This article presents a case study of defactorisation of production in a traditional industry–beedi rolling–in colonial South India. It examines the implementation of the Indian Factories Act and its subsequent impact on Malabar’s beedi industry during 1937–1941, focusing on the interaction between state, capital and labour within the framework of British India’s labour-legal history. Despite resistance from their workers, beedi manufacturers circumvented the provisions of the Factories Act by fragmenting the factory production space. Contrary to the intentions of the state and the workers, both the Act and the ensuing trade union agitations only served to promote the fragmentation of production units and exacerbate the exploitation of workers. The study argues that while union mobilisation raised the political consciousness of the beedi working class, it did not significantly improve wages or working conditions in the long term. © 2020 Informa UK Limited, trading as Taylor & Francis Group.