Corporate Law in Colonial India: Rise and Demise of the Managing Agency System

This paper focuses on the managing agency system, a peculiar type of corporate governance arrangement that emanated in India during the colonial period. Under this system, a managing agent (either an individual, partnership firm or company) would be appointed to manage one or more joint stock companies. The managing agent would also hold shares in the managed companies and control their boards of directors. While this system was introduced in the early part of the nineteenth century to facilitate trade and investment by British businesses in India, it was also adopted by Indian businesses. Over a period of time, its advantages were overshadowed by mismanagement by the agents and consequent abuse of the shareholders of the managed companies. The legal response was ineffective as the colonial government refused to recognise or rein in managing agents for nearly a century from its inception. It is only in 1936 that restrictions were imposed. Following India’s independence in 1947, the restrictions were tightened further before the system itself was abolished in 1970. This paper offers an analysis of the system using a corporate law and governance framework, and finds the existence of several institutional, economic, political and social factors that led to its emergence and disappearance.