The official version (which I have reported in my book on Ravi Matthai- IIMA) is that Bombay University dragged its feet over the idea as it not comfortable with an autonomous institution within its fold. Vikram Sarabhai, with the backing of industrialists in Ahmedabad, used his clout in government to claim the IIM for Ahmedabad.
In his memoirs (A book of memory), well-known pscyho-analyst Sudhir Kakar has a different story to tell. He contends that Sarabhai got an IIM created in Ahmedabad primarily in order to retain Kamla Chowdhry, an academic then working at ATIRA, with whom Sarabhai had a long and intimate relationship. (Chowdhry happened to be Kakar's aunt).
Chowdhry, Kakar says, began to get uncomfortable in the triangle that had Sarabhai and Mrinalini at the other two ends. She began to toy with the idea of accepting an offer from DCM in Delhi which was similar to the work she was doing at ATIRA. Sarabhai "used every means at his disposal to persuade her to stay back in Ahmedabad". He dangled the prospect of a directorship of a research centre on group dynamics, funded by an American foundation.
This didn't work out and three years later, Chowdhry envisaged a move to ASCI in Hyderabad or to Bombay University. This time, Sarabhai offered her a chance to work with a branch of UK's Tavistock Institute in Ahmedabad. This too did not happen.
Finally, as Kakar puts it, "To keep Kamla in Ahmedabad, Vikram Sarabhai successfully lobbied the Indian government to locate one of the two postgraduate institutions of management ....... in Ahmedabad rather than Bombay." Not only that, since Sarabhai and Chowdhry both had connections with Harvard, the original collaborator with IIMA, the University of California, came to be replaced by Harvard.
Kakar bases his narrative on the private papers of Chowdhry. The conclusion he draws is illuminating:
"The letters (from Sarabhai to Chowdhry) are also cautionary for any historian who still believes that decision-making in institutions, whether private or those of the state, is independent of the personality and the emotional needs of the actors, that the public record is sufficient to fully explain the course of a historical event......the location of the IIM at Ahmedabad rather than in Bombay and its collaboration with the Harvard Business School.... had as much to do with the demands of the relationship between Vikram and Kamla (if not more) as with the rational deliberations captured by the public record."