition, is the right remedy, and that abolishing the system would damage industrial finance and modernisation.

Essays

Government’s Outlook on Managing Agencies Needs Re-orientation

By C. C. Chokshi

C. C. Chokshi argues that the Government’s outlook on managing agencies needs re-orientation. He traces the chequered history of the system over the previous 30 years, the seven misdeeds listed before the old Legislative Assembly, and the successive tightening of the law (1913 amendments, the Bhabha Committee, the Companies Act of 1956) that has placed managing agents in a ‘straight-jacket’ more severe than that on managing directors or managers. Reviewing the I. G. Patel Committee report, Chokshi stresses that the committee did NOT advise abolishing the system under Section 324 in any industry, only discouraging it in three of five, and that the Government already has ample power under Section 326 to curb concentration and refuse appointments. He contends the Cabinet’s decision to abolish across all five industries appears to rest on political rather than economic grounds, and that managing agents still play a positive promotional and entrepreneurial role, citing the House of Tatas as the typical case of efficient group management.

• The Companies Act has put managing agents in a ‘straight-jacket’ stricter than that on managing directors or managers.
• Chokshi recounts the seven misdeeds of managing agents listed by Government representative Mr. Sushil Sen in the old Legislative Assembly.
• The Bhabha Committee and the 1956 Act introduced severe restrictions but did not recommend abolition; C. D. Deshmukh defended retention while piloting the 1954 Bill.
• The I. G. Patel Committee advised only discouraging the system in three of five industries, never abolition under Section 324.
• The Government already holds power under Section 326 to refuse appointments and reduce concentration of economic power.
• Chokshi argues the Cabinet’s blanket abolition rests on political, not economic, grounds and that good managing agents (e.g., the House of Tatas) still add value.

Shareholders Desire Continuation of the System

By Dhirajlal Maganlal

Dhirajlal Maganlal argues that shareholders desire the continuation of the managing agency system. Against the official view that the system has ‘outlived its use,’ he holds that the malpractices of 1947-1954 were curbed by the Companies Act of 1956, producing a remarkable improvement acknowledged even by Government. Citing the Company Law Committee’s view that, shorn of its abuses, the system ‘may yet prove to be a potent instrument for tapping the springs of private enterprise,’ and a Government spokesman’s article noting that managing-agency remuneration had fallen from 11.5 per cent in 1956 to around 9 per cent, he argues the system is now functioning healthily and should be continued. He warns that abolition would deprive managed companies of financial aid, fragment their resources, weaken the link between investors and new enterprises, harm small middle-class investors, and forfeit the economies of group management.

• The 1956 Companies Act curbed the malpractices of 1947-1954, producing improvement acknowledged even by Government.
• The Company Law Committee held the system, shorn of abuses, could be ‘a potent instrument for tapping the springs of private enterprise.’
• Managing-agency remuneration fell from 11.5 per cent (1956) to about 9 per cent in recent years; he supports a reasonable ceiling.
• Abolition would deprive managed companies of managing-agent loans and guarantees and fragment their financial resources.
• It would weaken the investor-enterprise link, harm small middle-class investors, and forfeit group-management economies.
• He concludes the system ‘is not inherently bad and it should be continued because it is in the best interests of the country.‘

Problems of Textile Industry Ignored

By R. L. N. Vijayanagar

R. L. N. Vijayanagar, Secretary of the Bombay Millowners’ Association, argues that the inquiry committee ignored the problems of the textile industry. He notes the pronounced decline in managing agencies (from 3,944 agents managing 5,055 companies in 1954-55 to 860 agents managing 1,236 companies by March 1965) as evidence that existing restrictions are already a more-than-sufficient deterrent. Citing Dr. Raj K. Nigam’s findings, he argues the system has been disciplined and that its abrupt abolition risks creating a damaging void in the industrial set-up. He criticises the committee for relying on out-of-date 1963-64 data, for failing to study how the system fares abroad (the UK’s Jenkins Committee, EEC textile reorganisation), and for ignoring the textile industry’s specific capital needs. He concludes that no system of management is free from abuse, that the essentials of joint-stock management are the same in the USA, UK or India, and that the answer is greater protective and regulatory control inculcating social responsibility, not the substitution or abolition of managing agencies.

• Managing agencies fell sharply from 3,944 agents (5,055 companies) in 1954-55 to 860 agents (1,236 companies) by March 1965, showing restrictions already bite.
• He cites Dr. Raj K. Nigam that discipline imposed by the Companies Act had already reduced complaints and lapses.
• The committee relied on out-of-date 1963-64 statistics and was set up under rules confining membership to Government officers.
• It failed to study comparable foreign experience — the UK Jenkins Committee and EEC textile-combine reorganisation.
• It ignored the textile industry’s specific need for long-term institutional finance and the question of how capital can be attracted to a low-profitability industry.
• He argues abuse is not peculiar to managing agencies (citing the UK Cohen Committee on managing-director malpractices) and that regulation, not abolition, is the remedy.

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