Industrial Banks and Special Financial Institutions

The last three chapters have revealed the gaps and deficiencies in the existing system of industrial finance. While some of the defects are undoubtedly capable of being remedied within the framework of the existing banking and financial structure there are others which may need more radical solution or require the establishment of special machinery to remove them. Before examining the possible lines of reform, it is necessary to re-state the essential elements of the problem of industrial finance as it reveals itself in Indian conditions. Apart from the defects in the existing system of deposit banking, the most serious handicap to industry at the present time is the absence of some agency or institution of an organized character which would do for Indian industry what the issue houses and trust and financial companies do for England or what the German banks do for Germany. Industry lacks the assistance of an institution which would help in the formation of the industrial company, and in placing its shares and other securities on the market. Until now this service has been done in varying degrees of efficiency by the managing agents in India, who were able to obtain the additional capital which they needed from parties associated with them by business or personal relations. Owing to a series of adverse circumstances the managing agency system has, especially in western India, and more particularly in the Indian section of it, greatly diminished in prestige and popularity, and will not be in a position to perform this function efficiently. No longer is the name of an Indian managing agent either a guarantee of the soundness of the venture or an inducement to the investor to put his capital into the concern. The investor all over the world is getting increasingly nervous of direct investment in industrial undertakings. As has been pointed out, “owing to the rapidity of post-war industrial and economic changes, owing to the rapid growth of a multitude of minor miscellaneous industries, owing to the losses incurred in previous years, the public is less willing to invest directly in industrial undertakings by the purchase of shares or lend to such undertakings in exchange for bonds.” 1 This apathy on the part of the investor, although to some extent the result of the depression in industries in recent times, is likely to remain more or less permanent. 2 The only way of overcoming this natural, and in the circumstances justifiable, shyness is to establish an intermediary between him and the industry, who will be able by his expert knowledge and financial strength to inspire the confidence of the investor in the ultimate success of the concern whose shares he seeks to place on the market. Such an intermediary must also be in a position to underwrite the shares in the first instance, so that the industrial company may not have to wait for the public subscription. The need for the underwriting of industrial securities arises from the inevitable delay to the industrial company which direct appeal to the investing public will involve and the trouble and expense which will have to be incurred in direct sale. Underwriting not only insures the company against the risk of the failure of a public issue, but enables it to get the most valuable advice from an expert agent who generally has great experience of the investing public, and the conditions of the market for securities. Further, in India after the unfortunate experience of the public with the large number of fraudulent promotions in 1920–2, it is doubtful if even legitimate and sound promotions will ever be able to enthuse the investing public by appealing to it directly. An industrial company can assure itself of capital in right quantities and at the right time only if there is a guarantor who can relieve the concern of the financial burden and release its energies for industrial work.