The Marwari business model
HARISH DAMODARAN
The Marwaris represent the only business community one would truly call pan-Indian.
For a cluster of Bania/Jain merchant castes originally from the Marwar (Jodhpur), Bikaner and Shekhawati desert tracts of Rajasthan, their sinking roots into the business landscape covering virtually the whole of the country is a remarkable phenomenon.
Till around the 16th century, the Agarwals, Oswals, Maheshwaris and Khandelwals of this belt – loosely clubbed under the appellation of ‘Marwari’ – were confined to their homeland as local traders and money-lenders, if not army provision suppliers and financiers for various Rajput princely regimes.
G.D. Birla and Lakshmi Mittal: Both their grandfathers worked for Tarachand Ghanshyamdas, one of the first ‘great’ Marwari firms.
The latter role was crucial in expanding their footprints to other lands. As ration suppliers and paymasters, they often accompanied Rajput units attached to Mughal armies, which, in turn, opened up avenues for setting up shop all over the Gangetic plains and the Deccan.
From the 18th century, there were Marwari bankers financing even the assorted independent, yet cash-strapped, principalities that had arisen from the ruins of the Mughal Empire. Thus, the Jagat Seths became treasurers to the Nawab of Bengal, just as the firm of Gopaldas Manohardas bankrolled the Kingdom of Benares, and the Ganeriwala and Pittie families ingratiated themselves with the Nizam of Hyderabad. Typically, they lent against the security of ijara or land revenue-farming rights assigned for a particular region.
Desert diaspora
But the real impetus to Marwari outmigration came during British rule. By the early 19th century, they were significantly present across Delhi, the grain markets of Hapur, Khurja and Hathras in western Uttar Pradesh, and the river ports of Farrukhabad, Mirzapur, Patna and Bhagalpur along the Ganges.
This process gathered further steam with the coming of the railways, as the community spread itself to Kolkata and beyond to Bangladesh, and from there, up the Brahmaputra valley into Assam and across the Bay of Bengal into Burma. Within this overall eastward direction, there were sideward forays into Jharkhand, Orissa, northern Bihar, Nepal and the highlands of Jalpaiguri, Darjeeling and Kalimpong. Another large migration stream was to Central India (especially the princely states of Gwalior, Bhopal and Indore, and also Chhattisgarh), Vidarbha and the Maratha hinterland. Some of it spilled over to the Deccan, before trailing off to a trickle at Madras and Mysore.
Towards the middle of the 19th century, a veritable pan-Indian Marwari business community had emerged – a commercial resource group using the hundi, an indigenous bill of exchange, to move money and goods across the length and breadth of the subcontinent.
The hundi made it possible for a grain dealer from Kanpur to sell in Kolkata without taking cash and risk being waylaid during transit. He could, instead, have the buyer draw a hundi of equivalent amount in his favour and present it to the latter’s agent or drawee at Kanpur, who would make the payment in cash. Alternatively, the seller could transfer the hundi through endorsement to a lender, who would extend the loan at a discount to its value. The same hundi was, then, encashed at par by the lender.
The hundi, in other words, served both as a cashless remittance facility enabling long-distance inland trade and also a source of mobile credit, by virtue of it being freely transferable through successive endorsements before being finally presented to the drawee. It was the lubricant that greased the wheels of commerce, by connecting some 1,700 nationwide produce mandis and 12 nodal money markets handling the bulk of discounting of these bills at the turn of the century.
The first conglomerates
The traditional hundi, alongside the modern-day railways and telegraph, also laid the ground for the birth of large multi- branch Marwari trading firms such as Tarachand Ghanshyamdas – which, in 1870, had offices at Kolkata and Mumbai, Amritsar in Punjab, the Malwa opium belt of Madhya Pradesh and elsewhere, including through related entities.
These firms were magnets for attracting fellow Rajasthani clansmen, who could join as clerks, managers, brokers and partners. G.D. Birla’s grandfather, Shivnarayan worked with Tarachand Ghanshyamdas; so did the grandfather of the global steel czar, Lakshmi Niwas Mittal. Likewise, there was Sevaram Ramrikhdas that employed, among others, the RPG Group patriarch, Rama Prasad Goenka’s grandfather’s great-grandfather, Ramdutt. The Sevaram Ramrikhdas firm’s division resulted in independent offshoots at Kanpur, Mirzapur, Farrukhabad and Kolkata: The Singhanias are descendents of the Kanpur line.
The functional utility of such extensive upcountry networks was soon recognised by British expatriate firms, who started engaging the Marwaris as intermediaries to finance and forward raw jute for their mills or to redistribute cotton piece goods imported by them.
But increasing awareness of the power derived from control over the hinterland supply chain led the community, in due course, to also undermine the operations of the British agency houses themselves. In this, the practical trading skills and financial ingenuity of its members, honed over generations, proved most useful.
‘Desi’ futures & options
In 1905, six Marwaris introduced fatka or futures trading in raw jute that registered meteoric growth at the baras (informal exchanges) of Kolkata’s Burrabazar market.
These contracts – rarely resulting in delivery of the underlying goods, since most purchases and sales got cancelled against each other before maturity date – weren’t taken kindly to by entrenched European interests. Used only to spot buying, they saw their supply-and-demand calculations and produce flows disrupted by the rampant speculation engendered by such trades, which extended to cotton, opium and grain as well.
No wonder, one of their representatives claimed fatka to have been “invented” by Marwaris “deprived of the pleasures of rain gambling”, and only to satisfy “their craving for the gains of chance in a system of contracts purporting to evidence the purchase and sale of jute, but [where] in no single instance has jute ever been delivered”!
That view, in a sense, echoes those of many who even today harbour a suspicious attitude towards futures transactions, which they contrast to ‘legitimate’ business.
Apart from the hundi and fatka, the Marwaris also pioneered trading in indigenous options ( satta), giving the buyers the right, but with no obligation, to buy or sell a certain commodity at a specified future date and price. These could be teji (call) or mandi (put), with the premium paid by the buyer of the option known as nazrana.
The success of Marwari enterprise can, in short, be put down to three components:
Pan-India presence, key to the forging of long-distance networks of trade and finance, extending from the desert towns of Rajasthan to the Brahmaputra valley;
Community resources and connections, which could be leveraged to raise capital or expand the scope and spread of business operations. A firm could open as many branches as the number of brothers, nephews, in-laws, cousins or trusted accountants permitted. Over time, each of these would develop into or further spawn independent firms, facilitating diffusion of entrepreneurship within the community;
Evolving sophisticated trading and financing mechanisms, complementing their ostensibly hardwired talents at sourcing/selling of produce and ability to draw on information or ground-level knowledge not normally accessible to others.
These traditional strengths have revealed themselves even in more recent times – be it in organised industry, share markets or, for that matter, modern-format retail and e-commerce (the promoters of Big Bazaar, Flipkart, Snapdeal and Myntra happen to be all northern Bania/Jains, if not Marwaris).
This essay now looks deeper at the relevance and limitations of the ‘Marwari way’ of doing business in today’s world:
Having a business presence spanning much of the subcontinent is a feature that has distinguished the Marwaris from other prominent trading communities.
The latter — the Parsis, Sindhis, Gujarati Banias/Jains, Lohanas and Bhatias, Nattukottai Chettiars, Punjabi Khatris/Aroras or Muslim Memons, Khojas and Bohras — have historically had more geographically concentrated inland operations: Some of them had predominantly overseas mercantile or investment interests.
File photo of Ramkrishna Dalmia, seen with a wire recorder device to improve his English.
The ability to draw on extensive pan-Indian bazaar connections made a huge difference during the interwar years, more so with the Great Depression. It tilted the balance against foreign trade, in favour of those whose business activity was largely domestic-focused.
The Marwaris were the ones to make the most out of the disruption of normal trading channels during wartime. The speculative profits earned from fatka and teji-mandi transactions — that rose manifold at the numerous commodities exchanges formed in this period — they partly funnelled into industry. That also included buying out the units of beleaguered European managing agencies, to whom they were previously brokers and financiers.
Dalmia’s exploits
Exemplifying this trajectory was Ramkrishna Dalmia, arguably the greatest Marwari businessman before Independence.
Originally from Chirawa in Jhunjhunu district of Rajasthan’s Shekhawati region, Dalmia went to Kolkata to join his maternal uncle’s bullion business. In no time, the ambitious young man had launched his own operations, starting with gambling on silver prices during World War-I, followed by shares at the Calcutta Stock Exchange and trading in commodities.
Dalmia’s industrial debut was through a sugar mill in 1933 at a site in Bihar’s Rohtas district. Over time, it also housed plants manufacturing cement, asbestos, paper, board, vanaspati, sulphuric acid, chlorine, caustic soda and bleaching powder. These units — besides a foundry, central workshop, power house and a rail feeder line connecting the 3,800-acre complex — became part of a single entity, Rohtas Industries, that may have well anticipated today’s much-touted Special Economic Zones.
But Dalmia did not stop there. In 1937, he challenged the quasi-monopoly of ACC — a combine of 10 cement firms formed only the year before — by commissioning plants at Karachi and Dandot (both now in Pakistan), Charkhi Dadri (Haryana) and Trichy (Tamil Nadu), apart from the Rohtas Industries facility. The ensuing price war lasted till 1941, when the World War boom lifted sentiments.
From speculation, trading and manufacturing, Dalmia’s next port of call was finance. In 1943, he promoted Bharat Bank Ltd. This, along with two insurance ventures (Bharat Insurance and Bharat Fire & General Insurance), provided a captive fund pool, especially for the takeover binge that Dalmia indulged in over the next few years.
The companies he bought — with interests as diverse as flour-milling, sugar, jute and cotton textiles, civil aviation, railways, coal mines, electricity supply and newspapers — belonged mainly to British concerns like Govan Brothers, Andrew Yule and Bennett Coleman, whose owners weren’t too bullish on business prospects in Independent India. By 1948, he also had controlling stakes in Punjab National Bank. The downside
Ramkrishna Dalmia’s case is illustrative on three counts. The first, of course, is the raw drive and venturous spirit of a first- generation entrepreneur it highlights.
The second is the role of kinship and community ties, a valuable resource pool not available to every aspiring tycoon. Dalmia benefited from learning the ropes under an uncle, well entrenched in Kolkata’s Marwari trading circles. Even his initial foray into sugar was with a big land-owning relative in Bihar. All the subsequent ventures involved his brother, Jaidayal and son-in-law, Sahu Shanti Prasad Jain – under the ‘Dalmia-Sahu Jain’ group banner.
The third element was the extent to which Dalmia’s business operations remained grounded in the bazaar. The ‘speculative’ phase did not end with putting up factories. Rather, the proclivity for playing the market — including diverting public issue proceeds from one company to finance the activities of others, or booking fictitious losses on share transactions between group entities — only rose with time.
The above three facets — inherent risk-taking disposition, ability to leverage community resources, and overwhelming bazaar orientation even after entry into the ‘modern’ industrial sphere — can be said to apply to Marwari enterprise broadly, with their associated strengths and weaknesses.
In Dalmia’s case, his adroit speculative skills eventually got the better of him. As details emerged of how deposit and premium monies from banks and insurance firms controlled by the group were used to fund acquisitions — of Bennett Coleman, among others — he had to suffer the ignominy of a two-year jail term in 1956, just like Satyam Computers’ Ramalinga Raju some five decades later.
Even before that, the Dalmia-Sahu Jain empire was partitioned among his brother’s and son-in-law’s families, for reasons still shrouded in mystery and intrigue. Many of the erstwhile group’s concerns, including Rohtas Industries, have since folded up, while the surviving ones, save Bennett Coleman, cannot really be considered in the top league.
The route ahead
That links up with two major limitations of Marwari, or even Indian, enterprise in general.
The first has to do with entrepreneurial zeal and ‘animal spirits’, which, in most family-owned businesses, tends to disappear along with the founding patriarchs. The Bangurs, Modis, Singhanias, Shrirams and Dalmias represent this trend in varying degrees.
The same possibly holds for the Birlas as well: Among its various factions today, only the $ 40 billion Aditya Birla Group can measure up to, if not surpass, the vision of G.D. Birla. And that happened because his grandson, Aditya Vikram, chose to tread an independent path. In the seventies — when most others, particularly Marwaris, were happy doing business domestically — he established viscose staple fibre, spun yarn, carbon black and palm oil refining units all across South-East Asia. The latter’s son, Kumar Mangalam, has gone one step further, in aiming for global leadership in the industries where the group is active: Viscose and acrylic fibre, carbon black, aluminium and cement. That calls for no less ambition and animal spirits, even if more evolved and organised than innately present in first-generation entrepreneurs.
The second limitation flows from an inability to transcend the bazaar that provided the basis for capital accumulation for most Marwari firms (unlike for say, an Infosys or Dr Reddy’s Laboratories). But innovativeness in trading and financing – where there’s probably not much JP Morgan, Goldman Sachs or even Walmart can teach our Banias — is inadequate and certainly cannot substitute for knowledge of the factory floor and production processes.
Weakness on the latter front may not have mattered in a closed domestic economy, where the trader-industrialist’s choice of industry was dictated more by the profits it offered and the availability of licenses at that point of time. It was both theoretically and practically feasible, then, to straddle diverse industries and operate suboptimal capacity plants using borrowed, outdated technologies. These could be ‘managed’ even from a distance, without going too much into the technical details of manufacture.
The partha system of accounting devised by the Marwaris was perfectly suited for this purpose. Under it, every group firm provided informed estimates of how much it cost to manufacture a given quantity of their product. Based on it and the expected profits corresponding to the sale price, the promoters sitting at their gaddis in Kolkata or Mumbai compared the unit’s actual daily earnings to the normative partha cash flows. If substantial deviations occurred, a trouble-shooter was sent to check out the ground situation and report back. In extreme cases — rare in a protected economic environment — it led to a shake-up of the plant team or closure of the business.
The above detached approach has limited relevance in the post-liberalisation era, where the success of Lakshmi Mittal, Kumar Mangalam Birla or Anil Agarwal owes largely to their focusing on particular industries and building global-scale state-of-the-art plants.
While their in-born talents in buying and selling or having connections from relatives already in business will always stand the Marwaris in good stead, that by itself is not enough in today’s world where other things are increasingly mattering more.
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