TIDMIGC
RNS Number : 8338N
India Capital Growth Fund Limited
26 May 2020
INDIA CAPITAL GROWTH FUND LIMITED
Publication of a circular setting out proposals for the future
of the company
-- Significant actions to improve performance including near
doubling of the investment team devoted to managing the fund
-- Proposed redemption facility on 31 December 2021 and every two years thereafter
-- Cut in the investment manager's fee and a further review of the fee in 2022
-- Shareholders to vote on the proposals at an EGM on 12 June
The Board of India Capital Growth Fund Limited (the 'Company')
has today published a circular to shareholders (the 'Circular') in
relation to a continuation vote and the recommended proposals for
the continuation of the company (the 'Proposals') alongside a
notice of extraordinary general meeting (the 'EGM').
The investment manager, Ocean Dial, will be hosting two webinars
so shareholders can hear from the Chairman, Elisabeth Scott, and
the Portfolio Adviser, Gaurav Narain, on the following dates:
Friday 29 May - 12.00 BST and Wednesday 3 June - 12.00 BST
Elisabeth Scott, Chairman of India Capital Growth Fund,
said:
"The company has significantly underperformed its benchmark,
India's BSE Mid Cap Total Return Index, in the recent past. This is
disappointing and means the company is likely to fail the second
part of its three-yearly assessment in August, triggering a
continuation vote, details of which are set out below[i]. As a
result, the Board has been carefully assessing, in the interest of
shareholders, the best options for the future of the company.
"The choice is between winding up the company at a time when
Indian mid-cap and small-cap equities are trading at close to their
15-year lows; or taking strong measures to improve performance and
provide shareholders with a way to redeem the bulk of their
holdings, if they wish, at a set date in the future.
"The Board has weighed both options and is now putting before
shareholders its proposed way forward. These include extensive
measures to improve performance, a redemption offer at the end of
2021 and a cut in the fee the company pays to the investment
manager, Ocean Dial. Below, and in more detail in the circular
being dispatched today, is information on the proposals.
"The Directors consider this way forward is in the best
interests of the company and shareholders. If you wish India
Capital Growth Fund to continue you should vote in favour of these
proposals at the EGM on 12 June, with proxy votes needing to be
lodged by 10 June. The Directors unanimously recommend you do
this."
THE PROPOSALS
Despite the underperformance and taking account of the measures
to improve performance and the investment manager's outlook set out
below, the Board considers that there is good potential for the
company's performance to improve markedly. The Board is therefore
proposing that the company should continue on the basis of the
proposals outlined below:
-- the introduction of a redemption facility, giving
shareholders the right to request the redemption of part or all of
their shareholding on 31 December 2021 and every second year
thereafter at an exit discount equal to a maximum of a six per
cent. discount to NAV per redemption share;
-- a change to the investment manager's fee from 1.25 per cent.
of total assets per annum, to the lower of 1.25 per cent. of
average market capitalisation (calculated on a daily basis) per
annum or 1.25 per cent. of total assets per annum with effect from
1 July 2020 with a further review of the investment manager's fee
in 2022.
Given the strong likelihood of there needing to be a
continuation vote this year and the changes made by the investment
manager, the Board has decided to bring forward the date for
proposing a continuation resolution and at the same time to put
forward these proposals. In order to implement the proposals, the
Board proposes amending the company's articles of association to
introduce a redemption facility subject to the terms set out in New
Article 132 in the circular which is available in electronic form
on the company's website at http://www.indiacapitalgrowth.com. If
the resolutions are passed, the first redemption facility will be
on 31 December 2021.
IMPROVING PERFORMANCE
In addressing the issue of poor recent performance the
investment manager has taken several steps. First, the research
team has been materially strengthened (from 4 to 7) with the
appointment of a co-Head of Equity (30 years' experience) and two
analysts, one senior and one junior.
In addition, and following a rigorous review process, several
incremental measures were introduced to strengthen the investment
process, but without altering the investment strategy per se. The
first was to create a 'focus list' of circa 140 companies, which
now forms the investible universe from which the investment manager
constructs the portfolio. This enables greater analytical depth and
stronger conviction. Financial models of companies included in the
universe are integrated via the team data analyst who is
responsible for building the 'ranking tool'. This tool ranks the
potential investee companies in order of the team's expectation of
upside to value. The ranking tool does not dictate the portfolio
construction process but strengthens the team's sell discipline in
particular, providing the investment manager with objectivity and a
clearer understanding of the relative opportunity that a particular
stock offers. Turnover in the portfolio has increased
commensurately and is now expected to stabilise at 20%-25%.
Artificial Intelligence tools have been introduced to the
screening and monitoring process through a tool that pulls
information on an investee company from multiple sources of
unstructured data onto a single dashboard that is readily
accessible by the investment team.
Integral to this enhanced process is the opportunity the
investment team now has to work alongside Ocean Dial's key
shareholders and related entities on the ground in India, where
appropriate to do so. The potential benefits are material in this
regard, as the team is better able to leverage associates' depth of
knowledge and strong relationships, helping to identify key shifts
in consumer or business activities (by way of example) in a timely
and productive manner.
Recently Ocean Dial closed its Emerging India Fund (a mid-cap
and small-cap open ended alternative to India Capital Growth Fund).
The closure has significantly reduced the number of stocks under
ownership, freeing up the investment team's bandwidth to the
benefit of the company's shareholders.
In conjunction with this strengthening of the investment team,
Ocean Dial has modified its stock selection process and selling
discipline which has led to a careful re-orientation of the
portfolio. Exposure to areas such as wholesale banking and consumer
discretionary sectors, which contributed negatively to performance,
have been reduced, as has been exposure to highly valued companies
where the holding is significant. The money raised has been
invested in existing portfolio companies and new companies that
Ocean Dial believes have the best medium-term prospects. The Board
is also pleased to see a lower cash weighting in the portfolio as
stocks have become more attractively valued. These changes are
already leading to improved performance.
investment Manager's OUTLOOK
It is expected that India's small and mid-cap sector will regain
investors' attention in anticipation of an economic recovery in
India back to, at least, the historical growth rate of around six
per cent a year. The beneficial, longer term impact of structural
reforms made by Prime Minister Modi should also help drive a higher
and more sustainable level of economic growth, improving corporate
earnings expectations and equity multiples.
Analysis of historic market valuations shows that mid and
small-cap Indian equities are trading at close to 15-year lows.
Therefore, despite the near-term uncertainty around corporate
profits, the investment risk/reward outlook is highly attractive. A
recovery in mid and small-cap equity performance in India, combined
with a more robust and focused investment process should lead to a
positive outcome for shareholders over the investment cycle
ahead.
BENEFITS OF THE PROPOSALS
The Directors believe that the proposals will benefit
shareholders through:
-- being able to redeem some or all of their shareholding,
without being reliant on the market liquidity of the ordinary
shares
-- progressively reducing the discount at which the shares trade
-- addressing, through the redemption facility and the issue of
shares from treasury, market imbalances in the supply and demand
for the shares
-- an uplift in NAV per share for continuing shareholders as a
result of the exit discount applied to the ordinary shares that are
redeemed
-- a greater likelihood that the value of the shares will
reflect the prospects of the company's investment strategy
-- a reduction in the operating costs of the company and a more
effective alignment between the investment manager and shareholders
by switching the fee calculation from total assets to market
capitalisation.
CONSEQUENCES IF THE PROPOSALS ARE NOT APPROVED
If the proposals are not passed, the Board is required to put
forward to shareholders plans to wind-up, reorganise or reconstruct
the company.
Given the extremely volatile market environment and the as yet
unknown impact of Covid-19 on India, the Board considers that the
realisation of the company's portfolio of investments at the
present time is likely to result in sub-optimal returns for
shareholders and is not in the interests of the company or of
shareholders as a whole.
EXTRAORDINARY GENERAL MEETING
The proposals require approval of the shareholders by the
passing of the resolutions at the EGM. A notice convening the EGM
to be held at 10:00 a.m. on 12 June 2020 is set out at the end of
the circular. To be valid, a form of proxy must be received no
later than 10:00 a.m. on 10 June 2020.
RECOMMENDATION
The Directors, who have been advised by Shore Capital, consider
that the proposals and the resolutions to be proposed at the EGM
are in the best interests of the company and shareholders as a
whole. In providing advice to the Board, Shore Capital has placed
reliance on the Directors' commercial assessments.
The Directors unanimously recommend that shareholders vote in
favour of each of the resolutions at the EGM as the Directors
intend to do in respect of their own beneficial and non-beneficial
holdings of shares (amounting in aggregate to 92,500 shares,
representing approximately 0.08 per cent. of the issued share
capital of the company as at the date of the circular).
ENDS
ENQUIRIES:
William Clutterbuck
Maitland/AMO
+44 7785 292617
wclutterbuck@maitland.co.uk
David Cornell
Ocean Dial Asset Management
+44 20 7068 9870
david.cornell@oceandial.com
Robert Finlay
Henry Willcocks
Fiona Conroy
Shore Capital
+44 20 7408 4090
Nick Robilliard
Apex Fund and Corporate Services (Guernsey) Limited
+44 1481 735827
nick.robilliard@apexfs.com
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 and private Indian companies where
the investment manager believes long-term capital appreciation will
be achieved. www.indiacapitalgrowth.com
[i] THREE-YEARLY ASSESSMENT
The Board carries out an assessment of the company's performance
every three years and a vote on the company's continued existence
is put to shareholders only in the event that either of the
following criteria are met:
(a) the company's monthly average market capitalisation million
over the past year is below GBP30 million; or
(b) the company's published diluted NAV per ordinary share has
underperformed its benchmark by more than a cumulative five per
cent. over the previous three years.
When the last three yearly assessment was conducted in August
2017 both thresholds were comfortably exceeded so no continuation
vote took place.
Today, the company is exceeding the first part of the test, with
its monthly average market capitalisation at a little over GBP46
million. But with less than three months to go until 6 August 2020
(the date for the next three yearly assessment) the Board regards
it as unlikely that performance could improve sufficiently to
exceed the second part of the test by then, since the diluted NAV
per share fell 45.8 per cent from 7 August 2017 to 15 May 2020,
giving a cumulative underperformance against the benchmark of 14.1
per cent.
From 7 August 2017 to 15 May 2020 there was a 31.7 per cent.
decline in the Benchmark Index and the share price fell 55.7 per
cent. over the same period.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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