How did a Managing Agency extract value

 

1. What a managing agency fee actually was

A managing agency (e.g., Duncan Brothers) was compensated through a bundle of rights, not a single transparent fee. Value extraction occurred through multiple contractual levers, many of which were asymmetric.

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2. Primary extraction channels (core economics)

A. Commission on gross turnover (not profits)

Typical structure

• 2.5%–10% of gross sales, regardless of profitability

Why this mattered

• Paid even in bad years

• Shifted risk entirely to shareholders

• Encouraged volume over margin

Effect

The agency got paid even when dividends were zero.

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B. Profit-linked commission (upside without downside)

Typical structure

• 10%–20% of net profits after a low hurdle

Asymmetry

• Agent shared upside

• Did not share losses

Effect

Shareholders absorbed volatility; agents skimmed peaks.

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3. Secondary extraction channels (often overlooked)

C. Control over procurement (related-party pricing)

The managing agent often:

• Purchased machinery

• Supplied stores

• Arranged coal, jute, packaging

These were frequently:

• Sourced from agent-affiliated firms

• Marked up legitimately but opaquely

Effect

Margin migrated from the tea company to the agency ecosystem.

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D. Shipping, insurance, and export commissions

Agents controlled:

• Freight booking

• Marine insurance

• London sales brokers

Each step generated:

• Brokerage

• Rebate

• Override commissions

Effect

Tea profits were “bled” along the logistics chain.

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E. Capital structuring fees

Managing agents:

• Floated new tea companies

• Issued shares and debentures

• Charged underwriting and placement fees

This occurred:

• At formation

• During expansions

• During distress recapitalisations

Effect

Value extraction intensified when companies were weakest.

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4. Governance asymmetry (the silent extractor)

F. Board dominance without proportional ownership

Managing agents typically:

• Held minority equity

• Controlled:

  • Board agendas

  • Information flow

  • Accounting presentation

Shareholders:

• Fragmented

• Overseas

• Passive

Effect

Control divorced from capital → weak checks.

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5. Inter-temporal extraction (long-term effect)

G. Underinvestment bias

Because agents earned on:

• Turnover

• Short-term profits

They were less incentivised to:

• Replant aggressively

• Modernise labour housing

• Absorb long-gestation costs

Effect

Estates aged faster; capital base eroded.

This explains why many estates:

• Looked profitable on paper

• Were structurally fragile underneath

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6. Why shareholders tolerated it (important)

This system persisted because:

1. Early returns were excellent
   Tea dividends in good years were very high.

2. Information asymmetry
   Assam/Dooars were remote; agents were trusted professionals.

3. No alternative managerial class
   Professional management did not yet exist.

4. Imperial legal comfort
   Contracts were enforceable in London courts.

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7. Why independent India abolished managing agencies

By the 1950s–60s, the model was seen as:

• Extractive

• Anti-minority-shareholder

• Anti-capital-formation

• Incompatible with modern corporate governance

This led to abolition under Indian company law reforms (1969–70).

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8. One-page mental model

Shareholders (Capital)
        │
        ▼
Tea Company (Asset)
        │
        ▼
Managing Agent (Control)
   ├─ Sales commission
   ├─ Profit commission
   ├─ Procurement margins
   ├─ Shipping & insurance fees
   └─ Capital market fees

Value leaked at every junction before reaching shareholders.