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In this article we will discuss about managing agency of the Indian industry:- 1. System of Managing Agency 2. Origin of Managing Agency 3. Extent and Size 4. Organisation 5. Critical Appraisal 6. Legislative Measures.
Contents:
- System of Managing Agency
- Origin of Managing Agency
- Extent and Size of Managing Agency
- Organisation of Managing Agency
- Critical Appraisal of Managing Agency
- Legislative Measures for Managing Agency
1. System of Managing Agency:
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The organisation of large-scale factory industry in India was peculiar in that a special arrangement for management the managing agency system was almost universally employed.
A managing agent was “a person, firm or company in charge of the whole or substantially the whole of the management of the company, but deriving his or its authority by virtue of an agreement with the company or by virtue of the memorandum or articles of association containing the terms of such agreement. Unlike a manager, who would be administratively under the control and supervision of the directors, the latter’s control over a managing agent was exercised only in terms of the agreement or the provisions of the Act.”
2. Origin of Managing Agency:
The system of managing agency rose in the wake of the charter Act of 1833 which abolished the remittance trade and China monopoly of the East India Company but recognised the right of Europeans to own land in India. The abolition of the transit duties further assured the creation of a national market.
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In the field which India thus offered, the former servants of the East India Company set up their business as general merchants. In the Course of trading, they came to acquire an intimate knowledge of the local markets and of the ways to exploit them.
These traders, making effective use of their connections with the British monopolies and acting as their agents, constituted a sort of pipe-line “through which British Capital flowed to India and got distributed among the varied enterprises promoted by the British managing agents.”
Many attribute the emergence of the managing agencies to the shortage or absence of well-developed modern banks. Such assertions betray ignorance of the fact that the very institution of British managing agencies hampered the emergence of a developed banking system.
Furthermore, such an interpretation ignores the fact that these agencies were branches of the British monopolies and were closely linked with the British banks. The master of both was the financial oligarchy in Britain which utilised the system “for the formation of private British capitalist enterprise in India and simultaneously as a means of subordinating it to England’s interests.”
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Whereas British agencies were a means for exploiting and enslaving India, the Indian agencies were a manifestation of the drive of Indian capital towards independent enterprise in large- scale industry. The supply of Indian entrepreneurs was limited and that of industrial capital inadequate.
The capital market was shy. Banks were not prepared to finance the long-term needs of industry and were unable to provide anything more than “circulating capital” and that also for short periods.
On the other hand, many of the enterprises were under-capitalized. The managing agency system was found to be an excellent institution within which business ability could be developed with the best advantage and limited finance could be put to the best possible use. Besides, it enabled Indian capital to withstand the competition of foreign enterprise.
Whatever might be the way in which the managing agency system originated, it soon struck deep roots in the industrial organisation of the country. It constituted the bone round which “the flesh and sinews” of Indian industry grew.
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While the British agency houses were mainly interested in export and extractive industries, their Indian counter-parts in Bombay and Ahmedabad followed a more conservative course and turned to consumer goods industries.
3. Extent and Size of Managing Agency:
According to a study of Dr. R. K. Nigam, there were 3,944 managing agencies composed of public and private limited companies and unincorporated firms at work during 1954-55. They managed as many as 5055 out of a total of 29,625 joint-stock companies.
The control of the managing agency was by far the greatest in the case of public limited companies where they controlled 40.7% of the companies accounting for 66.3% of the paid-up capital of all public limited companies in the country.
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There was a decline in the number after August, 1960 when all old managing agency agreements expired. On 31 March, 1964, the number of managing agents came down to 885 which managed, out of a total of 25,824 companies in that year, 1272 companies. There was, however, considerable variation in size and operations.
Out of 3,944 managing agents in 1954-55, 3526 managed only one company each while another 250 managed two companies each. The concentration of capital and economic power was the highest in the case of a handful of leading agencies as is evident from the fact that a mere 17 managing agents managed 359 companies representing 1/4 of the entire paid up capital of all managed companies.
According to the commission which conducted enquiry into the jute industry in 1953, 75% of all the mills were controlled by a dozen managing agencies while four of them controlled 45% of all weaving looms.
The overwhelming majority of the agencies continued to be concentrated in the three states of Bengal, Bombay and Madras which together controlled 4/5 of all joint-stock companies managed by managing agents in the country.
The coverage of various industries by managing agents also differed. In the case of some 59 industries including coal mining, rayon manufacture, paper and paper board, cement, jute spinning and weaving, cotton mills, matches, tea, sugar, Iron and steel and Artificial silk, more than 50% of the groups’ paid up capital belonged to companies managed by managing agencies.
However, in certain industries like petroleum and natural gas, manufacture of cigarettes, cotton ginning and pressing, agricultural implements, manufacture of perfumes and wholesale trade, the share of managing agency-managed companies was rather insignificant- say less than 10% of the total paid-up capital of the group.
By 1960-61, when all old managing agency agreements expired, the overall importance of the system was greatly reduced. Nevertheless, managing agents continued to be of predominant importance in Plantations, Sugar, Textiles, Cement, Power, Iron and Steel, Vegetable oils and fats.
4. Organisation of Managing Agency:
The Indian Industrial commission described the managing firm as partnerships or private limited companies. Until the Second World War, this description was substantially correct. One of the significant developments in the post-war years was a shift away from partnerships in favour of the corporate form of organisation.
Accordingly, a large number of well-established managing agency houses were converted into limited liability companies, public or private, mostly the former. Among the well-known conversions may be cited the names of Andrew-Yule, Mackinson Mackenzie, Martin and company and Burn and company as Martin Burn Ltd.
While the predominance of unincorporated firms of managing agents was thus reduced, it would be misleading to suggest that the partnership concern became extinct. Out of 3,944, managing agencies in the whole of India in 1954-55, those owned by individuals and partnership numbered 2522; 1238 were private limited companies while only 184 were public limited companies.
However, after I960, when the number of agencies declined to 885,457 was unincorporated firms, 345 were private limited and only 83 were public limited companies.
5. Critical Appraisal of Managing Agency:
That the managing agency system was a mixed blessing was recognised early. The Indian Industrial commission was impressed by the high financial prestige of “the better class of agency firms and the readiness of the investing public to follow their lead” but did not look with favour on their inclination “to develop commerce rather than industries.”
The Central Banking committee, wiser from the available evidence, recommended “the establishment of direct financial relations between industrial companies and commercial banks.” While the condemnation of the system as “rotten, root and branch, leaf, bark and blossom” may be exaggerated, it certainly led to many gross abuses.
One result of the system was to hand over the management to a body of individuals not because they possessed the necessary ability but because they had the financial resources to help the industry. Industrial ability never entered the matter and, in the words of Lokanathan finance, instead of being the servant of the industry, became its master.”
The most vital abuse related to the inter-investment of funds by the managing agents. The surplus funds of one mill were very often invested in the shares and debentures of another mill under the same agency.
Funds raised on the credit of one concern were lent to another under the same management. As a result, the difficulties of some concerns reacted unfavourably on all and the sound and unsound concerns suffered equally.
Managing agents often speculated in stocks and shares. Many of the ‘Corners’ in the Bombay stock exchange were the result of the inter-dependence between the managing agents’ external activities and their function as financial agents of the companies under their management.
Speculation often led to heavy losses. The consequent deterioration in the financial position of the managing agent had undesirable effects on the mills under its control. In several cases although the mills themselves were sound, banks withdrew their cash credits because the agents were weak.
There were instances where agents turned their loans to companies into debentures with the result that the concerns passed into their hands and the share-holders lost all their capital invested in the undertakings.
Managing agents dictated the financial policies of the companies relating to the creation of internal reserves, declaration of dividends, and incurring of revenue or capital expenditure.
At times, they were interested in declaring high rates of dividend either to satisfy their friends or relations who might be share-holders in the managed companies or to appear efficient before the investing class and thus create a good impression or just to keep the companies dependent upon themselves. No wonder, the Fiscal Commission (1949-50) found their malpractices detrimental to capital formation in the country.
Over a period of time, the managing agency itself acquired a certain value because of its rights and privileges. The vast resources of the managed companies provided temptation for financiers to gain control over the managing agents and through them over the funds of the managed companies. Managing agency rights, thus, became a negotiable asset.
In every boom, the rights in many companies were transferred at fabulous prices and capitalized at inflated values. During slumps, transfers took place because the managing agents were in trouble and could no longer raise finances on their own guarantees.
Even the Tata’s handed over the majority control in the managing agency of their electric companies in the 1920’s to an American Syndicate without the prior sanction of the shareholders.
Managing agency agreements contained elaborate provisions which stipulated that the managing agents would be entitled to charge interest not only for the advances made by them but also for those made by the third parties and the repayment of which was guaranteed by them.
Agreements, however, seldom made it obligatory for the agents to provide adequate assistance. In plain words, the arrangements were mostly one-sided.
The ‘firm and stable’ control, which the managing agency system was supposed to provide, meant the perpetuation of the family control. The system conferred a birth-right upon the managing agency family not merely to control the management of companies in the group but also to actively participate in and to direct their routine management.
A factor which made the managing agency system so successful in the past was the efficiency of the agents based on their experience and technical knowledge. However, the newfangled managing agents neither had any knowledge of manufacture, engineering, technical or scientific, nor of purchase and sales.
They, instead, appointed purchase agents at the cost of the company while sales were entrusted to ignorant wholesale agents who too were paid out of the company funds.
A serious abuse related to the “excessive and arbitrary remuneration received by the agents.” The fixed office allowance, as K.C. Mahindra pointed out, was not a “recovery of the estimated out-of-pocket expenditure on behalf of the company but was a mere duplication of the agent’s commission.”
What is more, as Basu found, the commission charged was flagrantly high, exceeding the amount of dividends paid to the share-holders in certain mills of Bombay and Ahmedabad, by 125%.
The gains on ‘subsidiary services’ were often more important than the managing agency commission. In addition, there were supplementary or secret profits.’ S.K. Dutta estimated that with a capital investment of 15% on average, the managing agents appropriated approximately 30% of the profits.
The system hindered the development of sound relations between the industry and the banking system because the bank lent only on the guarantee of the managing agents and not on the intrinsic strength of the company.
The gravest abuse of the system was that it led to a very unhealthy growth of concentration of economic power in the hands of managing agents in general and a few business houses in particular. This may be seen from the fact that in 1955, 64 managing agents controlled and managed 415 joint-stock companies with a paid-up capital of Rs. 737 crores.
This “expensive, irrational and part-time system of management” had even otherwise become redundant in the post-independence period. Public and semi-public financial institutions set up since 1948 made available resources of a magnitude which managing agents could never raise, and their underwriting activities largely replaced the functions of managing agents.
As regards foreign investment, it largely came from international combines which did not rely on the managing agents.
6. Legislative Measures for Managing Agency:
Such gross abuses could not have been allowed to continue indefinitely. Although demand was voiced early for legislative action, statutory restrictions on the powers of the managing agents were imposed for the first time in 1936. The Indian companies Amendment Act laid down that no managing agent could hold office for more than 20 years at a time though the term could be renewed.
Managing agents could nominate not more than 1/3 of the total number of directors of the company under their control nor could they utilise the funds of one company for the development of another. Extra remuneration or commission could be given to the managing agents only with the sanction of the directors.
These measures, halfhearted as they were, were never vigorously enforced by the British Indian Government which was anxious to safeguard the interest of British managing agencies.
In the late 1940’s a large number of serious abuses including cornering of shares of some leading companies, fraudulent promotions, trafficking in managing agency rights, large-scale inter-company loans and investments, wide-spread use of dummy shareholders and frauds upon creditors and tax authorities came to light.
In order to check these, it was decided to draft a new and consolidated company law. The Bhabha committee was accordingly appointed in 1951 and, based on its recommendations, was passed the Indian companies Act, 1956.
The Act required public companies and their subsidiaries to obtain prior govt. approval of the appointment and remuneration of managerial personnel, their relatives and associates, intercompany investments, changes in the constitution of managerial firms.
Four categories of managerial personnel were recognised and defined for the first time: managing agents, secretaries and Treasurers, managing directors and managers.
All the four categories were specifically subject to the Superintendence, control and direction of directors. The first two categories could be companies, firms or individuals but the latter two had to be individuals. They were to be appointed by the company in its general meeting.
The maximum remuneration to a managing agent was fixed at 10% of profits after depreciation; the maximum for Secretaries was 7½% and for managing directors and managers was fixed at 5%.
Managerial personnel (and their partners or members) were not permitted to hold any other office of profit under the company. The period of appointment was 5 years at a time for managing directors at 10 years maximum for managing agents. No company could have more than one category of managerial personnel and managing agents, in turn, could not have sub-managing agents.
The Act tightened up the conditions of the issue of prospectus, required greater disclosure of the accounts and interests of managerial personnel, abolished the issue or continuance of shares with disproportionate voting powers, and restrained fraudulent persons from managing companies.
No person could be a director of more than 20 public companies; managing agents could not manage more than 10 companies but there was no restriction on the employment of the previous managing agents as Secretaries and Treasures who could manage any number of companies; managing directors and managers could manage not more than 2 companies.
Important decision required shareholders’ approval by special resolution which had to be passed by 3/4 majority. A new Department of company Law was set up at the centre to administer the law which also gave the government the right to abolish the system in notified industries.
Amendments made between 1960-65 either tightened up or introduced provisions relating to intercompany investments, audit, powers of investigations by govt., appointment of sole selling agents and prevention of undesirable persons from exercising their voting power as shareholders, appointment of a public trustee to take over the voting power of larger trusts and a special tribunal with powers to remove managerial personnel and officers for misconduct.
Powers were also assumed to nominate directors to protect minority interests in a company.
In the meantime, the govt. had been exercising its administrative discretion to weed out managing agents in several cases. Between April 1964 to February 1965 the govt. approved the removal of managing agents in 33 companies and refused permission of appointment to 40.
These legislative measure could not rid the system of its many abuses. The Patel committee, appointed to enquire into and report on the continuance of the managing agency system in cement, cotton paper, sugar and jute, found that 92% of the managing agents had hardly any organisation of their own.
The active part in the management was taken by one or two persons though the remuneration was shared by many. The committee, therefore, found no force in the argument that the system provided substantial and irreplaceable advantages of group management.
It, therefore, recommended dis-continuance of the system in cotton-textiles, sugar and cement and ‘go slow’ in the case of jute and paper industries. Accepting these recommendations in 1966, the government abolished the managing agency system in these three industries but gave them three years, ending in March 1970, to make alternative arrangements.
No tears need to be shed for the managing agencies on their disappearance from a certain section of the corporate landscape.
They reappeared from their ashes like, the fabled Phoenix though with an altered form, status, and system of remuneration i.e. in the garb of Secretaries, Treasurers or managing directors. The Act of 1966, therefore, made no difference to the control and management of companies by monopoly groups in the country.
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