The Economic History of the Corporate Form in Ancient India

Abstract

The corporation is the most popular form of business organization. Moreover, as the economies of emerging markets leap forward the popularity of the corporate form continues to grow. In light of its widespread appeal, one is naturally inclined to inquire more about the corporation and how it developed over time. Many questions can be pondered including: where did the corporate form originate; how old is it; has the corporation taken the same form everywhere or have there been local variations; and what are the pre-conditions for the development of the corporate form. All these questions are important not only for their own intrinsic value, but also because of the insights they provide about the development of the corporate sector in emerging markets and about the prospects for convergence, of one kind or another, in corporate governance. Indeed, a series of important papers by Henry Hansmann & Reinier Kraakman and other authors examine these questions both in Rome and in Medieval Europe. The aim of this paper is to explore a number of these questions by examining the economic history and development of the corporate form in Ancient India. The paper finds considerable evidence that urges us toward a significant revision of the history and development of the corporate form.

The examination reveals that business people on the Indian subcontinent utilized the corporate form from a very early period. The corporate form (e.g., the sreni) was being used in India from at least 800 B.C., and perhaps even earlier, and was in more or less continuous use since then until the advent of the Islamic invasions around 1000 A.D. This provides evidence for the use of the corporate form centuries before the earliest Roman proto-corporations. In fact, the use of the sreni in Ancient India was widespread including virtually every kind of business, political and municipal activity. Moreover, when we examine how these entities were structured, governed and regulated we find that they bear many similarities to corporations and, indeed, to modern US corporations. The familiar concerns of agency costs and incentive effects are both present and addressed in quite similar ways as are many other aspects of the law regulating business entities. Further, examining the historical development of the sreni indicates that the factors leading to the growth of this corporate form are consistent with those put forward for the growth of organizational entities in Europe. These factors include increasing trade, methods to contain agency costs, and methods to patrol the boundaries between the assets of the sreni and those of its members (i.e., to facilitate asset partitioning and reduce creditor information costs). Finally, examination of the development of the sreni in Ancient India sheds light on the importance of state structure for the growth of trade and the corporate form as well as on prospects for some kind of convergence in corporate governance.