Item # 3 SEMINAR IN LAW AND ECONOMICS Professors Louis Kaplow & Steven Shavell Tuesday, February 21 Pound 201, 4:45 p.m. “The Economic History of the Corporate Form in Ancient India” Vikramaditya Khanna THE ECONOMIC HISTORY OF THE CORPORATE FORM IN ANCIENT INDIA By: Vikramaditya Khanna∗ 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 around 800 B.C. 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 its growth 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 or entity shielding and reduce creditor information costs). Finally, examining 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. ∗ Professor of Law, University of Michigan Law School. Email: [email protected] or [email protected]. THE ECONOMIC HISTORY OF THE CORPORATE FORM IN ANCIENT INDIA BY: VIKRAMADITYA KHANNA TABLE OF CONTENTS I. INTRODUCTION 1 II. WHAT IS A CORPORATION AND WHAT ENCOURAGES ITS GROWTH? 2 A. Corporations and Business Organizations. 2 B. Factors Leading to the Growth of Corporate Entities and Business Organizations. 3 III. THE ANCIENT INDIAN FORMS OF BUSINESS ORGANIZATION 6 A. Precursors to the Corporate Form in Ancient India 6 B. Economic Entities in Ancient India – Sreni 8 1. Separate Legal Entity & General Prevalence 9 2. Structure 10 3. Internal Governance 11 4. Formation 14 5. The Accumulation, Use, and Division of Funds. 17 6. Other Roles of the Sreni 19 C. Political and Municipal Entities in Ancient India 21 1. Political Nature of State 21 a. Vairajya – the kingless state. 21 b. The elected king states. 22 c. The simple monarchies. 22 2. Municipal or Political Corporation. 22 IV. THE DEVELOPMENT OF THE CORPORATE FORM IN ANCIENT INDIA 27 A. Earliest Civilizations in the Indian Subcontinent and the Origin of the Sreni 29 1. Earliest Sites – Mehrgarh 29 2. The Indus Area Civilizations 30 3. The Indo-Gangetic Civilizations 33 B. The Rise of Buddhism & Jainism. 34 C. The Mauryan Dynasty 35 D. Post-Mauryan Kingdoms in North and South India 41 E. The Gupta Dynasty & India’s “Golden Age” 45 F. Post-Gupta & Harsha Vardhana 48 G. Summary & Commentary 50 V. CONCLUSION 54 TABLES & FIGURES TABLE 1: SUMMARY OF CHARACTERISTICS OF THE SRENI 26 TABLE 2: ANCIENT INDIAN HISTORY TIMELINE 28 Figure 1: Map of Early World Civilizations 31 Figure 2: Detailed Map of Indus Valley Sites 31 Figure 3: Map of Mauryan India 36 Figure 4: Map of Gupta India 45 …..] Khanna, The Economic History of the Corporate Form in Ancient India, Draft, 1 THE ECONOMIC HISTORY OF THE CORPORATE FORM IN ANCIENT INDIA By: Vikramaditya Khanna∗ © Vikramaditya Khanna. All rights reserved. I. INTRODUCTION The corporation is the most popular form of business organization.1 Moreover, as the economies of emerging markets leap forward the popularity of the corporate form continues to grow.2 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.3 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 around 800 B.C. 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 ∗ Professor of Law, University of Michigan Law School. Email: [email protected] or [email protected]. My thanks to Reuven Avi-Yonah, Bruce Frier, Henry Hansmann, Nicholas Howson, Reinier Kraakman, Jonathan Macey, Adam Pritchard, Roberta Romano, Henry E. Smith, Henry Wright and participants at the Informal Lecture, Yale Law School Center for the Study of Corporate Law; Legal Theory Workshop, University of Michigan Law School; ____ for helpful discussions, comments, and suggestions and to Chris Zealand and Doug Chartier for excellent research assistance. 1 See ROBERT C. CLARK, CORPORATE LAW 1 (1986). 2 See generally John W. Cioffi, A Review Essay on Comparative Corporate Governance: The State of the Art and Emerging Research, 48 AM. J. COMP. L. 501 (2000); Leora F. Klapper & Inessa Love, Corporate Governance, Investor Protection and Performance in Emerging Markets, 10 J. CORP. FIN. 703 (2004); Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, Law and Finance, 106 J. POL. ECON.1113 (1998); Stilpon Nestor, The Corporate Governance Crisis: An Opportunity for Emerging Markets Corporations?, 21 INT’L FIN. L. REV. 11 (2002). 3 See Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J. 387 (2000); Henry Hansmann, Reinier Kraakman & Richard Squire, Law & The Rise of the Firm, forthcoming HARV. L. REV. (2006). …..] Khanna, The Economic History of the Corporate Form in Ancient India, Draft, 2 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 its growth 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 or entity shielding and reduce creditor information costs). Moreover, specific attributes of the sreni grew to meet demands raised by changing business conditions. Finally, examining the development of the sreni sheds light on the importance of state structure for the growth of trade and the corporate form. Ancient India appears to have gone through times of widely decentralized political states, a strongly centralized political state, and points in between. Examining the conditions under which trade flourished, albeit to differing degrees, in these varied state structures provides important insights for understanding the growth of the corporate form then and, perhaps, even now.