India Capital Growth Fund

INDIA CAPITAL GROWTH FUND LIMITED

Annual Results for the year ended 31 December 2020

25 March 2021, 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 2020.

Highlights

·    In 2020 as a whole, NAV rose 10%, underperforming the benchmark, the BSE Midcap TR Index, which was up 14%

·    In the second half of the year, after the changes to the investment process and investment team came into effect, performance significantly improved. NAV increased 39%, outperforming the benchmark by 10% over the six months       

·    Turnover in the portfolio was higher (29%) than usual as the Investment Manager re-balanced the holdings following the improvements to the investment process and to capture opportunities that arose from COVID 19 market disruption

·    The investment team in India was strengthened with the addition of two sector specialist analysts and the creation of a new role for an ESG analyst

Elisabeth Scott, Chairman of India Capital Growth Fund, said: "We are pleased with the progress made so far by the Investment Manager in strengthening the investment team in Mumbai and improving the investment process. The Board has confidence this tighter process gives the Company stronger foundations upon which to build better performance in the future."

"For so long we have been predicting economic benefits from the reforms that the Modi-led government has been putting in place - at last it seems that these are bearing fruit. The Board is optimistic that your Company will prosper as India's growth accelerates."

ENQUIRIES

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 Fund Manager believes long-term capital appreciation will be achieved. www.indiacapitalgrowth.com

CHARIMAN'S STATEMENT

2020 saw considerable turbulence in stock markets globally, and India was no exception.  Investors in India saw share prices fall dramatically in March and April and then a steady strong recovery to the year end.  The sharp fall came in response to the nationwide lockdown introduced by the Indian Government in March 2020 in an attempt to stop the spread of COVID-19. As the lockdown was lifted, the economy showed signs of recovery and share prices moved up. 

Performance

Over the year, the Net Asset Value (NAV) per share of your company rose by 10.4%, underperforming the company's benchmark, the BSE Mid Cap Index (sterling, total return) which rose by 13.9%.  However, the company's share price rose by 18. 8%, with the discount to NAV decreasing from 20.2% to 14.1%.  Much of the underperformance over the year was due to the company's exposure to private sector banks, which have been hurt by concerns about possible rising non-performing loans. The Investment Manager's report covers the financial sector in more detail.  It is worth noting that relative performance was poor in the first half of the year, but in the second half of the year, as the expectations of an economic recovery took hold, the company outperformed its benchmark, with positive contributions from companies likely to benefit from outsourcing and pharmaceutical manufacturers.

Investment Manager

As I noted in my statement last year, the Investment Manager appointed Tridib Pathak as co-Head of Equities, to work alongside Gaurav Narain, the Company's investment adviser and a financial analyst will join the team at the end of March 2021. Ocean Dial has continued to invest in the fund management team based in Mumbai, adding a data analyst and two senior analysts, and are in the process of recruiting a financial sector analyst.  In the Investment Manager's report you will read a detailed account of the evolution of the Ocean Dial investment process.  The Board is pleased with the progress that has been made so far and is confident that this tighter process gives the Company stronger foundations upon which to build better performance in the future.

Discount

As you will be well aware, the Extraordinary General Meeting held in June 2020 saw shareholders vote in favour of the continuation of the company and the introduction of the redemption facility. The redemption facility gives shareholders the right to request the redemption of part or all of their shareholding on 31 December 2021 (with a record date of 30 September 2021) and every second year thereafter at a maximum discount of 6% to NAV. 

As I write, the discount to NAV remains around 12%, which is in line with the majority of our peer group but, nonetheless, is wider than the Board would like. The Board, the Manager and our brokers, Shore Capital, continue to look for ways to reduce the discount over time. 

Governance, Board Leadership and Effectiveness

The Board individually and collectively seeks to act with diligence, honesty and integrity. I encourage its members to express differences of perspective and to challenge but always in a respectful, open, cooperative and collegiate fashion. The Board encourages diversity of thought and approach and chooses its members with this approach in mind. The governance principles that the Board has adopted are designed to ensure that the Company delivers long term value to its shareholders and treats all shareholders equally. All shareholders are encouraged to have an open dialogue with the Board and as a consequence of this approach, we have had feedback from certain shareholders that three directors is too small a number for a Board such as this. We have, therefore, engaged a recruitment firm to conduct a search for a successor to Peter Niven who will retire from the Board at the end of 2021 and an additional director, who can bring hands on knowledge of investing in India to the Board whilst providing further diversity to the Board.

Spreading the Message

One of the more positive developments to have arisen out of the pandemic has been the increase in engagement with current and prospective shareholders in the company. Ocean Dial has conducted a number of well attended webinars and investment updates, and we have been delighted with the enthusiasm with which these have been greeted by shareholders. If you have been unable to attend in person, they are available on the company's website (indiacapitalgrowth.com). Please do register if you would like to attend future events of this type.

Outlook

India experienced a technical recession in November 2020, however, the economic recovery appears to be gathering steam. Whilst new COVID-19 cases in India are on the increase again, a second lockdown is currently regarded as unlikely and the economic recovery is expected to continue with the implementation of a successful vaccination programme coupled with investment from international companies seeking to diversify their supply chains and by reductions in corporate tax rates.  For so long we have been predicting economic benefits from the reforms that the Modi-led government has been putting in place - at last it seems that these are bearing fruit. 

Thank you for your support over the last year. The Board is optimistic that your Company will prosper as India's growth accelerates.

Elisabeth Scott

Chairman

25 March 2021

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 per cent. of Total Assets of ICG Q and the Company (measured at the time of investment) may be invested in the securities of any one Issuer; and 

·      No more than 10 per cent. of Total Assets of ICG Q and the Company (measured at the time of investment) may be invested in listed closed-ended funds.

The Board of Directors of the Company does not intend to use derivatives for investment purposes. The Directors confirm the investment policy of the Company has been complied with throughout the year ended 31 December 2020.

INVESTMENT MANAGER'S REPORT

Just before 2020 began, the Indian Government's Chief Economic Advisor tweeted:

"Clear message from PM: India's business sector and banks have been cleaned, and a rules based system introduced. The next stage is to build a risk taking culture & trigger the animal spirits of the Indian entrepreneur."

Indeed, after years of disruptive reforms, Indian companies were witnessing evidence of demand returning to help real GDP growth pick up from its lowest level since 2012 and corporate profitability recover from its lowest level since 2001. The pandemic has delayed but not derailed this story (more on this later). Over the year ended 31 December 2020 the portfolio delivered 10.4% growth in Sterling terms versus the BSE Midcap TR Index which delivered 13.9%. This year was however very much one of two halves as the market reacted and then recovered from the global spread of COVID-19:

As 2019 came to an end we were fully conscious that the portfolio's longer term numbers were not up to the high standards that we set ourselves. This report will therefore start with the steps taken by the team to improve performance, followed by an overview of how the portfolio was re-calibrated over the year, and will conclude with our outlook.

Improving performance

The recruitment of Tridib Pathak as my fellow co-Head of Equities in October 2019 has added 30 years of institutional experience to the research team. Subsequently, one data analyst and two senior analysts joined the team with an additional financial sector analyst due to join the team very shortly.

With a bigger and more experienced team, the investment universe was re-examined. 850 companies with a market capitalisation higher than US$100m were whittled into a shortlist of 143. Businesses that we feel are un-scalable, conglomerated, overcomplicated, driven by commodity prices, have governance concerns, are owned by the Government, exposed mainly to overseas consumers, or where we don't have enough knowledge to have an informed view on any of the above, are currently excluded. Each analyst covers roughly 30 names and coverage entails detailed financial modelling, one-to-one corporate interaction at least twice annually, and a final valuation based on relative and absolute metrics. All financial models are aggregated at a portfolio level by the data analyst, and the universe is now ranked on a live basis in descending order of expected return which then helps guide me on where to direct deeper due diligence whilst also acting as a behavioural nudge for potential sell decisions.

An investment committee was formed as a gatekeeper for the investment universe and as a forum for open debate to test for behavioural attachment to flawed investment theses. In addition, we adopted more technology through an AI tool to increase analyst productivity in assessing new ideas, monitoring universe companies, and aggregating due diligence from a broader range of sources. We believe these efforts are now feeding into better performance and expect over time to have the combined benefit of supplementing our long-standing ability to unearth new opportunities, with limiting the impact that poor investments can have on returns.

Going forwards, business practices in India have been changing and this has been accelerated by the recent slowdown. Any improvement takes time to filter through into better reputations, stronger profitability, and higher valuations, hence creating an opportunity for mispricing, particularly in a market that has been hyper-focused on "proven-quality" at any price. Beyond the well-known market darlings, we are noticing a broader recognition by management teams of minority shareholder rights, transparency, alignment of interests, and professionalisation. This is being driven by a combination of an inter-generational handover of family control, ESG awareness, rapidly growing social media usage (There were 294 million active users in 2018 vs 136 million in 2016 (We are Social, McKinsey)), and greater openness to work with external shareholders who can act as stewards for best practice. As such, we are also in the process of adding a dedicated external and internal ESG resource for integration into our investment process in order to capture opportunities presented by this transition. We look forward to updating investors on this in the coming year.

Portfolio activity

As the Pandemic was flaring overseas we exited our most global consumer facing business, Motherson Sumi Systems (an auto-components manufacturer) and subsequent to India's lockdown, we lowered our banking exposure, particularly to businesses most exposed to unsalaried borrowers and SMEs. Beyond this, underlying stock specific risks were re-assessed name by name but as volatility, it was clear that the market was offering an opportunity to purchase exceptional businesses at deeply discounted prices.

We added to our four remaining private sector banks that each offer different types of exposure. While City Union Bank and Federal Bank are regional in nature focusing on SMEs and corporate banking, IndusInd Bank and IDFC Bank are more retail driven. They are well capitalised and have used the RBI's moratorium to boost their provision coverage ratios in anticipation of higher non-performing loans - something that has not yet transpired as India's economy continues to re-open.

Switching from borrowing to spending, our long-held thesis that companies most geared to rural consumers in India will provide the strongest returns has been tested over the last two years in the wake of disruptive government reforms and a credit crunch in early-2019. Our confidence has however been reinforced of late. Rural India has been less impacted by COVID-19 and has a lot of tailwinds - a good Monsoon and massive doses of investment by a government now looking to stimulate rather than disrupt. Our three names most focused in this space are dominant players to whom we have added-to during the volatility. Bajaj Consumer Care in almond hair oil, Emami in the increasingly popular Ayurvedic segment and Jyothy Laboratories in household and personal care. They have participated in the sharpest end of the recovery in sales and are still very attractively valued relative to both their own history and the peer group.

In terms of new additions to the portfolio we were looking for market leaders and companies who had the ability to thrive in a post-COVID world. Dixon Technologies is one such example of the both. Using its dominance in LEDs (it is a top four global player), it has expanded its base to be an outsourced manufacturer for the likes of Xiaomi, Panasonic, and Samsung for items including televisions, mobile phones, and medical equipment. At a time when global companies are looking to broaden the geographic sources of their production, and the Indian government is providing significant incentives to reduce its electronics import bill of over $40bn (mainly from China) - Dixon is in the right place at the right time. It is rapidly adding brands to its portfolio across segments and is set to grow at a substantial pace over the next few years. Currently a small cap, we don't expect it to be so for very long.

Beyond electronics, an area of the portfolio that has performed well during this period is the broader chemicals space. Long term holdings such as Divi's Laboratories, Neuland Laboratories (active pharmaceutical ingredients and custom research) and PI Industries (agrochemicals) have seen strong growth as their customers have sought to build up their inventories. To this we added Aarti Industries a global leader in benzene chemistry supplying to the likes of global companies such as Pfizer, Bayer, BASF, 3M, Dow and Unilever, as well as a whole host of Indian blue chips. Both these sets of customers are looking to de-risk their sourcing from China whose chemicals manufacturing base is ten times the size of India's. Our holdings have a strong order book and have an excellent track record in executing on their product pipeline. With huge structural tailwinds we have high visibility of a conservative 20% annual growth trajectory for the coming years.

We introduced ICICI Lombard to the portfolio which is India's largest private sector general insurance company that is building a technology platform like no other in India. The company has been replacing manually-repetitive paper-intensive processes with artificial intelligence in areas such as claims adjudication and fraud detection to lower costs and improve customer experience. It is set to gain market share from cumbersome public sector companies and is well placed to capitalise on a historically underpenetrated but growing part of India's wallet-spend.

A position was built in CCL Products which is the world's largest private label instant coffee manufacturer. Aside from steady growth of 19% per annum over the last five years, we think the business can earn a higher valuation as it takes on Nestlé in India with its domestic brand Continental. It will do this armed with low cost manufacturing and economies of scale, a strong reputation amongst its long term client relationships for consistency and quality, and technical know-how to produce high-quality instant coffee using all grades of raw coffee beans.

Multi Commodity Exchange, India's largest commodity exchange was also a new addition. It has near monopoly position in trading non-agricultural commodities such as energy, base metals and bullion. The sophistication of India's financial market ecosystem is accelerating as the regulator has permitted new distribution channels (banks' broking subsidiaries), new products (option contracts, commodity index futures) and new participants including mutual funds. These initiatives will go a long way in growing the commodity market in India, and MCX being the dominant player is well placed to benefit the most due to its head start and the strong network effects the business enjoys.

The final new entrant of the year was Persistent Systems, an IT Services company which has been among the first movers in digital technology. It has projects in key areas of cloud, analytics and mobility. Following a period of restructuring (having revamped its management team), the company is now scaling up and margins are expanding. India's broader IT services sector is seeing a boom in demand as companies around the world look for support to facilitate their transition to a cloud-based infrastructure. This is Persistent's core strength, and importantly the Company's clients are no longer seeing IT services as way to cut costs, but as an enabler for top-line growth.

Portfolio turnover (at 29%) has been higher than usual this year as we sought to re-calibrate to deliver the best possible returns over the coming three years at the lowest risk exposure. The outlook from the management team of our companies for the coming year is very positive which tallies with our broader assessment of what is happening in India.

Outlook

Going forwards, the core driver for returns will be a shift in earnings expectations, and in this regard our conviction is growing. We also believe that India may be poised for a recovery in cyclical businesses which have struggled over the last four years. Having now increased our banking exposure, we believe the portfolio is well geared to take advantage of this with 46% of its weight comprising of banks, auto, cement, infrastructure and gas utilities.

As international investors grapple with challenges within their respective countries, the prospective resumption in demand and expansion of profitability in India is largely going unnoticed. The country historically produced 60% of the world's vaccines and will produce a greater proportion of doses for COVID-19. It has a strong vaccination infrastructure which should help to mitigate the impact of a potential second wave of infections which has yet to occur.

Thus far, the economy is virtually back to being fully re-opened but the key question is how sustainable is the economic bounce-back? We choose to be macro aware rather than macro driven and our conviction on the answer being a positive one is driven by our analysis of the investible universe. More broadly, at the time of writing the country is more open than it was in 2020 and liquidity is more abundant than it was in 2019. This is exactly what is needed following several years of disruptive structural reforms that climaxed in the pandemic. The portfolio is forecast to deliver substantial earnings growth over FY22 and, as greater clarity on the operating environment has continued to come through, our confidence in this is strong. That this portfolio is valued by the market at a multiple of 16x is a strong signal and one that matches our conviction that India is poised for a sustained period of positive surprises for investors.

Ocean Dial Asset Management

25 March 2021

TOP 20 PORTFOLIO INVESTMENTS

PRINCIPAL GROUP INVESTMENTS

AS AT 31 DECEMBER 2020

AUDITED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2020

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 in Note 1.

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

FOR THE YEAR ENDED 31 DECEMBER 2020

AUDITED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2020

For the year ended 31 December 2019

AUDITED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2020

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 2020 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, and subsequently revised in November 2019, 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

During 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organisation. The situation is dynamic with various cities and countries around the world responding in different ways to address the outbreak. There are meaningful direct and indirect effects developing with companies across multiple industries and the World. The Company will continue to monitor the impact COVID-19 has on them and reflect the consequences as appropriate in its accounting and reporting. The Board made an assessment of the Company's ability to continue as a going concern taking into account all available information about the future including the analysis of the possible impacts in relation to COVID-19, which is at least, but is not limited to, twelve months from the date of approval of these financial statements.

Given the Company's previous performance, the Directors proposed a continuation ordinary resolution at the Extraordinary General Meeting in June rather than at the Annual General Meeting in September as initially envisaged. At the Extraordinary General Meeting held on 12 June 2020, the Shareholders approved an Ordinary Resolution that the Company continue as currently constituted and introduce a redemption facility which gives the ordinary shareholders on record on the 30 September 2021 the ability to redeem part or all of their shareholding at the first redemption point on 31 December 2021 at an exit discount equal to a maximum of 6% of NAV. There is therefore a possibility that redemption requests may impair the future viability of the Company. This creates a material uncertainty which may cast significant doubt as to the Company's ability to continue as a going concern. If the Board believes this to be the case, the Board will investigate a range of options and put proposals to shareholders regarding the future of the Company. In an attempt to mitigate the potential for large redemptions, the Investment Management team in Mumbai has been substantially strengthened at both the Senior Management and analyst level which, together with a complete review of the investment management process, has resulted in a number of changes in the portfolio which are already having a positive effect on performance.

Notwithstanding the uncertainty over the potential redemptions, the Directors are satisfied that the Company has sufficient liquid resources to continue in business for the foreseeable future therefore the financial statements have been prepared on a going concern basis.

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.          

Impact of IFRS 10 'Consolidated Financial Statements' (continued)

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.  Realised gains and losses are calculated with reference to book cost on a FIFO (First in First out) basis.

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.

Impairment of financial assets

The Company holds only cash and cash equivalent with reputable institutions at amortised cost and, as such, has chosen to apply an approach similar to the simplified approach for expected credit losses (ECL) under IFRS 9. Therefore, the Company does not track changes in credit risk, but instead, recognises a loss allowance based on lifetime ECLs at each reporting date. The Company's approach to ECLs reflects a probability-weighted outcome, the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

The Company uses the provision matrix as a practical expedient to measuring ECLs on trade receivables, based on days past due for groupings of receivables with similar loss patterns. Receivables are grouped based on their nature. The provision matrix is based on historical observed loss rates over the expected life of the receivables and is adjusted for forward-looking estimates.

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, such impairment to be determined using the simplified expected credit losses approach in accordance with IFRS 9. 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 presentational 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 of Bank current accounts. 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 comprises 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 effective but not material to the financial statements

The following standards (some of which are amendments to existing standards) are effective for the first time for the financial period beginning 1 January 2020 and is relevant to the Company's operations:

·      Long- term Interests in Associates and Joint Ventures (Amendments to IAS 28; and

·      Amendment to IFRS 16 Leases COVID-19 Related Rent Concessions effective 1 June 2020.

The following standards and amendments have been issued and are mandatory for accounting periods beginning on or after 1 January 2020 but are not relevant or have no material effect on the Company's operations or financial statements:

Standards, interpretations and amendments to published statements effective but not material to the financial statements (continued)

·      Amendments to IFRS 3 Business Combinations (issued on 22 October 2018)

·      Amendments to IFRS 9, IAS 39 and IFRS17: Interest Rate Benchmark Reform (issued on 26 September 2019)

·      Amendments to IAS 1 and IAS 8: Definition of Material (issued on 31 October 2018)

·      Amendments to References to the Conceptual Framework in IFRS Standards (issued on 29 March 2018)

·      EFRAG endorsement status report 18 February 2021

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 judgements, estimates and assumptions that affect 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 judgements 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 analysis in note 10. In relation to the valuation of the 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.

Operating expenses

EARNINGS/(LOSS) PER SHARE

Earnings/(loss) per Ordinary Share and the fully diluted loss per share are calculated on the profit/(loss) for the year of £10,353,000 (2019 - losses of £14,802,000) divided by the weighted average number of Ordinary Shares of 112,502,173 (2019 - 112,502,173).

Financial asset designated at fair value through profit or loss

Financial assets at fair value through profit or loss comprise of investments in securities listed on Indian stock markets, namely the National Stock Exchange or the Bombay Stock Exchange, as well as investment in the wholly owned subsidiary, ICG Q Limited. A summary of movements is as follows:

Financial asset designated at fair value through profit or loss ("continued")

The net realised and unrealised losses totalling £10,900,000 (2019: £14,220,000) on financial assets at fair value through profit and loss comprise of gains on the Company's holding in ICG Q Limited to the extent of £11,733,000 (2019: losses of £14,264,000) and losses of £833,000 arising from investments in securities listed on Indian stock markets. The movement arising from the Company's holding in ICG Q Limited is driven by the following amounts within the financial statements of ICG Q Limited, as set out below.

The equity investment represents ICG Q Limited, the Company's wholly owned subsidiary. ICG Q Limited is incorporated and has its principal place of business in the Republic of Mauritius. The Company holds Participating Shares in ICG Q Limited, which confer voting rights to the Company, hence controlling interests.

TAXATION

Guernsey

India Capital Growth Fund Limited is exempt from taxation in Guernsey on non-Guernsey sourced income. The Company is exempt under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended) and paid the annual exemption fee of £1,200. For the year ended 31 December 2020, the Company had a tax liability of £nil (2019: £nil).

Segmental information

The Board has considered the provisions of IFRS 8 in relation to segmental reporting and concluded that the Company's activities form two segments under the standard. From a geographical perspective, the Company's activities are focused in two areas - Mauritius and India. The subsidiary, ICG Q Limited, focuses its investment activities in listed securities in India. Additional disclosures have been provided in this Annual Report to disclose the underlying information.

Share capital

Authorised Share Capital

Unlimited number of Ordinary Shares of £0.01 each

The Ordinary Shares of the Company carry the following rights:

(i)   The holders of Ordinary Shares have the right to receive in proportion to their holdings all the revenue profits of the Company (including accumulated revenue reserves) attributable to the Ordinary Shares as a class available for distribution and determined to be distributed by way of interim and/or final dividend at such times as the Directors may determine.

(ii)   On a winding-up of the Company, after paying all the debts attributable to and satisfying all the liabilities of the Company, holders of the Ordinary Shares shall be entitled to receive by way of capital any surplus assets of the Company attributable to the Ordinary Shares as a class in proportion to their holdings.

(iii)  Subject to any special rights or restrictions for the time being attached to any class of shares, on a show of hands every member present in person has one vote. Upon a poll every member present in person or by proxy has one vote for each share held by him.

Fair value of financial instruments

The following tables shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

·      Quoted prices in active markets for identical assets or liabilities (Level 1);

·      Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

·      Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

The analysis as at 31 December 2020 is as follows:

The analysis as at 31 December 2019 is as follows:

The Company's investment in ICG Q Limited, the Company's wholly owned subsidiary is priced based on the subsidiary's net asset value as calculated as at the reporting date. The company has the ability to redeem its investment in ICG Q Limited at the net asset value at the measurement date therefore this is categorised as level 2. The classification within the hierarchy does not necessarily correspond to the Investment Manager's perceived risk of the investment, nor the level of the investments held within the subsidiary. All the underlying investments of ICG Q Limited are categorised as level 1 at 31 December 2020 and 2019. The year-end fair value of those investments, together with cash held in ICG Q Limited, comprise all but an insignificant proportion of the net asset value of the subsidiary.

There has been no movement between levels for the year ended 31 December 2020. There were no changes in valuation techniques during the year ended 31 December 2020.

Financial instruments and risk profile

The primary objective of the Company is to provide long-term capital appreciation by investing predominantly in companies based in India. The investment policy permits making investments in a range of equity and equity linked securities of such companies. The portfolio of investments comprises of listed Indian companies, predominantly mid cap and small cap.

The specific risks arising from exposure to these instruments and the Investment Manager's policies for managing these risks, which have been applied throughout the period, 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 2020, 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.

Market Risk

Market price risk arises mainly from the uncertainty about future prices of the financial instrument held by the Company and its subsidiary, ICG Q Limited ("the Group"). It represents the potential loss the Group may suffer through holding market positions in the face of price movements.

The Group'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. The Group's investment portfolio is concentrated and, as at 31 December 2020, comprised investment in less than 35 companies. Thus, the Group has higher exposure to market risk in relation to individual stocks than more broadly spread portfolios.

The Group's investment 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 the Group's investment portfolio to market price risk can be approximated by applying the percentage of funds invested (2020: 90.36%; 2019: 94.94%) to any movement in the BSE Mid Cap Total Return Index. At 31 December 2020, with all other variables held constant, this approximation would produce a movement in the net assets of the Group's investment portfolio of £10,774,000 (2019: £9,452,000) for a 10% (2019: 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 and its investments.

Foreign currency risk

Foreign currency risk arises mainly from the fair value or future cash flows of the financial instruments held by the Group fluctuating because of changes in foreign exchange rates. The Group's investment 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 the Group's investment portfolio is the Rupee. The Group's policy is not to hedge the Rupee exposure.

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

At 31 December 2020, if the Indian Rupee had strengthened or weakened by 10% (2019: 10%) against Sterling with all other variables held constant, pre-tax profit for the period would have been £10,115,000 (2019: £9,923,000) 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, the consequent impact on the fair value of the Company's investment in ICG Q Limited and in the Company's investment portfolio.

Credit risk

Credit risk arises mainly from an issuer or counterparty being unable to meet a commitment that it has entered into with the Group. 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 are in relation to cash held by the custodian. Kotak Mahindra Bank Limited ("Kotak") acts as the custodian to the Group. The aggregate exposure to Kotak at 31 December 2020 was £2,047,000 (2019: £5,182,000).

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 the Group. Kotak has a long term credit rating of AAA (CRISIL Ratings - a S&P company).

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 the Group 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. The Group has no unlisted securities and its focus is to invest predominantly in mid and small cap listed stocks. 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 the Group's investment portfolio.

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 investment 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. The Company and ICG Q Limited are registered with the Securities and Exchange Board of India ("SEBI") as a foreign portfolio investor ("FPI") with a Category I licence, and ICG Q Limited 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% apply to the investment portfolio.

The Group 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. There is no capital gains tax accrual at 31 December 2020 (2019: Nil).

RELATED PARTY TRANSACTIONS AND MATERIAL CONTRACTS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.  

The Directors are responsible for the determination of the investment policy and have overall responsibility for the Company's activities. Directors' fees are disclosed in the unaudited Directors' remuneration report.

From 1 July 2020, the Investment Manager is entitled to receive a management fee payable jointly by the Company and its subsidiary equivalent to the lower of 1.25 per cent per annum of the aggregate value of its assets less current liabilities or 1.25 per cent per annum of the average daily market capitalisation of the Company, calculated and payable monthly in arrears.

From 1 July 2019 to 30 June 2020, the investment management fee was equivalent to 1.25 per cent per annum of the aggregate value of its assets less current liabilities, calculated and payable monthly in arrears. The Investment Manager earned £664,000 in management fees during the year ended 31 December 2020 (2019: £1,472,000) of which £98,000 was outstanding at 31 December 2020 (2019: £106,000).

Under the terms of the Administration Agreement, Apex Fund and Corporate Services (Guernsey) Limited is entitled to a minimum annual fee of US$41,000 or a fee of 5 basis points of the NAV of the Company, whichever is greater. The Administrator is also entitled to reimbursement of all out of pocket expenses recoverable by way of a fixed disbursement charge of US$50 per month excluding all international calls and courier. The Administrator earned £42,000 for administration and secretarial services during the year ended 31 December 2020 (2019: £43,000) of which £10,000 was outstanding at 31 December 2020 (2019: £16,300).

CONTINGENT LIABILITIES

The Directors are not aware of any contingent liabilities as at 31 December 2020 and at the date of approving these financial statements.

SUBSEQUENT EVENTS

There have been no material events since the end of the reporting period which would require disclosure or adjustment to the financial statements for the year ended 31 December 2020.