The Marwaris Page 6
Speculation: The Art of Managing Risk
Finally, a considerable number of the larger Marwari business groups made their money in the speculative markets of the nineteenth century and especially in the early twentieth century during the First and Second World Wars. These funds they then sometimes invested in new industrial ventures.
Though records of the great speculators are under-documented, there exists a body of anecdotes and stories which emphasizes how much they operated on intuition, perhaps based on superior commercial intelligence, and maybe even inside information before tapping into such information became illegal. Niall Ferguson emphasizes the same characteristics in the operation of the early Rothschild firm which is particularly well documented in the thousands of letters between the partners; these have been preserved and have only recently become generally available.11
We can also trace the evanescence of speculators. Keshoram Poddar lost all his wealth, and continued à la Warren Buffett to live right through in the same modest apartment. Motilal Jhunjhunwala did not have heirs who were successful speculators. Many of the firms that speculators left behind ended up riven with litigation and family infighting.
All business involves some risk. The management of that risk is a key management task. Businessmen, especially entrepreneurs and those who launch new enterprises, are risk-takers. As a consequence, some businessmen seek risk or try to make a business out of handling it and in the process become professional speculators or, euphemistically, ‘risk managers’.
Some of the risk is simply borne, for a price. Some is insured against. But some is bought and sold on speculative markets. It is on these markets that a ‘killing’ can be made. George Soros became a billionaire from betting against the British pound. Like horse racing, the betting does not occur in a vacuum but in a world in which information about the factors likely to influence prices is considered.
Most of the speculation is constrained both by the narrow limits within which prices are expected to move and the limited financial capacity of speculators. Many participants in speculative markets hedge, which means that they take a position that reduces their risks and uncertainties as well as their potential profits. Thus, a flour mill company may buy options to purchase wheat, a key input, in the future at certain prices to reduce its risk of fluctuations. Those companies with future obligations in dollars may buy options to purchase dollars at specific prices when they will need to pay them out. Sometimes, the hedgers will both buy an option to purchase and to sell to constrain the range of their risk. But other speculation is done for its own sake, as a business activity.
A part of the impulse that leads to speculation is undoubtedly a desire to gamble, and speculators often gamble on sports events. But economic speculation is also pursued as a strategy for risk management for normal business or as a separate business by businessmen who specialize in it.
Speculative markets have existed for as long as trading has, and the spreading Marwari diaspora was involved in these markets from an early point in their history—the Victorian British rulers of India and their modern Indian successors were not always pleased by this. A whole body of literature exists on the conflicts that this entailed and has been documented by anthropologists.12 The press was full of records of British–Indian police raids on speculative markets and this continued in independent India too. As one government source in the British period said, ‘A large amount of the professionally owned capital of the district is diverted from the legitimate operations of trade to speculation, or more correctly to gambling by means of anticipation bargains, “vaida”.’13 Raids on speculative markets were sporadic.14
The issue remains alive. The post-Independence Indian government suppressed a broad variety of speculative markets and it is only relatively recently that they have been permitted, and even then slowly and with some hesitation. Even though the hedging function is recognized, there is anxiety that in India these markets will be subject to manipulation and somehow act against the interests of ‘productive businessmen’.
More generally, the rise of interest in Islamic or sharia finance has focused attention on the differences between real (inevitable and permitted) and artificial (independently generated and forbidden) risk.
S.M. Edwardes in his classic Gazetteer of Bombay notes:
The Mercantile and Moneyed classes in the city perform an enormous amount of speculative business on behalf of upcountry constituents . . . in Government Promissory notes . . . the shares of joint companies, in cotton, in oil seeds . . . in wheat, in Rangoon rice, in Calcutta-made gunny bags, and in gold and silver. 15
A British visitor in the 1870s noted that the home areas of Shekhawati and Bikaner already had vigorous speculative markets. Regular speculation on opium in Bombay and Calcutta seemed to have started on an organized basis in the 1830s.
I have seen entries in Marwari ledgers, as early as 1791, entering speculative transactions, fatka, which refers almost certainly to the so-called rain bargains. These were bets on the date when the monsoons would arrive. On the one hand, in the broader sense, when the rainy season will start is the most obvious thing to speculate on in the hot north Indian summer; on the other hand, it is a datum of crucial economic significance given its impact on the harvest. As Basil Blackett, not John Maynard Keynes as some report, notoriously said, the Indian economy then, and even to some extent now, is a wager on the monsoons.16
Personalities such as Harduttrai Chamaria (1872–1916) and Sir Swarupchand Hukumchand (1874–1959) were the ‘kings’ of speculative markets. Harduttrai Chamaria’s family came to Calcutta from Fatehpur in Shekhawati in the 1840s. The family became brokers to the wealthy Bombay-based Ismaili Currimbhoy Ebrahim family (later made baronets by the British). Harduttrai partitioned the family firm with his brother Ram Pratap in 1903 and the partition deed included a fair amount of Calcutta real estate. As early as 1900 we find Harduttrai invited to the Viceroy’s levees and given the title of ‘Seth’ by the Maharaja of Jaipur.
Hukumchand’s family owned the largest banking firm dealing with Indore state. During 1909–10, when the British started restricting the number of opium boxes for export, the Indian market weakened. Hukumchand bought Rs 20–25 lakh worth of opium on credit. The price skyrocketed ten times, and Hukumchand mopped up Rs 2 crore. In 1911, Harduttrai was the key organizer in a syndicate including, among others, Jugal Kishore Birla, G.D. Birla’s elder brother, which made a killing on the opium market. Sir Hukumchand made Rs 1 crore in 1914–15 and Rs 75 lakh in 1918–19 based on successful cotton market corners.
Though Harduttrai dealt in a large number of commodities, his strength lay in organizing the market for silver speculation. The silver futures market played a role almost as seminal as the opium, cotton and jute markets (the last during the First World War period). The opium market reached its dizzy heights in the years before the First World War as the trade itself was being shut down as the result of a coordinated international movement to control the drug. Jute reached its speculative heights during the First World War when it was the raw material of choice for sacks used to package gunpowder. Cotton had its speculative apex during the American Civil War (1860–65). Dinshaw Wacha, a talented nineteenth-century Bombay journalist, has produced a classic account of the cotton boom of the American Civil War period which continues to attract attention.17
Motilal Jhunjhunwala was to dominate the silver market in a later period. His descendants and protégés are found among India’s leading businessmen. R.K. Dalmia, once among India’s three largest industrialists, got his start through association with his relative Jhunjhunwala. One descendant of Motilal has a memoir covering Motilal’s descendants who are now to be found all over the world, many of them in prosperous circumstances.18
The stock market was another focus for speculation. The Marwaris entered the stock market between 1860 and 1900. The Calcutta Stock Exchange was formally organized in 1850. In 1863, a list of
stockbrokers shows few Marwari names. By 1900, more than one-fourth of the stockbrokers in Calcutta were Marwaris. Babulal Gangaprasad Soni was founded in 1892 by Babulal Soni of Didwana in Jodhpur who had been a merchant in Mirzapur, but was already dealing in shares in Calcutta in 1872. His son-in-law, Magniram Bangur, arrived later and was a major figure in speculation on coal stocks between 1904 and 1908. Later, the Bangurs became a major industrial business group.
The stock market was closely interrelated with other markets. Many of the major jute shares increased three times in value between 1915 and 1921. The price of a seat on the Bombay Stock Exchange went up from Rs 2900 in 1914 to Rs 48,000 in 1921. The boom during the Second World War was more subdued but the fluctuations were great. Interestingly, while there is some written history of the First World War period in the share market, I am yet to find a good account of the Second World War period in India.
Speculative wealth does have a tendency to be evanescent. It is made in booms and lost in busts, but when the game of musical chairs ends there are always some people seated. Some successful speculators have been so habituated to speculation that their love of the game exceeds their capacity and they lose their stake. This certainly happened to Keshoram Poddar, also one of the first Marwaris to enter the jute industry along with G.D. Birla. Keshoram Poddar (1883–1945)—the grandson of Soniram Poddar, one of the early Marwari traders in Calcutta—specialized in the shares of several mills managed by McLeod and Company. He had started business as a teenager, as an underbroker to Mitsui, the leading Japanese firm in India. Next, he went into the umbrella business, always a good prospect in rainy Calcutta. Finally, he became a sugar broker, especially to Rallis. By 1909, Keshoram was already a prosperous merchant. When the First World War broke out, he became a leading stockbroker. He was one of a small group of Indian brokers allowed to directly deal in hessians and gunny bags with the big British firms. He started to import sugar and cement from Java. He developed close ties with several Japanese firms. He bought heavily into Calcutta real estate, especially blocks of luxury apartments for Europeans built over the last several decades by Jewish and Armenian businessmen. He went into the taxi business, ran ferries on inland waterways, bought a colliery and a flour mill, and loaned the capital to start the Hindi daily newspaper, the Vishwamitra. He dabbled in brick kilns, and was rumoured to be cornering the brick market. He bought a jute mill from Andrew Yule in 1918 for Rs 80 lakh. At his height, he was supposed to be worth Rs 3 crore, but his bookkeeping was rudimentary and his approach to business carefree. The reverses he suffered in the post–First World War period finished him.
Baldevdas Dudhwawala had an uncle who entered the stock market in 1880. He and his brother, Basantlal, started in the Calcutta stock market at the turn of the century. Baldevdas specialized in the Kamarhatty Jute Mills Company shares during the First World War period. Reportedly financed by British banks hugely, it is said that he earned Rs 50 crore a year in dividends alone on shares held by him.
Vishveshvarlal Halwasiya (1870–1925) and Hargovindrai Dalmiya, both from Bhiwani, owned the firm Vishveshvarlal Hargovind, an active speculator both in shares and gunny. Vishveshvarlal’s father was a jeweller in Hyderabad while his uncle had a leading firm in Lucknow and Calcutta. Hargovindrai’s father had established his firm in Calcutta in 1866. The firm Vishveshvarlal Hargovind was formed in 1890. When the firm was partitioned between the partners in 1921 each partner took away Rs 2.5 crore, an enormous sum in those days.
Historically, the greatest speculators sometimes played a critical role in industrial entrepreneurship. The wealthiest in many countries are people whose prime skill is the ability to play speculative markets and manage risk, be it Warren Buffett or George Soros.
Of the leading Marwari businessmen today no one has the public prominence of Rakesh Jhunjhuwala, the Indian Warren Buffett.
If tracing the details of large business group holdings is difficult, the reverse is the case with Rakesh Jhunjhunwala. Just like in the reclusive Warren Buffett’s case, Jhunjhunwala’s every investment is closely followed by the market and the public, and his results have been astounding. In the earlier years he was thought to be a bit of a bear but is now the pre-eminent bull in the market. Unlike Warren Buffett, he is flamboyant and a bon vivant. Interviewers report his endless cigars, swigging draughts of $400-a-bottle single malt Scotch whisky, his flashy cars, and frank and overtly sexual discourses which call for censoring. However, it should be noted that despite all the innuendos—Jhunjhunwala recently announced that a world-class Mumbai required world-class nightclubs—he is reportedly a devoted family man. Unlike Warren Buffett, his father was not a businessman (Buffett’s father was also a member of the US Congress and a leader of the far-right John Birch Society) but an income tax officer and a punter on the stock market who originally sparked Jhunjhunwala’s interest.
Jhunjhunwala’s public presence is underlined by the fact that he was the pre-eminent billionaire interviewed by the Financial Times for its ‘Billionaires Club’19 section in a recent weekend piece on India, was the subject of an entire blog entitled ‘The Fake Jhunjhunwala’ and was featured in several recent movies.
Though the stereotype of the Marwaris is certainly a puritanical one, there is no question that several of the great speculators of the past were reported to be bon vivants as well, indulging in liquor and prostitutes. So Jhunjhunwala is not an aberration in that respect. This is also the stereotype of speculators in London and New York and has been well documented in bestsellers like Michael Lewis’s The Big Short and Liar’s Poker or in fiction like Tom Wolfe’s Bonfire of the Vanities, to say nothing of a mass of popular and academic writing of a similar kind.
Why Were the Marwaris Successful before Independence?
My academic answers in 1978 (in The Marwaris, my earlier book) had to do with psychological disposition (depending on the business concerned different orientations served very well), social support networks and individual and historical factors. This was before ‘to network’ became a verb, but there were still a lot of commentators (dare I say pandits) who knew how to write ‘prose’20 and referred to networks in various ways. All of these are factors which resonate with the characteristics of the Marwari community, and are shared with other successful Indian business communities. Communities and castes with a history of involvement in business orient their children, traditionally their boys (and now frequently their girls), to the trade, applaud success and know how to help each other in business. It is for this reason that the psychological make-up of those who run businesses in crowded markets is often marked by ‘n-affiliation’ (a psychological orientation to work social networks, as politicians do), rather than ‘n-achievement’, which was posited as characterized by Schumpeterian entrepreneurs venturing into new fields (the psychological orientation to launch successful innovative enterprises).21 In a study of small engineering shop owners in Howrah, Raymond Owens demonstrated that members of the Mahisya caste, who were prominent among owners of shops, had high n-affiliation since their business success was dependent on networking with caste fellows. The other entrepreneurs who came from a wide variety of castes, usually upper-class ‘service castes’ (Brahmins, Kayasthas, Baidyas), had high n-achievement.
Marwaris from business families were expected to work in and expand their family firms if they had them, to work for others in such firms if they did not, and perhaps to start new firms of their own in due course. Unlike those from ‘service’ communities they were not expected to qualify in examinations and work for social and governmental institutions. Entrenched in tradition, as a lot of them were, young Marwaris did what was expected of them.
I find, from my experiences, research and travels in Rajasthan and India, that among the young Marwaris I met in 1970, often from humble families in their Rajasthan homeland, many have succeeded well in businesses in India and around the globe.
Everything in the environment of these young Marwari men a
ssisted them in being successful in business. They had a first-class support network constituted by their traditional family firms, business groups and the community. When they arrived in a new place, they found a basa, which provided boarding, lodging and society. Their friends and relatives were often already in business and could help them. Their families guided them in a manner to prepare them for their destined roles.
Because of their earlier positions in the market, Marwari firms found themselves particularly suited to avail opportunities brought about by British rule in the nineteenth century. They also had the benefit of a cultural orientation that directed them towards business. Now that the Marwaris of today can afford the best education and have access to the highest levels of professional advice, they are therefore even better equipped to start businesses.
This book attempts to determine to what extent these factors continue to play a role even today. Even though we might pay attention to their psychological orientation as a factor when explaining their success, support networks (especially those of the family firm, business group and business community) and specific historical circumstances are still important.
The Modernity of Tradition22
When I wrote my earlier book, The Marwaris, in the 1970s, there were many people who believed in the polarity of tradition and modernity. Tradition was seen as eternal, unchanging. Traditional Hindu traders, especially those who belonged to the Vallabhacharya Vaishnava and Jain sects (to which many Marwari and Gujarati traders adhere) were not expected to engage in modern economic activity successfully because of the weight of the business traditions they inherited. Max Weber, the great German sociologist, one of the fathers of sociology as an academic discipline, had written as much in Religion of India, and his influence was widespread. The concept that traditional Indian merchants were unsuited to modern industry was still current among ‘practical’ men though experience indicates otherwise. Of course, the ‘scribblers’ current among practical men are typically those of their youth when they were still open to what the world had to offer. As John Maynard Keynes, in The General Theory of Employment, Interest and Money, wrote: ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually slaves of some defunct economists. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back’.