By 1773, East India Company of Britain was facing terrible financial straits. The company had a great significance to Britain as it was doing monopoly business in India and east and many influential people of Britain were attached with the company as shareholders. The company paid four hundred thousand pounds annually to British Government so that their monopoly was maintained. But the time came when the company was unable to meet its commitments to the government because of the loss of tea sales to America since the year 1768. About eighty five percent of the tea sold to America was smuggled tea from Holland. The East India Company owed money both to the Government and Bank of England. Fifteen million lbs of tea was being wasted in the British warehouse and more tea was on the way from India. There were also some other reasons behind the decision of undertaking Regulating Act of 1773.
The conditions that persisted on the region of Bengal, Bihar and Orissa reflected the irresponsibility of the East India Company since it acquired the Diwani and the Nizamat. After these incidences British Parliament was convinced of the incompetence of the Company in any given circumstances and settled to undertake the Regulating Act.
The conditions can be narrated in a more detailed way-
After the battles of Plassey (1757) and Buxar (1764 ), Company won over Diwani and Nizamat and established its military domination in Bengal, Bihar and Orissa. These areas were acquired without any proper law for the greed for wealth of Company`s employees. The company`s servants were totally corrupted and exploited the common people so that they could gather much wealth in order to return quickly to England. After returning to England the Employees of East India Company took part in politics and bought the seats in the House of Commons with the huge wealth they had accumulated in India. They also purchased the share of the company and tried to become influential in political world. This uncouth display of wealth caused them to earn the nickname `Nabobs`.
The British Rulers realized that East India Company was gradually becoming the source of political and territorial power instead of being a mere commercial farm. The British politicians understood that it should not be wise to leave the East India Company beyond any Parliamentary control. It was becoming more dangerous as the members of the Company had no training or experience in handling Politics as they were specialized in commerce. This was supported by the mess they created in the Bengal and its surrounding region. Thus public opinion in England was in the favor of interference of British Parliament in company`s affair.
As a consequence of this corruption, company`s servants were getting more affluent while East India Company itself was suffering from monitory loss. The directors of the Company voted for increased profits to shareholders but the Company had to borrow a loan from the British Parliament to meet the increasing demand for Company shares. The company was already committed to pay the British Treasury four hundred thousand pounds annually as `Share in the Indian Spoil`. The incidence of Bengal famine and other things already reached the British Parliament and granting the loan was difficult without supporting the requirement of the loan with proper reason.
The House of Commons appointed a Select Committee and a Secret Committee to investigate and report the deficiencies in the Management of East Indian Company in the Indian region. The report was condemning in all the aspects and it became obvious that company could no longer be an independent body and must be subdued to the parliament.
Lord North decided to overtake the management of the East India Company with the Regulating Act. This was the first incidence of British Government interference in India. The Act set up such a system that the Government supervised or regulated East India Company but did not undertake the whole power.
The East India Company was basically a trading farm that made business over a vast area of India but also maintained an army to protect its interests. North decided to start Governmental control, as East India Company had no experience in ruling and it conquered few areas. East India Company had a very powerful lobby in Parliament in spite of the financial crises of the Company. The Shareholders along with this lobby of Parliament opposed the act.
However, British Parliament passed the Regulating act of 1773. The Government AT Calcutta was reorganized and Supreme Court was established in Calcutta. The Regulating Act of 1773 was the first instance where Parliamentary Acts deviated from its royal charters. The Regulating Act, 1773 might have various defects but it was the turning point in the Constitutional history of India as it protested against the putrefaction of East India Company.
The Regulating Act, 1773 said that:
The Government of the presidency of Fort William in Bengal should have a Governor General and a Council, which consists of four Councilors with the general democratic rule that the Governor General would consider decision of the majority of the Councilors.
Warren Hastings shall be the first Governor General and Lt. General John Clavering, George Monson, Richard Barwell and Philip Francis shall be the first four Councilors.
His Majesty shall establish a supreme court of judiciary, which would have a Chief Justice and three subordinate judges at Fort William. The Court`s jurisdiction shall be applied to all British subjects residing in the subdivision of Bengal and to their native servants.
The Company shall pay the salaries to the designated persons out of its revenue in the rate of : the Governor General twenty five thousand sterling, Councilors ten thousand sterling each, Chief justice eight thousand sterling and the judges six thousand sterling a year.
The fifth, sixth and seventh sections of the act state that:
The Governor General, Councilors, Judges, Persons from military and civil establishments, collectors and other district officials are refrained from taking gifts, present or reward and any monetary advantages from the Indian kings, princes, zamindars or any other native subjects.
The provision of the Regulating Act of 1773 clearly indicates that it was enacted to stop the malpractice of law and to control corruption among Company officials. However, it failed to stop the corruption and degeneracy became a common practice for all officials, from the top level to the lowest subordinate. The major charges were brought against the first Governor General, Warren Hastings and he was impeached in the trial for corruption. Infact the whole council was divided into two factions based on the corruptions- the Hastings Group and the Francis Group. They fought against each other on the issues of corruption charges alleged on them. Consequently, Pitt`s India act, 1784 was passed to prevent corruption and an uncorrupted person, Lord Cornwallis, was appointed in order to bring a corruption free environment in the company.