Final Results

RNS Number : 2202U

India Capital Growth Fund Limited

28 March 2019

 

INDIA CAPITAL GROWTH FUND LIMITED

Annual Results for the year ended 31 December 2018

28 March 2019, London - India Capital Growth Fund ("ICGF" or "the Company"), the LSE premium listed investment company established to take advantage of long term investment opportunities in companies based in India, today reports results for the year ended 31 December 2018.

Highlights

	31 Dec 2018	31 Dec 2017	% change
Per Ordinary Share
Net Asset Value (NAV)	101.65p	127.05p	-20.0%
Share price discount to NAV	14.0%	8.3%
FX impact
Indian Rupee / Sterling	88.55	86.07	-2.9%

·     2018 was a difficult year for Indian equity markets and for Indian small and mid-cap stocks in particular       

·     The NAV declined by 20% during the year, underperforming the Company's benchmark, the BSE Midcap TR Index which fell 15%         

·     Positive contributions to the portfolio came from NIIT Technology (+80.2%), Tech Mahindra (+46.7%), Divis Laboratories (+36.0%), Radico Khaitan (+36.6%)

·     Portfolio turned over 9% (2017: 13%) during the year

Indian investment environment

·     Macroeconomic environment: the falling value of the Indian rupee magnified the impact of rising oil prices    

·     Banking headwinds: higher interest rates compounded a draconian approach to the recognition of non-performing loans (NPLs) and curbs on incremental lending (particularly by public sector banks) 

·     Long Term Capital Gains Tax introduced in early 2018. Future investment long term gains (for holdings longer than 12 months) will be taxed at 10%   

·     India gears up for the General Election in May 2019: result either way unlikely to de-rail positive structural changes made by Modi's Government

·     Corporate earnings growth continues at a strong pace which, combined with lower valuations, creates a positive environment for investors

Elisabeth Scott, Chairman of India Capital Growth Fund, said: "After the decline in the Indian equity market in 2018, valuations have fallen to attractive levels. Recent data suggests that the economy is gaining momentum once again. However, it is likely that the market will continue to be unpredictable until the results of the Indian General Election are known. A more stable oil price has removed some of the pressure on the rupee and on inflation, allowing the Reserve Bank of India to be more accommodating with interest rates. Corporate earnings growth continues at a strong pace which, combined with the lower valuations, creates a positive environment for investors. These factors, combined with the Investment Manager's investment process, places India Capital Growth Fund in a good position for the coming year."

David Cornell, Fund Manager of India Capital Growth Fund, added: "One of the challenges of investing in Emerging Markets is the speed at which things change. India is no exception. In 2017 the country was in vogue, but 2018 saw tailwinds become headwinds with uncertainty and volatility dominating investor sentiment. After a period of strong returns across the whole market, 2018 was notable for the sharp divergence between large cap stocks and others. The BSE Sensex index (the thirty largest Indian companies) was up 7.2% in rupees, while the BSE Mid Cap Index was down 12.6% and the Small Cap Index fell 22.9%. The Mid Cap Index had outperformed the Sensex over the previous four years. We are confident the strength and depth of the investment process will leave the portfolio well positioned for the long run, regardless of shifts in sentiment that occur along the way."

ENQUIRIES

David Harris

Frostrow Capital

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[e-mail]

William Clutterbuck

MaitlandAMO PR

[phone]

[e-mail]

David Cornell

Ocean Dial Asset Management

[phone]

[e-mail]

Robert Finlay

Stockdale Securities

[phone]

[e-mail]

Stephen Cuddihee

Apex Fund Services

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[e-mail]

About India Capital Growth Fund

India Capital Growth Fund Limited ("ICGF"), the LSE premium listed investment company registered and incorporated in Guernsey was established to take advantage of long term investment opportunities in companies based in India. ICGF predominantly invests in listed mid and small cap companies, although investments may also be made in large cap Indian companies where the Fund Manager believes long-term capital appreciation will be achieved. www.indiacapitalgrowth.com

CHAIRMAN'S STATEMENT 

Performance and review

2018 was a difficult year for Indian equity markets, and for Indian small and mid-cap stocks in particular.  As a consequence, the Net Asset Value of the Company's shares declined by 20% during the year, underperforming the Company's benchmark, the BSE Midcap TR Index (Total Return), which fell 15%.  The Company's share price fell 24.9% over the period, with the discount to Net Asset Value widening from 8.3% at the beginning of 2018 to 14.0% at the year end. While the underperformance is disappointing, over longer periods the Company has delivered positive returns, although behind benchmark, over three and five years and continues to outperform its peer group of other similar Indian equity funds over the longer term.

After a period of improving economic growth, the macroeconomic environment was less investor friendly in 2018 than in previous years. The falling value of the Indian rupee magnified the impact of rising oil prices, interest rates increased, and bank lending slowed following a default by finance company, IL&FS.   The internationally respected Governor of the Reserve Bank of India, Dr Urjit Patel, resigned, leading to concerns about political interference. Confidence in the financial sector was dented and this has had an impact on holdings in the Company's portfolio. As often happens when the economic situation looks like it is deteriorating, the small and mid-cap sector underperformed large cap companies regardless of the health of the underlying small and mid-cap companies. The Investment Manager's Report gives detailed information about the economic situation in India, the performance of the Company's portfolio and the investee company holdings. 

Long Term Capital Gains Tax was introduced in early 2018. It did not have an effect on Net Asset Value in the year, but it does mean that in future investment long term gains (for holdings longer than 12 months) will be taxed at 10%. 

Investor relations and greater visibility

Despite the challenges of 2018, and while the Company's discount widened, it remained in line with that of the other Investment Companies investing in India and other emerging markets. We are taking action on several fronts to make sure India Capital Growth is firmly in the sights of existing and potential investors, and those who influence them. 

Frostrow Capital was appointed in March 2018 to market the Company to investors more widely across the UK, and, with their help, the fund adviser and other representatives of Ocean Dial have conducted 158 meetings in 18 cities across the United Kingdom and Ireland. As a consequence, the Company's shareholder register has seen a slight shift towards self-directed investors, retail investment platforms and wealth managers. We welcome this evidence of increasing investor interest in India. In support of the efforts to widen the Company's shareholder base, the Company appointed MaitlandAMO PR to raise its profile across the national and trade press.

The Company's website has been upgraded to provide shareholders and others with easy access to information about the Company. Also available are case studies and videos about investee companies and up to date views about India.

Your Board believes that these efforts to grow the Company will benefit all shareholders. Growing the Company's total value should make the Company attractive to a wider range of investors by improving secondary market liquidity and by enabling the Company's fixed expenses to be spread over a larger asset base.

Board matters

I visited the Investment Manager's offices in Mumbai in May 2018, meeting the research team and senior managers of the Investment Manager's parent company, Avendus. I also accompanied the Fund Adviser on a number of visits to investee companies in Mumbai and in Delhi. In March 2019, the whole Board visited the Investment Manager's offices in Mumbai in order to undertake a review of the Investment Manager's business there. We were impressed by the quality of the Investment Adviser's relationships with the management of these companies, and the deep understanding not just of the companies' businesses but of the industry and competitive environment in which they operate.

Outlook

After the decline in the Indian equity market in 2018, valuations have fallen to attractive levels. Recent data suggests that the economy is gaining momentum once again. However, it is likely that the market will continue to be relatively volatile until the results of the Indian General Election are known. Since the end of 2018 there has been much concern about the fractious relationship between India and Pakistan over Kashmir. A degree of calm has been restored, but border conflict continues to be a concern. 

As you will read in the Investment Manager's Report, there are many reasons to be optimistic about India's equity market in the longer term. A more stable oil price has removed some of the pressure on the currency and on inflation, allowing the Reserve Bank of India to be more accommodating with interest rates. Corporate earnings growth continues at a strong pace which, combined with the lower valuations, creates a positive environment for investors. 

These factors, combined with the Investment Manager's investment process, places India Capital Growth Fund in a good position for the coming year.

Elisabeth Scott

Chairman

28 March 2019

INVESTMENT POLICY

The Company's investment objective is to provide long-term capital appreciation by investing in companies based in India. The investment policy permits the Company to make investments in a range of Indian equity and equity linked securities and predominantly in listed mid and small cap Indian companies with a smaller proportion in unlisted Indian companies. Investment may also be made in large-cap listed Indian companies and in companies incorporated outside India which have significant operations or markets in India. While the principal focus is on investment in listed equity securities or equity linked securities, the Company has the flexibility to invest in bonds (including non-investment grade bonds), convertibles and other types of securities. The Company may, for the purposes of hedging and investing, use derivative instruments such as financial futures, options and warrants. The Company may, from time to time, use borrowings to provide short-term liquidity and, if the Directors deem it prudent, for longer term purposes. The Directors intend to restrict borrowings on a longer term basis to a maximum amount equal to 25% of the net assets of the Company at the time of the drawdown. It is the Company's current policy not to hedge the exposure to the Indian Rupee.

The portfolio concentration ranges between 30 and 40 stocks; however, to the extent the Company grows, the number of stocks held may increase over time. The Company is subject to the following investment limitations: No more than 10% of Total Assets may be invested in the securities of any one Issuer or invested in listed closed-ended funds.

INVESTMENT MANAGER'S REPORT

One of the challenges of investing in Emerging Markets is the speed at which things change. India is no exception. In 2017 the country was in vogue, but 2018 saw tailwinds become headwinds with uncertainty and volatility dominating investor sentiment.

As long-term investors in small and midcap companies in a growing economy we have seen these shifts in sentiment in the past.  We know there will be more in the future.  What is important is to cut through the noise and calmly assess how the macro environment is affecting the opportunities we see, in terms of profitability and valuation.

After a period of strong returns across the whole market, 2018 was notable for the sharp divergence between large cap stocks and others. The BSE Sensex TR Index (the thirty largest Indian companies) was up 7.2% in Rupees, while the BSE Mid Cap TR Index was down 12.6% and the Small Cap Index fell 22.9%. The Mid Cap Index had outperformed the Sensex over the previous four years. Added to this, the Rupee depreciated 9.2% against the dollar and 2.9% against sterling. 2018 was the first year of net Foreign Institutional Investor (FII) outflows from Indian equities since 2011 with US$4.6bn going out compared to the previous year which saw net inflows of US$8bn.

The main drivers of the deterioration in performance and sentiment in 2018 were threefold:  rising oil prices, tightening liquidity, and greater political uncertainty.

India imports 70% of its oil, and a 36% spike in Brent Crude from March to October 2018 was reflected in a worsening current account deficit (CAD) from 1.1% to 2.9% of GDP, currency depreciation, and fears of a return to petroleum subsidies and their consequential impact on the deficit. Alongside this the Reserve Bank of India (RBI) raised rates by 50bps in anticipation of higher inflation. These higher interest rates were compounded by a draconian approach to the recognition of non-performing loans (NPLs) in the banking sector as well curbs on incremental lending (particularly by public sector banks) not backed by adequate capital. A final flourish was the default of an AAA-rated quasi-sovereign lending company called IL&FS in September.  This caused temporary systemic panic. While this was diffused swiftly, it brought to the fore long held concerns over the sustainability of credit in a capital constrained economy. Public disagreement between the central bank and the Government over how to manage the situation climaxed with the resignation of the RBI Governor, Urjit Patel in December. Liquidity remains tight as many businesses are finding it difficult to refinance.  The new RBI head, Shaktikanta Das, has started with a more accommodative approach, addressing the Government's and wider industry's concerns.  More on this later.

The ruling BJP's lacklustre performance in state elections through the year didn't help equity markets. This reflected the party's lower popularity following disruption from landmark reforms such as the introduction of a Goods and Services Tax, the Insolvency and Bankruptcy Code and the Real Estate Act. This has broadened the range of potential outcomes of the General Election which is taking place in April and May 2019.  We expect news flow to be increasingly dominated by electioneering for the first half of the year. Trying to forecast the election result is a dangerous exercise but history shows that India grows in spite of politics, not because of its politicians. While we have been encouraged by the current administration, India's democratic process seems to be empowering an electorate that expects to see improving transparency and accountability, regardless of which party is in power.

In the short run, a correction in the oil price and a more dovish US Federal Reserve has bought breathing space for Indian policy makers.  But last year's events are not without repercussions.  The oil price spike will hit the margins of companies grappling with commodity and currency volatility in the short term. That said, we believe an economic turnaround is underway and this has coincided with lower valuations across many parts of our investable universe - mid and small cap companies.

Despite the IL&FS default there has been improvement in asset quality which suggests that the banking system is getting into better shape to lend. We have a benign inflationary environment (Consumer Price Inflation was at a record low of 2.2% in December and continues to fall), and a correspondingly more accommodative monetary policy (the RBI cut rates by 25bps in February 2019 and altered its policy stance from calibrated tightening to neutral) should provide further impetus to investment growth. Indeed, credit demand growth has increased to 15% from 8% a year ago. Capacity utilisation in the economy, which was 72% in September 2017, is now closer to 75%, a four-year high.  This augurs well for a pickup in the private sector capex cycle:

Our outlook on economic activity in India differs from the market view. The Mid Cap and Small Cap indices have fallen 23% and 35% respectively from their peaks (December 2017) and valuations are much more reasonable. As this happened, the team sat tight and avoided the temptation of activity for activity's sake and this was reflected by a low 9% turnover in the portfolio for 2018. While it is disappointing to deliver negative returns over the year (see the following section on Portfolio Performance), our investment horizon is longer. The fall in the Small and Mid Cap market has been indiscriminate, and as the dust is still settling it is revealing attractively priced opportunities in companies that fit our quality and corporate governance expectations. We will be looking to exploit these opportunities through the period of likely higher volatility in the run up to the General Election.  We are confident the strength and depth of the investment process will leave the portfolio well positioned for the long run, regardless of shifts in sentiment that occur along the way.

Portfolio performance

The portfolio was down 20.0%, underperforming BSE Mid Cap TR index by 5.0%.  During the year, apart from IT and Healthcare, all sectors contributed negatively to the performance.

Positive contribution came from NIIT Technology (+80.2%), Tech Mahindra (+46.7%), Divis Laboratories (+36.0%), Radico Khaitan (+36.6%), City Union Bank (+19.5%) and Berger Paints (+21.3%). Negative contribution came from Skipper (-67.4%), Ramkrishna Forgings (-37.4%), Manpasand Beverages (-79.6%) and Motherson Sumi Systems (-33.5%). Overall, nine stocks delivered positive returns in 2018 while the rest had negative returns.

During the year we added one new holding and exited three. We did however make several changes to the weights of individual stocks, mainly adding to some existing stocks on the back of attractive valuations after sharp price falls. These include BLS International, J&K Bank, JK Lakshmi Cement, Kajaria Ceramics, Manpasand, Skipper and Yes Bank. We also top sliced some of the stocks including Dewan Housing, Sobha Developers, Ramkrishna Forgings and Finolex Cables. Turnover for the fund was 9% compared to 11% in 2017.

Portfolio additions and exits

Companies added	Sector	Companies exited		Sector
Aurobindo Pharma	Healthcare	Dish TV		Consumer Discretionary
		Goodluck India		Materials
		Matrimony.com		IT

Top 20 portfolio investments

Holding	Sector	Value £000	% of Company NAV
Tech Mahindra	IT	5,308	4.6%
Federal Bank	Financials	5,265	4.6%
Jyothy Laboratories	Consumer staples	5,036	4.4%
City Union Bank	Financials	5,016	4.4%
Kajaria Ceramics	Industrials	4,267	3.7%
Motherson Sumi Systems	Consumer discretionary	4,180	3.7%
NIIT Technologies	IT	4,153	3.6%
Divi's Laboratories	Healthcare	4,104	3.6%
Ramkrishna Forgings	Materials	4,014	3.5%
PI Industries	Materials	3,701	3.2%
Exide Industries	Consumer discretionary	3,678	3.2%
Berger Paints India	Materials	3,656	3.2%
Radico Khaitan	Consumer staples	3,491	3.1%
Aurobindo Pharma	Healthcare	3,476	3.0%
Indusind Bank	Financials	3,432	3.0%
IDFC Bank	Financials	3,402	3.0%
Welspun India	Consumer discretionary	3,377	3.0%
Sobha Developers	Real estate	3,136	2.7%
Balkrishna Industries	Consumer discretionary	2,791	2.4%
Sagar Cements	Materials	2,547	2.2%

Brexit impact

The Investment Manager believes that whatever the outcome of the current Brexit negotiations, it will have little or no impact upon the Company and its performance as it is a non-EU investment company incorporated in Guernsey, investing in the securities of companies in India.

Ocean Dial Asset Management

28 March 2019

PRINCIPAL GROUP INVESTMENTS

AS AT 31 DECEMBER 2018

Holding	Market cap size	Nominal		Value £000		% of Company NAV
Listed securities
Consumer discretionary
Balkrishna Industries	M	267,517		2,791		2.4%
Exide Industries	M	1,215,336		3,678		3.2%
Kitex Garments	S	700,000		879		0.8%
Motherson Sumi Systems	L	2,218,110		4,180		3.7%
Welspun India	S	5,000,000		3,377		3.0%
				14,905		13.1%
Consumer staples
Emami	M	390,000		1,850		1.6%
Jyothy Laboratories	S	2,086,710		5,036		4.4%
Manpasand Beverages	S	1,386,000		1,391		1.2%
Radico Khaitan	S	772,000		3,491		3.1%
				11,768		10.3%
Financials
City Union Bank	M	2,277,000		5,016		4.4%
Dewan Housing Finance	S	510,000		1,436		1.3%
Indian Bank	S	754,400		2,075		1.8%
IDFC Bank	S	6,950,000		3,402		3.0%
Indusind Bank	L	190,000		3,432		3.0%
Jammu & Kashmir Bank	S	4,600,000		1,958		1.7%
Federal Bank	M	5,000,000		5,265		4.6%
Yes Bank	M	1,125,000		2,310		2.0%
				24,894		21.8%
Healthcare
Aurobindo Pharma	M	420,000		3,476		3.0%
Divi's Laboratories	M	245,100		4,104		3.6%
Neuland Laboratories	S	148,000		766		0.7%
				8,346		7.3%
Industrials
Finolex Cables	S	494,083		2,534		2.2%
Jain Irrigation Systems	S	2,190,000		1,726		1.5%
Kajaria Ceramics	S	766,243		4,267		3.7%
PSP Projects	S	373,875		1,657		1.4%
				10,184		8.8%
IT
BLS International Services	S	1,000,000		1,352		1.2%
NIIT Technologies	S	320,000		4,153		3.6%
Tech Mahindra	L	650,000		5,308		4.6%
				10,813		9.4%
Materials
Berger Paints India	M	980,000		3,656		3.2%
Essel Propack	S	1,796,520		2,226		1.9%
JK Lakshmi Cement	S	504,239		1,668		1.5%
PI Industries	S	380,000		3,701		3.2%
Ramkrishna Forgings	S	661,230		4,014		3.5%
Sagar Cements	S	330,000		2,547		2.2%
Skipper	S	1,768,293		1,743		1.6%
The Ramco Cements	M	320,000		2,313		2.1%
				21,868		19.2%
Real Estate
Arihant Foundations & Housing	S	592,400		217		0.2%
Sobha Developers	S	610,000		3,136		2.7%
				3,353		2.9%
Total equity investments				106,131		92.8%
Cash less other net current liabilities of ICG Q Limited				8,226		7.2%
Total net assets of ICG Q Limited				114,357		100.0%
Cash less other net current liabilities of the Company				7		0.0%
Total Net Assets				114,364		100.0%
Notes:-
Large cap (L) - companies with a market capitalisation above US$7bn						11.3%
Mid cap (M) - companies with a market capitalisation between US$2bn and US$7bn						30.1%
Small cap (S) - companies with a market capitalisation below US$2bn						51.4%
						92.8%
The information above relates to the investment portfolio held by ICG Q Limited, the Company's wholly owned subsidiary.

AUDITED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2018

			2018	2017
	Revenue £000	Capital £000	Total £000	Total £000
Income
Net gains on financial asset at fair value through profit or loss	-	(27,989)	(27,989)	43,257
Expenses
Operating expenses	(422)	-	(422)	(378)
LSE Main Board listing expense	(155)	-	(155)	(424)
Foreign exchange loss	(1)	-	(1)	-
Investment management fees	-	-	-	(2)
Total expenses	(578)	-	(578)	(804)
(Loss)/profit for the year before taxation	(578)	(27,989)	(28,567)	42,453
Taxation	-	-	-	-
(Loss)/profit for the year after taxation	(578)	(27,989)	(28,567)	42,453
(Loss)/earnings per Ordinary Share (pence)			(25.39)	37.73
Fully diluted (loss)/earnings per Ordinary Share (pence)			(25.39)	37.73

The total column of this statement represents the Company's statement of comprehensive income, prepared in accordance with IFRS as adopted by the EU. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies, as disclosed in the Basis of Preparation note.

The profit after tax is the "total comprehensive income" as defined by IAS 1. There is no other comprehensive income as defined by IFRS and all the items in the above statement derive from continuing operations.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2018

			2018		2017
			£000		£000
Non-current assets
Financial asset designated at fair value through profit or loss			114,357		143,131
Current assets
Cash and cash equivalents			13		76
Receivables			206		189
			219		265
Current liabilities
Payables			(212)		(465)
Net current assets/(liabilities)			7		(200)
Net assets			114,364		142,931
Equity
Ordinary share capital			1,125		1,125
Reserves			113,239		141,806
Total equity			114,364		142,931
Number of Ordinary Shares in issue			112,502,173		112,502,173
Net Asset Value per Ordinary Share (pence) Undiluted & diluted			101.65		127.05

AUDITED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018

		Share Capital £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2018		1,125	56,402	(9,946)	95,350	142,931
Loss on investments		-	(27,989)	-	-	(27,989)
Revenue loss for the year after taxation		-	-	(578)	-	(578)
Balance as at 31 December 2018		1,125	28,413	(10,524)	95,350	114,364

  For the year ended 31 December 2017

		Share Capital £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2017		1,125	13,145	(9,142)	95,350	100,478
Gain on investments		-	43,257	-	-	43,257
Revenue loss for the year after taxation		-	-	(804)	-	(804)
Balance as at 31 December 2017		1,125	56,402	(9,946)	95,350	142,931

AUDITED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2018

	2018		2017
	£000		£000
Cash flows from operating activities
Operating (loss)/profit	(28,567)		42,453
Adjustment for:
Net loss/(gain) on financial asset at fair value through profit or loss	27,989		(43,257)
Foreign exchange losses	1		-
Increase in receivables	(17)		(50)
(Decrease)/increase in payables	(253)		286
Net cash flows from operating activities	(847)		(568)
Cash flows from financing activities
Proceeds from issue of shares	-		-
Cash flows from investing activities
Partial redemption of investment in ICG Q Limited	785		500
Net cash flows from investing activities	785		500
Net increase in cash and cash equivalents during the year	(62)		(68)
Cash and cash equivalents at the start of the year	76		144
Foreign exchange losses	(1)		-
Cash and cash equivalents at the end of the year	13		76

ACCOUNTING POLICIES

Basis of accounting

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and interpretations adopted by the International Accounting Standards Board (IASB). 

Basis of preparation

The financial statements for the year ended 31 December 2018 have been prepared under the historical cost convention adjusted to take account of the revaluation of the Company's investments to fair value.

Where presentational guidance set out in the Statement of Recommended Practice (SORP) for Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies (AIC) in November 2014 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. In particular, supplementary information which analyses the statement of comprehensive income between items of a revenue and capital nature has been presented alongside the statement of comprehensive income.

Going concern

The Board has concluded the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern for the next 12 months.

Impact of IFRS 10 'Consolidated Financial Statements'

As set out under IFRS 10, a parent entity that qualifies as an investment entity should not consolidate its subsidiaries. The Company meets all the following criteria to qualify as an investment entity:-

(i)   Obtaining funds from one or more investors for the purpose of providing those investors with investment management services - the Board of Directors of the Company has delegated this function to its investment manager, Ocean Dial Asset Management Limited;

(ii)  Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both - funds are invested in ICG Q Limited for the sole purpose of achieving capital appreciation via further placements in Indian listed securities; and

(iii) Measures and evaluates the performance of substantially all of its investments on a fair value basis - on a monthly basis, the Company's investment in ICG Q Limited is revalued at the prevailing Net Asset Value at the corresponding valuation date.

The IFRS 10 Investment Entity Exemption requires investment entities to fair value all subsidiaries that are themselves investment entities. As the subsidiary meets the criteria of an investment entity, it has not been consolidated.

On the basis of the above, these financial statements represent the stand-alone figures of the Company.

Expenses

Expenses are accounted for on an accruals basis. Other expenses, including management fees, are allocated to the revenue column of the statement of profit or loss and other comprehensive income.

Taxation

Full provision is made in the statement of profit or loss and other comprehensive income at the relevant rate for any taxation payable in respect of the results for the year.

Investments

The Company's investment is designated at fair value through profit or loss at the time of acquisition. It is initially recognised at fair value, being the cost incurred at acquisition. Transaction costs are expensed in the statement of comprehensive income. Gains and losses arising from changes in fair value are presented in the statement of comprehensive income in the period in which they arise.

The investment is designated at fair value through profit or loss at inception because it is managed and its performance evaluated on a fair value basis in accordance with the Company's investment strategy as documented in the Admission Document and information thereon is evaluated by the management of the Company on a fair value basis.

The basis of the fair value of the investment in the underlying subsidiary, ICG Q Limited, is its Net Asset Value. ICG Q Limited's investments are designated at fair value through profit and loss.

Purchases and sales are recognised on the trade date - the date on which the Company commits to purchase or sell the investment.  

The financial asset is derecognised when the rights to receive cash flows from the investment have expired or the Company has transferred substantially all risks and rewards of ownership.

Impact of adoption of IFRS 9

The classification and measurement requirements of IFRS 9 have been adopted retrospectively as of the date of initial application on 1 January 2018. However, the Company has chosen to take advantage of the option not to restate comparatives. Therefore, the 2017 figures are presented and measured under IAS 39. The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Company's financial assets and financial liabilities as at 1 January 2018:

1 January 2018	IAS 39 classification		IAS 39 measurement		IFRS 9 classification		IFRS 9   measurement
			£000				£000
Financial assets Cash and cash equivalents	Loans and receivables		76		Amortised cost		76
Financial asset at fair value through profit or loss	Held for trading at fair value through profit or loss		143,131		Fair value through profit or loss		143,131
Financial liabilities
Payables	Other financial liabilities		465		Amortised cost		465

Receivables and Payables

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in profit or loss. The losses arising from impairment are recognised in profit or loss.

Other financial liabilities include all financial liabilities, other than those classified as at FVPL. The Company includes in this category short-term payables.

Foreign currency translation

The Company's shares are denominated in Sterling and the majority of its expenses are incurred in Sterling. Accordingly, the Board has determined that the functional currency is Sterling. Sterling is also the presentation currency of the financial statements.

Monetary foreign currency assets and liabilities are translated into Sterling at the rate of exchange ruling at the statement of financial position date. Investment transactions and income and expenditure items are translated at the rate of exchange ruling at the date of the transactions. Gains and losses on foreign exchange are included in the statement of comprehensive income.

Cash and cash equivalents

Cash comprises bank current account balances. Cash equivalents are short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant changes in value.

Share capital

The share capital of the Company consists of Ordinary Shares which have all the features and have met all the conditions for classification as equity instruments under IAS 32 (amended) and have been classified as such in the financial statements.

Standards, interpretations and amendments to published statements not yet effective

The following standard is effective for the first time for the financial period beginning 1 January 2018 and is relevant to the Company's operations:

·     IFRS 9, 'Financial Instruments'. The standard sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39, 'Financial Instruments: Recognition and Measurement.' The adoption of this standard has not had a significant effect on the Company's accounting policies related to financial assets and liabilities as majority are classified at fair value through profit or loss. The adoption of this standard did not require the restating of comparatives.

The following standards and amendments have been issued and are mandatory for accounting periods beginning on or after 1 January 2018 but are not relevant or have no material effect on the Company's operations or financial statements:

·     IFRS 15, 'Revenue from Contracts with Customers'. This standard establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18, 'Revenue', IAS 11, 'Construction Contracts' and related interpretations

·     Amendments to IFRS 15 Clarifications to IFRS 15 Revenue from Contracts with Customers

·     Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2

·     Transfers of Investment Property - Amendments to IAS 40

·     IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

·     Annual Improvements to IFRSs - 2014-2016 Cycle: IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters

·     Annual Improvements to IFRSs - 2014-2016 Cycle: IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by - investment choice

·     Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS 4

Other standards in issue, but not yet effective, are not expected to have a material effect on the financial statements of the Company in future periods and have not been disclosed.

SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

IFRS require management to make judgments, estimates and assumptions that effect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equate to the related actual results. The main use of accounting estimates and assumptions occurs in the calculation of the sensitivity. In relation to the valuation of unlisted investment, actual results may differ from the estimates. It is management's judgement that the Net Asset Value (NAV) of ICG Q Limited is an appropriate proxy for fair value as the Company can control the sale of the subsidiary's investments which are all listed on stock exchanges in India and therefore are mostly regarded as highly liquid.

(LOSS)/EARNINGS PER SHARE

(Loss)/earnings per Ordinary Share and the fully diluted (loss)/earnings per Ordinary Share are calculated on the loss for the year of £28,567,000 (2017 - profit of £42,453,000) divided by the weighted average number of Ordinary Shares of 112,502,173 (2017 - 112,502,173).

FINANCIAL INSTRUMENTS AND RISK PROFILE

The primary objective of India Capital Growth Fund Limited is to provide long-term capital appreciation by investing predominantly in companies based in India through its subsidiary. The investment policy permits making investments in a range of equity and equity linked securities of such companies. ICG Q Limited's portfolio of investments is predominantly in listed mid cap and small cap Indian companies and did not hold any unlisted securities during the year ended 31 December 2018. While the principal focus is on investments in listed equity securities or equity-linked securities, ICG Q Limited has the flexibility to invest in bonds, convertibles and other type of securities.

The specific risks arising from the Company's exposure to these instruments and the Investment Manager's policies for managing these risks, which have been applied throughout the year, are summarised below:

Capital management

The Company is a closed-ended investment company and thus has a fixed capital for investment. It has no legal capital regulatory requirement. The Board has the power to purchase shares for cancellation thus reducing capital and the Board considers on a regular basis whether it is appropriate to exercise such powers. In the year ended 31 December 2018, the Board determined that it was inappropriate to exercise such powers, although continuation of these powers will be sought at the Annual General Meeting.

The Board also considers from time to time whether it may be appropriate to raise new capital by a further issue of shares. The raising of new capital would, however, be dependent on there being genuine market demand.

The Company holds a single investment in ICG Q Limited, which holds an underlying portfolio of 37 listed equity instruments based in India. Below is an assessment of the various risks the Company may be exposed to via ICG Q Limited.

Market Risk

Market price risk arises mainly from the uncertainty about future prices of the financial instrument held by ICG Q Limited. It represents the potential loss ICG Q Limited may suffer through holding market positions in the face of price movements.

ICG Q Limited's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager in pursuance of the investment objectives and policies and in adherence to the investment guidelines and the investment and borrowing powers set out in the Admission Document. ICG Q Limited's investment portfolio is concentrated and, as at 31 December 2018, comprised investment in 37 companies. ICG Q Limited thus has higher exposure to market risk in relation to individual stocks than more broadly spread portfolios.

ICG Q Limited's portfolio consists predominantly of mid cap and small cap listed Indian securities, and thus the effect of market movements is not closely correlated with the principal market index, the BSE Sensex. The BSE Mid Cap Total Return Index provides a better (but not ideal) indicator of the effect of market price risk on the portfolio. Assuming perfect correlation the sensitivity of ICG Q Limited to market price risk can be approximated by applying the percentage of funds invested (2018: 92.80%; 2017: 97.36%) to any movement in the BSE Mid Cap Total Return Index. At 31 December 2018, with all other variables held constant, this approximation would produce a movement in the net assets of ICG Q Limited of £10,613,000 (2017: £13,916,000) for a 10% (2017: 10%) movement in the index which would impact the Company via a fair value movement of the same magnitude in its holding in ICG Q Limited.

Foreign currency risk

Foreign currency arises mainly from the fair value or future cash flows of the financial instruments held by ICG Q Limited fluctuating because of changes in foreign exchange rates. ICG Q Limited's portfolio comprises of predominantly Rupee denominated investments but reporting, and in particular the reported Net Asset Value, is denominated in Sterling. Any appreciation or depreciation in the Rupee would have an impact on the performance of the Company. The underlying currency risk in relation to ICG Q Limited's investments is the Rupee. ICG Q Limited's policy is not to hedge the Rupee exposure.

ICG Q Limited may enter into currency hedging transactions but appropriate mechanisms on acceptable terms are not expected to be readily available.

At 31 December 2018, if the Indian Rupee had strengthened or weakened by 10% (2017: 10%) against Sterling with all other variables held constant, pre-tax profit for the year would have been £11,439,000 (2017: £14,662,000) higher or lower, respectively, mainly as a result of foreign exchange gains or losses on translation of Indian Rupee denominated financial assets designated at fair value through profit or loss in ICG Q Limited and the consequent impact on the fair value of the Company's investment in ICG Q Limited.

Credit risk

Credit risk arises mainly from an issuer or counterparty being unable to meet a commitment that it has entered into with ICG Q Limited. Credit risk in relation to securities transactions awaiting settlement is managed through the rules and procedures of the relevant stock exchanges. In particular settlements for transactions in listed securities are effected by the custodian on a delivery against payment or receipt against payment basis. Transactions in unlisted securities are effected against binding subscription agreements.

The principal credit risks for the Company are in relation to cash held by the custodian. Kotak Mahindra Bank Limited ("Kotak") acts as the custodian to the Company. The aggregate exposure to Kotak at 31 December 2018 was £8,388,000 (2017: £4,170,000).

Kotak acted as custodian of the Group's assets during the period. The securities held by Kotak as custodian are held in trust and are registered in the name of ICG Q Limited. Kotak has a credit rating of AAA.

Interest rate risk

Interest rate risk represents the uncertainty of investment return due to changes in the market rates of interest. The direct effect of movements in interest rates is not material as any surplus cash is predominantly in Indian Rupees, and foreign investors are not permitted to earn interest on Rupee balances.

Liquidity risk

Liquidity risk arises mainly from ICG Q Limited encountering difficulty in realising assets or otherwise raising funds to meet financial commitments. As the trading volume on the Indian stock markets is lower than that of more developed stock exchanges the Group may be invested in relatively illiquid securities. ICG Q Limited has no unlisted securities. ICG Q Limited's focus is to invest predominantly in mid and small cap listed stocks. As noted in the Investment Manager's Report, minimum liquidity criteria are utilised for new purchases. However there remain holdings where there is relatively little market liquidity, which may take time to realise. The Directors do not believe that the market is inactive enough to warrant a discount for liquidity risk on ICG Q Limited's investments.

ICG Q Limited seeks to maintain sufficient cash to meet its working capital requirements. The Directors do not believe it to be appropriate to adjust the fair value of the Company's investment in ICG Q Limited for liquidity risk, as it has the ability to effect a disposal of any investment in ICG Q Limited's portfolio at the prevailing market price and the distribution of proceeds back to the Company should it so wish.

All liabilities are current and due on demand.

Taxation risk

Taxation risk arises mainly from the taxation of income and capital gains of ICG Q Limited and the Company increasing as a result of changes in the tax regulations and practice in Guernsey, Mauritius and India. ICG Q Limited is registered with the Securities and Exchange Board of India ("SEBI") as a foreign portfolio investor ("FPI") with a Category II licence, holds a Category 1 Global Business Licence in Mauritius and has obtained a Mauritian Tax Residence Certificate ("TRC") which have been factors in determining its resident status under the India-Mauritius Double Taxation Avoidance Agreement ("DTAA") and General Anti Avoidance Rules ("GAAR") under the Income Tax Act 1961 ("ITA").

However, with effect from April 2017, the DTAA was amended such that the advantages of investing in India via Mauritius were removed and capital gains arising from investments in Indian companies are subject to Indian Capital Gains Tax regulations. Consequently, tax on short term capital gains (for investments held less than 12 months) of 15% and long-term capital gains (for investments held for 12 months or longer) of 10% will apply to the investment portfolio in future.

ICG Q Limited seeks to minimise the impact of these changes in the taxation rates applicable to its capital gains by maintaining its investment strategy of investing in a concentrated portfolio for long term capital appreciation.

This announcement was approved by the Board on 28 March 2019. It is not the Company's statutory accounts but has been prepared on the same basis as those accounts. The statutory accounts for the year ended 31 December 2018 have been approved and audited and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The full Annual Report together with the audited accounts for the year is expected to be mailed to shareholders by 4 April 2019 and a copy will be posted on the Company's website www.indiacapitalgrowth.com 

Disclaimer: Neither the contents of the Company's website, nor the contents of any website accessible from hyperlinks on the Company's website (or any other website), is incorporated into, or forms part of, this announcement.

 

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